The Commanding Heights
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|Author||Daniel Yergin, Joseph Stanislaw|
The Commanding Heights: The Battle for the World Economy is a book by Daniel Yergin and Joseph Stanislaw, first published as The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World in 1998. In 2002, it was turned into a documentary of the same title, and later released on DVD.
Commanding Heights traces the rise of free markets during the last century, as well as the process of globalization and presents a compelling condemnation of the corruption and failure of centrally planned economies. The book attributes the origin of the phrase "commanding heights" to a speech by Vladimir Lenin referring to the control of perceived key segments of a national economy.
The authors take the thesis that, prior to World War I, the world effectively lived in a state of globalization, which they term the "First Era of Globalization."
The authors define globalization as periods where free markets predominate, and countries place few if any limits on imports, exports, immigration and exchanges of information. Overall, they see globalization as a positive movement that improves the standard of living for all the people connected to it, from the richest to poorest.
After World War II, the authors believe the work of economist John Maynard Keynes came to be widely accepted in Western economies. Keynes believed in government regulation of the economy, and the authors underline this as Keynes' great influence and prestige. In the authors' opinion, these so-called "commanding heights" were often owned or severely regulated by governments in accordance with Keynes' ideas.
The authors then discuss how the political change of the 1980s ushered in a change of economic policy. The old trend changed when Margaret Thatcher became prime minister of the United Kingdom, and when Ronald Reagan was elected President of the United States. Both these leaders parted ways with Keynesian economics. Rather, they were more in the tradition of the work of Friedrich von Hayek, who opposed government regulation, tariffs, and other infringements on a pure free market, and Milton Friedman, who emphasized the futility of using inflationary monetary policies to influence rates of economic growth. In practice, Hayek's policies were applied only selectively, as Reagan's 1986 income tax reforms substantially increased taxes on the lowest quintile of wage-earners while dramatically decreasing rates for the upper two quintiles. Moreover, in contrast to Hayek, Reagan's policies continued and expanded tax write-offs, rebates and subsidies for many large corporations. Friedman's Monetarism was also abandoned in practice, as government-issued debt as a percentage of GDP rose dramatically throughout the 1980s.
While Thatcher, Reagan, and their successors made sweeping reforms, the authors argue that the current era of globalization finally began around 1991, with the collapse of the Soviet Union. Since then, they assert, countries embracing free markets have prospered on the whole, while those adhering to central planning have failed.
While strongly in favor of this trend, the authors worry that globalization will not last. More specifically, they believe that if inequality in economic growth remains high, and if Third World nations are not offered the proper opportunities and incentives to support capitalism, the movement will end just as the first era did.
The reason the authors place so much emphasis on narrowing economic gaps is because they believe, against many of the people they interview, that there is no ideological support for capitalism, only the pragmatic fact that the system works better than any other. As they remark:
The market also requires something else: legitimacy. But here it faces an ethical conundrum. It is based upon contracts, rules, and choice – in short, on self-restraint – which contrasts mightily with other ways of organizing economic activity. Yet a system that takes the pursuit of self-interest and profit as its guiding light does not necessarily satisfy the yearning in the human soul for belief and some higher meaning beyond materialism. In the Spanish Civil War in the late 1930s, Republican soldiers are said to have died with the word "Stalin" on their lips. Their idealized vision of Soviet communism, however misguided, provided justification for their ultimate sacrifice. Few people would die with the words "free markets" on their lips.
Within the book, the authors examine briefly many different nations and regions, and their economic development since World War II (in the case of industrialized countries, they often begin before the war). While they admit that the book cannot touch on every single aspect (Yergin remarks that the topic of their book constitutes an entire new academic discipline), they nonetheless make some of the following assertions.
While the works of the robber barons was often condemned in the press, America's commitment to industrialization and free markets (compared to other countries) was extremely high in the late 19th/early 20th century. Unlike many countries after WWI, the 1920s saw great economic expansion for upper-income individuals, as well as a growth in median income. Labor unrest continued to mount throughout the 1920s and 1930s, however, as the lack of wage and hour rules, child labor protections, unemployment insurance, the right to organize, workplace safety requirements and social security insurance continued to exacerbate the discontents of the substantial numbers of working poor.
The Great Depression caused massive unemployment and, with it, massive public distrust of corporations and wealthy individuals (it didn't help that some businessmen took advantage of Depression conditions to benefit themselves). In response, the New Deal instituted by Franklin D. Roosevelt went into effect with massive public support. Many lawyers and economists influenced by Keynes worked under the New Deal, and believed that free markets, without proper regulation, would lead to disaster.
While the American economy boomed for about 30 years following World War II with the benefit of Keynesianism, robust anti-trust regulation to promote competition and financial regulations to prevent the most volatile forms of market speculation, high unionization rates and protections promoting the growth of domestic industry, during the 1970s, stagflation – brought on by the 1973 oil crisis and the shift from the gold standard to fiat currency – was made to discredit the policy consensus set in place under the years of the New Deal Coalition. This culminated in the election of Reagan in 1980, and many of the statutes and organizations created by the New Deal were dismantled.
London was the center of the so-called "First Era of Globalization" due to the power and resources of the British Empire. However, World War I severely weakened Britain, causing massive unemployment. While the United Kingdom successfully held out during World War II and emerged victorious, the war effectively caused the dismantling of its empire.
Winston Churchill was influenced by the work of Hayek and opposed heavy government interference in the British economy. However, during the 1945 elections, the Labour Party, led by Clement Attlee, came to power in force, and was dedicated to government controls to prevent another economic crisis. The UK's major industries were nationalized, and practically all occupations (and the wages they earned) were heavily regulated and unionized.
This practice became so prevalent that even Conservative governments, elected into power later, did nothing to change it. However, during the 1970s, massive strikes by unions combined with other economic woes such as the 1973 oil shock almost ground the British economy to a halt. Thatcher, an ardent admirer of Hayek, began privatization (Thatcherism). While her results were initially mixed, the Falklands War brought on a nationalistic fervor that kept Thatcher in office long enough to keep her reforms in place. Although the Labour Party later came back to power, it did not attempt to challenge the key principles of Thatcherism.
Russia, Soviet Union
Within a few years of the rise of the Russian Revolution, the socialist Soviet economy went into a major crisis. Lenin responded with the New Economic Policy, a program that allowed limited capitalistic activity, resulting in a type of market socialism, and the economy began to improve. Lenin's "commanding heights speech" was his attempt to defend himself against accusations that he "sold out" the principles of the revolution by implementing this new policy.
Under Joseph Stalin, the Soviet agricultural and heavy manufacturing sectors were largely centralized. During the 1940s-1970s, the Soviet Economy grew at a rate that outpaced that of Western European nations.
By the 1980s, the Soviet economy was in shambles. Because of a lack of incentives (and, ironically, a more tolerant central government), workers did not put much effort into their duties. Nonetheless, the Soviets continued to build their military, even though, at times, such spending took up half the country's revenue. Mikhail Gorbachev tried to reform the economy, but took only limited steps. When he lifted the Brezhnev Doctrine and allowed Poland's Solidarity Party to usurp that country's communist regime, the entire Warsaw Pact collapsed, soon followed by the Soviet Union itself.
However, even with the fall of the Soviet Union and the rise of the relatively free market-minded Boris Yeltsin, communists maintained much power in Russia, blocked free market movements, and forced the resignation of Yeltsin's free-market allies such as Yegor Gaidar. During the 1996 elections, Yeltsin was forced to accept support from the oligarchs to counter the growing power of the communists. While Yeltsin remained in power, the "privatization" of Soviet industries proceeded in an extremely unequal manner.
As predicted by Keynes, the hyperinflation caused by the Treaty of Versailles devastated the German economy and created political instability. In addition to widespread unemployment, this inflation effectively wiped out the country's middle class. This environment made it easy for the Nazi Party to gain power, and the Nazis practiced central planning (although their leaders were largely incompetent in this area).
Following the war and break-up of Germany, East Germany came under the rule of the Soviets while West Germany remained part of the Western powers. When economic conditions in occupied West Germany failed to improve, Ludwig Erhard, without consulting the occupying powers, completely destroyed price controls in 1948. After this, the Western German economy underwent a massive recovery, although such free market reforms remains largely confined to the country for many years.
By the time of German reunification, West Germany was an economic power, while East Germany faced many problems due to its communist-run economy.
Unlike Mahatma Gandhi, who supported a village centric economy, after India's independence in 1947, its first prime minister, Jawaharlal Nehru, promoted industrialization. However, he supported government-controlled development, and the bureaucracy that developed stifled innovation (the authors of Commanding Heights sarcastically claim that the British Raj was replaced by a "permit Raj"). Bribery and delays became commonplace in the Indian economy, while at the same time, many prominent economists studied the country and attempted to "fine tune" its central planning.
By the 1990s, the Indian government, mainly due to the influence of finance minister (and later Prime Minister) Manmohan Singh, began to relax these stringent regulations, and the Indian economy bloomed under the effects of exports and outsourcing. Political parties since this period have continued to promote these changes; The free marketer Singh was appointed prime minister when his party won the elections in 2009 even though he was not the victorious UPA party's stated candidate and the general expectation was Sonia Gandhi would take the seat. He has, since then, steered India to its slowest economic growth in a decade, and brought the rupee to its lowest levels ever.
Under the influence of dependency theory, a Marxist approach to international economics, many Latin American countries attempted to industrialize by limiting imports of manufactured goods and subsidizing their own industries. However, in the absence of competition, and with government subsidies, these companies had little incentive to become efficient or innovative. By the 1980s, the economic problems of these countries became obvious, and much of the West's investment in these countries was lost.
Chile unwittingly became an experiment in free markets when Augusto Pinochet called in followers of Friedman to evaluate the economy, the so-called "Chicago boys". The authors argue that these economic reforms proved successful, but since Pinochet was a dictator who came to power in a coup and had many political opponents murdered, the whole idea of free market reform became linked to fascism. While the authors (and Friedman) claim that these reforms eventually promoted democracy, they acknowledge that this issue - and their interpretation of events - is extremely controversial.
Bolivia was hit with hyperinflation as well. During the 1980s, economist Jeffrey Sachs was sent as a consultant, and a new president, Gonzalo Sanchez de Lozada in the 1990s, reined in inflation by severely cutting government spending. While Bolivia remained a very poor country, the authors argue that it is better off now because its inflation was curtailed. They also argue that Bolivia's example vindicates the bad reputation free-market economics acquired in Chile, as Bolivia's reforms came after a democratic election.
The authors argue that Africa's economic development was severely hindered by central planning, socialist ideas, and political dictatorships that promoted warfare and other conflicts.
While Japan was seen for many years as an economic success story as late as the early 1990s, the authors argue that its ongoing recession since then resulted from its governments refusal to stop subsidies to many of its industries and companies (this issue is ongoing).
Poland's free market reforms, pushed by Solidarity and Lech Wałęsa, were initially mixed and criticized by its citizens, but by the late 1990s, the Polish economy was doing much better than other former communist states in Eastern Europe. One feature of the Polish economy that makes it different from other capitalistic countries is that it is dominated by small businesses rather than corporations or conglomerates.
China is another major ongoing issue. While Deng Xiaoping, after the death of Mao Zedong, gradually introduced free market, he did not promote civil liberties or other freedoms, as demonstrated by his willingness to crush pro-democracy demonstrators. While the authors hope (according to Milton Friedman's ideas) that free markets will eventually promote a free society, it hasn't happened yet, although China's economy continues to grow.
In 2002, PBS aired a six-hour documentary based on the book. This documentary was later sold on DVD, and is available for viewing free at PBS' web site for those with high-speed Internet connections (see external links). The documentary is narrated by David Ogden Stiers.
Thanks to its later date, the documentary film is able to address many of the items Yergin and Stanislaw missed in their original book, including the recession, the collapse of Asian economies, the anti-globalization movement, and the attack on New York City. All told, two of the documentary's six hours—the entire final third—address things that happened since the original book was published. They also include free market solutions to international poverty that was not included in the book - they interview economist Hernando de Soto, whose book on the subject was not published until after the initial printing of Commanding Heights.
Like the book, the documentary attracted more support and criticism. One example is the anti-globalization movement, which argued they were portrayed unfairly. In the documentary, James Wolfensohn, then President of the World Bank, is interviewed and says that such protesters are attacking people "who are devoting their lives to addressing the very questions that these people claim to be addressing." The documentary includes a scene of Wolfensohn getting hit in the face with a pie by a protester.
Unlike the book, the PBS documentary is far more wary of the possible end of the current era of globalization. For example, they include a parallel between radio stocks of the 1920s and dot com stocks of the 1990s - both were industries built on new technology which had little capital, but which fell prey to a market bubble. Likewise, the documentary draws an unsettling parallel between the terrorist attacks of Sept. 11, 2001, and the terrorist assassination of Archduke Franz Ferdinand of Austria in 1914.
The documentary is also accused of further oversimplfying the so-called "Battle of Ideas" between Keynes and Hayek. For example, in the DVD version, Keynes is named together with Karl Marx and Lenin as supporters of controlled economies. However Keynes saw himself as a liberal, in both the party political and economic senses of the term.
The production was financed by donations from Electronic Data Systems, FedEx, BP, The Pew Charitable Trusts, John Templeton Foundation, Smith Richardson Foundation, and the Corporation for Public Broadcasting.
- http://www.dlc.org/ndol_ci.cfm?contentid=1570&kaid=125&subid=162 Review of Commanding Heights by the Fred Seigel of the Democratic Leadership Council.
- http://www.amazon.com/Commanding-Heights-Battle-World-Economy/dp/product-description/068483569X Excerpt from Commanding Heights.
- Keynes sat on the Liberal benches and even Hayek wrote that "Keynes believed that he was fundamentally still a classical English liberal and wasn't quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom" (in Reason Magazine, The Road to Serfdom, Foreseeing the Fall. F.A. Hayek interviewed by Thomas W. Hazlett).