Liberty and <I>Commanding Heights</I>

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Liberty and Commanding Heights

by Ari Armstrong, February 21, 2006

Here I continue my review of Commanding Heights, the documentary released by PBS. Previously I reviewed the first disk, which recounts the debate between Keynes and Hayek, between state control of the economy and free markets. In the second (and final) two disks, the documentary tracks the fall of Communism and economic reforms in Europe, Asia, and the Americas.

Overall, my review of the set is positive, even though the first disk contains problems I've discussed. The next two disks, while not perfect, handle more recent history fairly well.

The real strength of the documentary is its compilation of fascinating interviews with the leaders of the debate over globalization and free trade. Milton Friedman talks about going to Chile to discuss economic reforms. Jeffrey Sachs discusses the reforms he proposed first in Bolivia, then in Poland, and finally (with much less success) in Russia.

The segment that features Hernado de Soto alone is worth the cost of watching the series. He eloquently makes the case that free markets depend on property rights, and property rights -- when developed -- are what allow the world's poor to join the marketplace and climb out of poverty.

Another high point is a review of Margaret Thatcher's trip to Poland, where she demanded to meet with politically-suppressed reformers. The documentary gave me a rich appreciation for this woman's courage and dedication to the basic principles of liberty.

Bill Clinton provides some of the best comments. At times, he forcefully defends global free trade as the means to wealth and peace -- even if he offers some qualifications to appease his anticapitalist supporters.

The video adequately draws the distinction between the poverty of economic repression and the productivity of market economies, even though this point might have been presented even more forcefully. The documentary presents the economic collapse of the Soviet Union, along with the continued economic poverty of unfree regions of the world. It also reviews the productivity unleashed as the result of free-market reforms.

I wish to address four main problems with the documentary.

First, the film leaves the very concept of "globalization" -- the central topic of discussion -- vague and ambiguous. Indeed, I am increasingly convinced that the term should be avoided in favor of something more precise, such as "international free trade" or "global capitalism."

Whether or not something is "global" is not its essential characteristic. A one-world dictatorship would be "global," but that's not what's meant by the term "globalization." The essential point is that governments should respect and protect individual rights, including the right to trade freely with consenting adults around the world. Free trade is just an extension of the individual's right in his or her own body and property, and the right to exchange goods and services voluntarily.

So the documentary at times portrays poverty as a downside of "globalization," when in fact poverty is the direct result of the rejection of individual rights and free markets. True, the film makes the case that the road out of poverty is more free trade, but the distinction is not drawn clearly enough.

The documentary also appears to throw into the "globalization" mix things like political corruption, cronyism, and banking fraud -- things that represent the antithesis of capitalism.

I am skeptical of the alleged need for interstate managers of "globalization," including the bureaucrats of the WTO, World Bank, European Union, NAFTA, etc. As the documentary indicates, often these international state-driven rules are captured by special interests. One Indian economist complains that, while the U.S. can sell textiles in India, the U.S. also imposes protectionism that limits imports from India. And so this concept of "globalization" has become a package deal, incorporating elements of free trade with elements of protectionism and bureaucratization.

As a result, the documentary is entirely too friendly to the anti-"globalization" movement, which is driven by protectionists and socialists. By packaging in the term "globalization" the benefits of the free market with the harms of statist interventionism, the documentarians have opened the door to misplaced and incoherent criticisms of "globalization."

While it cannot be denied that international agreements to reduce tariffs have yielded benefits, the resources spent on these agreements, along with the problems of capture by interest groups, suggest to me that unilateral reduction of trade barriers is the way to go. I.e., we should be political isolationists but economic globalists. We should simply remove all our punitive tariffs and trade restrictions, then encourage the rest of the world to do likewise. While it's true that the tariffs imposed by other countries hurt both those countries and us, I think we'd do better to wage an international ideological campaign for free markets, rather than an international political struggle to impose trade bureaucracies.

The second main problem with the documentary is that it offers an ambiguous answer as to whether "globalization" -- I'll say international free trade -- is inevitable. It is not. For instance, the U.S. Congress and the President could utterly destroy international free trade (involving the U.S.) by passing a law banning all imports and exports. The U.S. economy would implode, but such risks haven't prevented politicians from destroying productivity in the past.

Another possibility is that international bureaucracies could increasingly be captured for purposes of protectionism rather than for free trade. As Thomas Larsson puts it in his clever and pithy book, The Race to the Top: The Real Story of Globalization (page 129), "It is easier to masquerade as a 'globalizer' than to actually institute free trade."

Third, the documentary understates the importance of ideology in driving cultural debate and political changes. In a few cases, the video suggested that a faltering economy can lead to social unrest. That's true to a degree. But it is ideology that sets the context for economic conditions in the first place. The poor regions of the world are plagued either by rampant socialism or tribalism. And what people do in the face of economic trouble depends on the ideas they accept. They can either adopt the principles of individual rights and the rule of law and establish a political context that encourages productivity, or they can adopt statism and undercut the economy even further.

Fourth, the documentary does not adequately explain the causes of the Asian financial crisis. It does discuss structural banking failures and the misincentive problems of international "aid."

But Brink Lindsey offers a more complete analysis in his Against the Dead Hand. Linsey criticizes as prejudice the continuing tendency to blame free markets for the faults of statism:

[T]he mindset that gave rise to the faith in comprehensive central planning still dominates the perspective of globalization's critics. After all, if -- as is perfectly obvious -- the world today is a jumble of market-oriented and anti-market elements, and if markets are recognized as efficient and useful while full-blown collectivism is counted a failure, why blame markets and not the remnants of discredited collectivism for the fact that the current jumble is sometimes volatile? The answer lies in patters of thought deeply engrained during the century-long eclipse of economic liberalism... [S]till there is a widespread intellectual reflex to long for orders from above. That reflex leads even highly serious students of world affairs to mistake the messy collapse of collectivism for a market phenomenon, and to describe as the cure for vestigial collectivism at the national level a new dose of collectivism on a global scale. (pages 192-3)

Lindsey discusses some of the exacerbating causes of the financial meltdown: IMF loans and other government transfers created a "moral hazard" that led to risky investments (pages 204 and 207), politicized lending shifted "capital away from its most profitable uses" (page 207), and "financial segmentation" created by unwise regulations put funds "in the hands of relatively backward and uncompetitive domestic financial institutions" (page 207). But the core problem, Lindsey explains, is the peculiar fiat monetary system in place:

[T]he recent financial crises in Latin America, East Asia, and Russia shared the same proximate cause: unsustainable monetary policies. Specifically, all of the crisis-affected countries had "pegged" the exchange value of their currencies to the U.S. dollar; in other words, they had promised that holders of those currencies could redeem them for dollars at a more-or-less fixed rate. By making such promises about the exchange value of their currencies, these countries were, in effect, pledging that their central banks would conduct monetary policy in a way that maintained those currencies' values relative to the dollar at the prescribed levels. As happened, though, the central banks did not keep up their end of the bargain. In the end the gap between promise and reality grew unbridgeable, and the countries ultimately were forced to renege. Currency values nosedived, and economic devastation ensued...

The root of the problem lies in the nature of contemporary money. All money in the world today is fiat money: It has no anchor in underlying tangible assets, but exists instead purely as a creation of governments... (page 193)

Lindsey summarizes that the countries that hit crisis "sought to control their exchange rate by pegging to the dollar while at the same time pursuing an independent monetary policy." This created "pent-up imbalances in financial flows... and ultimately the peg collapsed" (page 197).

Larsson also discusses the Asian crisis: "In 1997, the South Korean economy went down in flames when international banks and investors withdrew their money from the Korean peninsula" (page 105). He continues:

Far from an indictment of globalization, the trauma was widely seen as a vote of no confidence for the South Korean model, dominated by gigantic, rapacious conglomerates... And there were plenty of scoundrels to point to. One of them, Kim Woo-Choong, now enshrined in the Guinness Book of World Records as "the greatest manipulator of accounting books of the century," ended up fleeing the company... The rigged financial structures of South Korea helped make the massive deception possible. (page 106)

Thankfully, as Commanding Heights points out, the crisis has been left behind. However, it was a crisis caused not by capitalism, but by its antithesis, statism.

* * *

Perhaps the most (perversely) humorous segment of Commanding Heights was a clip of antiglobalization activists using the tools provided by the international economy -- such as computers and other high-tech devises -- in an effort to undermine that economy.

Too many Americans take their wealth for granted. It's all too easy for "middle class, socialist brat[s]" who "never really had to work" (Oingo Boingo) to advocate policies that entrench horrific poverty -- for other people in other lands. "[N]owadays the bulk of antiglobalization literature is produced in the United States and Europe," Larsson notes (page 127).

That global free markets have increased the quality of life for those in relatively free, industrialized nations is obvious -- or it should be. I rented the documentary through Netflix, an internet-based company. I watched it on my computer, at the same time that I was connected via high-speed internet to billions of sources of information around the world. By contrast, when John Van Sickle wrote to Professor Hayek in 1974 to congratulate him for his Nobel award, Van Sickle used a quant -- and tedious -- manual typewriter. For my web page, I use a digital camera made in Japan and a digital audio recorder made in China. I won't even begin to guess how many countries participated in the production of my computer.

But what too many Americans ignore are the life-and-death consequences of economic policy for the poorest people in the world. In The Capitalist Manifesto, Andrew Bernstein ably makes the case that freer markets lifted people out of poverty, whereas state-controlled economies resulted in mass poverty and, in many cases, mass starvation (in addition to brutal, totalitarian regimes). In his chapter "The Great Laboratory," Bernstein compares the prosperity of the U.S., Miami, South Korea, Hong Kong, and Taiwan to the poverty of Soviet Russia, Cuba, North Korea, and China under the hardline Communists. For example, North Korea "is one of the most destitute, starvation-riddled hellholes to be found," whereas South Korea's "growth is especially impressive when its current per capita GDP in excess of $11,000 is compared with the $100.00 figure of barely 40 years ago" (pages 324-5).

Despite the continuing problems of regions such as Africa -- which have largely resisted market liberalization -- the productivity of relatively freer markets -- particularly in places like India and Asia -- have lifted millions out of poverty. Commanding Heights points out that economic reforms in China, even though only partly free market, have lifted 300 million people out of poverty. In In Defense of Global Capitalism, Johan Norberg notes, "Between 1965 and 1998, the average world citizen's income practically doubled, from 2,497 to 4,839 dollars, corrected for purchasing power in fixed money terms... For the poorest one-fifth of the world's population, the increase has... [risen] during the same period from 551 to 1,137 dollars..." (page 25). Of course, such averages mask the fact that those in liberalized economies did much better, while those in repressive economies remained in harsh conditions.

Larsson sums up the appropriate approach to globalization, when that term is understood to mean the spread of free trade (page 136): "Truly progressive and concerned people will not fight globalization. Instead, they'll fight to overcome the multifarious barriers, at home and abroad, to the spread of globalization."

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