Globalization’s latest last stand

By Robert Skidelsky,

1990. Communism had just collapsed in Central and Eastern Europe. In China, Deng Xiaoping was unleashing capitalist enterprise. And political scientist Francis Fukuyama famously proclaimed the “end of history,” by which he meant the triumph of liberal democracy and free markets.

Years earlier, the British economist Lionel Robbins, a rm believer in free markets, warned that the shaky political foundations of the postwar international order could not support a globalized economy. But in the euphoria and triumphalism of the early 1990s, such warnings fell on deaf ears. This was, after all, a “unipolar moment,” and American hegemony was the closest thing to a world government. With the Soviet Union vanquished, the thinking went, the last political barrier to international economic integration had been removed. Dazzled by abstractions, econo - mists and political scientists should have paid more attention to history. Globalization, they would have learned, tends to come in waves, which then recede. The rst wave of globalization, which took place between 1880 and 1914, was enabled by a huge reduction in transport and communication costs. By 1913, commodity markets were more integrated than ever, the gold standard maintained xed exchange rates, and capital – protected by empires –owed freely and with little risk. Alas, this golden age of liberalism and economic integration gave way to two world wars, separated by the Great Depression. Trade shrank to 1800 levels, capital ows dried up, governments imposed tari s and capital controls to protect industry and employment, and the largest economies separated into regional blocs. Germany, Japan, and Italy went to war to establish blocs of their own.

The second wave of globalization, which began in the 1980s and accelerated following the end of the Cold War and the rise of digital communications, is now rapidly retreating. The global trade-to-GDP ratio fell from a peak of 61% just before the 2008 nancial crisis to 52% in 2020, and capital movements have been increasingly restricted in recent years. As the United States and China lead the formation of separate geopolitical blocs, and the world economy gradually shifts from interconnectedness to fragmentation, deglobalization seems well underway.

To understand why globalization has broken down for a second time, it is worth revisiting John Maynard Keynes’s memorable description of London on the eve of World War I. “The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise,” he wrote in 1919, “were little more than the amusements of [the investor’s and consumer’s] daily newspaper, and appeared to exercise almost no in uence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”

In our own time, geopolitics is once again threatening to break the international order. Commerce, as Montesquieu observed, has a pacifying e ect. But free trade requires strong political foundations capable of soothing geopolitical tensions; other - wise, as Robbins warned, globalization becomes a zero-sum game. In retrospect, the failure to make the United Nations Security Council truly representative of the world’s population might have been the original sin that led to the current backlash against economic openness. But geopolitics is not the only reason for the breakdown of globalization’s second wave. Neoliberal economics, which came to dominate policymaking in the 1980s, has fueled global instability in three major ways.

First, neoliberals fail to account for uncertainty. The ecient-market hypothesis – the belief that nancial markets price risks correctly on average – provided an intellectual basis for deregulation and blinded policymakers to the dangers of setting nance free. In the run-up to the 2008 crisis, experts and multilateral institutions, including the International Monetary Fund, were still claiming that the banking system was safe and that markets were self-regulating. While that sounds ridiculous in retrospect, similar views still lead banks to underprice economic risks today.

Second, neoliberal economists have been oblivious to global imbalances. The pursuit of market-led economic integration accelerated the transfer of manufacturing production from developed economies to developing economies. Counterintuitively, though, it also led to a ow of capital from poor to rich countries. Simply put, Chinese work - ers supported the West’s living standards while Chinese production decimated Western manufacturing jobs. This imbalance has fueled protectionism, as governments respond to public pressure by restricting trade with low-cost producers, and contributed to the splintering of the world economy into rival economic blocs.

Lastly, neoliberal economics is indi erent to rising inequality. Following four decades of hyper-globalization, tax cuts, and scal tightening, the richest 10% of the world’s population own 76% of the total wealth, while the poorest half own barely 2%. And as more and more wealth ends up in the hands of tech speculators and fraudsters, the so-called “e ective altruism” movement has invoked La er curve-style logic to argue that allowing the rich to become even richer would encourage them to donate to charity.

Will globalization’s second wave collapse into a world war, as the rst one did? It is certainly possible, especially given the lack of intellectual heft among the current crop of world leaders. To prevent another descent into global chaos, we need bold ideas that build on the economic and political legacies of Bretton Woods and the 1945 UN Charter. The alternative could be a more or less direct path to Armageddon.