Robert Kuttner's The End of Laissez-Faire
Heilbroner, Robert
THE END OF LAISSEZ-FAIRE: GLOBAL ECONOMY AND NATIONAL PURPOSE AFTER THE COLD WAR, by Robert Kuttner. Alfred A. Knopf, 1991. 304 pp. $22.95. t is not a correct deduction from the Principles of...
...But in international economics the political framework involves the rights and rules, privileges and duties of sovereign nations, not of individuals living under one sovereignty...
...The problem with hypocrisy is not merely that of guilty consciences...
...Robert Kuttner's book takes the full measure of this challenge...
...This brings a new political element into all international economic dealings — "new" because there is always a latent political aspect to economic activity, even in the most communitarian society...
...I think of it as a commitment to the model of huckster trading as that by which the clash of international economic interests would be best understood and resolved...
...For the ideology pictures the intercourse of nations as indistinguishable from the jostling of petty hucksters and householders that is the standard textbook illustration of supply and demand...
...Kuttner spells out some of them: • Why do some nations succeed in using a blend of public policies and market institutions to increase their real wealth and capture advantage for their national industries...
...One does not need to be told, these days, about the importance of international economic affairs for the well-being of the American economy...
...Laissez-faire becomes the chief villain in the piece not only because it distorts the American view of how the international economy actually operates but because its moralistic overtones tie our hands in responding to its evolving challenges...
...We have never been an openly imperial power, and gold has always been regarded with a certain populist skepticism...
...I should add that this country has yet to learn Kuttner's lessons...
...For here the contestants are not just participants in a market, but embodiments of two uneasily linked principles of social action: economics and politics...
...How can the United States improve its capacity to capture advantage for its key industries without setting off a trade war...
...Thus John Maynard Keynes in an essay written in 1926 whose title Robert Kuttner has borrowed for this stunning excoriation and analysis of the damage done, and the ills suffered, as a consequence of the American persistence in that incorrect deduction...
...He shows us how laissez-faire beliefs have impeded our efforts to think about—much less to work out—a manageable system of exchange rates among key currencies or a reasonable solution to the burden of international debt or an acceptable relationship to Japan...
...The decades after 1950 saw the gradual erosion of America's technological, managerial, and, finally, financial leadership...
...And the hegemon itself must occupy a secure place on the commanding heights of the world economy—not necessarily in each and every branch of economic activity but in the strategic ones...
...modern Japan had not yet been born...
...This explicit recognition of the political underpinnings of economics is what makes Kuttner's work stand out from the conventional views of modernday economics...
...It was in this now forgotten postwar decade that the United States found itself suddenly thrust into the role of the world's political and economic leader— its "hegemon...
...and when these commanding heights were lost, so was the viability of British hegemony...
...Utopian laissez-faire says that economics is the right way to resolve this tense relationship...
...All such "structural" explanations shed light on our painful decline...
...It is a continuation of a much older contest that arises within capitalism as the expression of the system's life force—a contest in which marketer is pitted against marketer, firm against firm, and, finally, nation against nation...
...England's preeminence in steel production and its centrality as the world's center of finance were key elements that secured British world leadership during the late nineteenth century...
...Traditionally they don't rank at all, on the grounds that if an economic activity is worth doing, the free market will find the capital to do it...
...This contest is not between capitalism and socialism...
...By virtue of its dominating place, a hegemon enjoys special privileges in conducting its international economic affairs, not the least of which is that its domestic money becomes the world's unit of account...
...The laissez-faire in Kuttner's title is a view of the market as a sacrosanct instrumentality, every interference with which must be regarded as the seed of economic error and the embodiment of political sin...
...What should those rules be...
...Free trade thus enabled the United States to be at once the source of the world's monetary wealth and the recipient, at bargain basement prices, of its material wealth...
...Here is where the ideology of laissez-faire becomes entangled with American international economic policy...
...At the end of World War II international involvements played only a small role in our economic lives: in those days introductory economics textbooks (including my own) regularly consigned foreign trade to their last chapter, to be covered if there was time, while international investment was rarely mentioned at all...
...This is certainly the way things appeared in the first decade after the war...
...Europe was barely alive...
...But Kuttner finds a deeper reason in the very policy by which we sought to assert and defend our hegemony...
...Those changing realities are the appearance, both in Europe and Japan, of a model of capitalism to which the image of the hucksters' market could never be applied...
...In addition to having its currency serve as the SUMMER • 1991 • 433 Books world's standard of value, a hegemon chooses the rules and duties that determine how the game of international economic life is to be played...
...There he came to a conclusion that will neither surprise nor disturb readers of Dissent, namely, that such an economy will be subject to the traditional dysfunctions of capitalism, and he concludes that the United States, indeed, all modern capitalisms, will be best served by a mixed economy, in which government uses its fiscal and monetary powers and its regulatory capacity to avoid or to mitigate these misfortunes...
...This is a tale with which we have become very familiar, and for which there is no shortage of explanations: the federal deficit itself, uneven playing fields that discriminate against U.S...
...This constricted imagination itself reflects the 434 • DISSENT Books impatience of laissez-faire thinking with such structural concerns as those we have mentioned...
...The market itself is regarded as a neutral field, where political interests and considerations do not enter...
...America was the world's cornucopia...
...The dollar, once the world's premier currency, slowly lost its preeminence and had finally to suffer the ignominy of being propped up by the gnomes of Zurich, Bonn, Paris, and—ultimate indignity!—Tokyo...
...Where should industrial and technology policy rank in the hierarchy of foreign-policy goals for the United States...
...As a result, whether as tariffs, cartels, bilateral agreements, imperial preference systems, or as free trade, political determinations establish the very possibility of international economic life...
...This happy condition was, alas, short-lived...
...For the workings of the international economy are complicated by an element entirely missing within a domestic economy: international economic relationships, by definition, involve the laws and institutions of more than one nation...
...These questions spell out an agenda of huge importance for American capitalism in a time when political and economic forces clash more openly and with larger consequences than ever before in its history...
...It should be read by everyone interested in awakening our nation from its somnambulistic decline...
...From the beginning capitalism abroad has been conceived as a cooperative endeavor between the state and the private sector in which the normal means of establishing prices or determining the volume of production were not merely the forces of supply and demand—these are operative in every economy save a centrally planned one—but also the interests of unions, farmers, trade associations, and the government itself...
...The End of Laissez-Faire is not intended to explore in detail how an international order of managed capitalisms might work...
...But with these privileges come responsibilities...
...There must be rights and rules, privileges and duties in any economy, market-run or collectivist, and the determination of these order-bestowing elements is intrinsically political...
...To the true believer, markets are immaculate conceptions that leave no room for low-level institutional considerations...
...It is the chief virtue of Kuttner's book to expose this view of the market for the ideology that it is...
...In the British case, a combination of the gold standard and the imperial preference system was the policy by which Britain administered its hegemony—not, we should note, in the explicit name of underwriting the pound and the empire, but as rules and regulations that appeared so self-evidently beneficial that they had no need for justification...
...Never mind...
...Economic theory shows that from such a market there will emerge, quite without any intervention from "outside" —indeed, precisely because there is no such intervention—prices and quantities that will best promote the well-being of the larger community...
...Such managed capitalisms can have their own difficulties—not so many years ago we were throwing up our hands at signs of "Eurosclerosis" — but the countries that practice it have shown themselves to be more adaptive, tough-minded, and effective than the United States in managing their international economic affairs...
...It is not answers that we need right now but a willingness to ask new questions...
...We discover this in such innocent testimony as the casting of the United Nations' annual surveys of worldwide economic performance in dollars rather than in rupees or marks and in the somewhat less innocent testimony of the denomination of internationally traded commodities, such as oil or coffee, in dollars rather than rials or cruzados...
...The policy that emerged to support our own hegemonic role rested on the simpler, more American foundation of free trade...
...Much of Kuttner's book is an exposition in detail of the ways in which laissez-faire inhibits our capacity to create an effective policy of our own...
...I need hardly add that this conclusion depends on many assumptions about the structure of such a market...
...Is there such a thing as a comparative advantage in economic planning, and how does a nation acquire it...
...Foreign nations could not get their hands on enough dollars, and foreign goods were dirt cheap for Americans...
...Hence the regime of laissez-faire does not have to be justified in the same fashion as one of protectionism or imperial preference...
...It is this credo that Kuttner thinks is finally nearing its end in the United States, which is the only country that still believes it—or, more accurately, it is this credo that ought to be nearing its end, considering the extraordinary price it has exacted for moral rectitude...
...The End of 1 432 • DISSENT Books Laissez-Faire is a book that Keynes himself would have relished, rolling his eyes heavenward at the follies committed in the name of preserving capitalism's virtue, never mind the price...
...It also follows that whatever advantages accrue to a hegemonic nation from free trade will be viewed as part of such an efficiency-maximizing, benevolencespreading process, not as a result that follows the choice of rules by the hegemon...
...He calls that policy "utopian" laissez-faire...
...Instead we negotiate to establish the number of Japanese automobiles and the tonnages of steel that competitor nations will export to us, avoiding the heresy of protectionism because the limitation has been arrived at "voluntarily...
...But the conflict between nation and nation cannot be viewed in quite the same way...
...The United States has had the most destructive booms and busts, the worst pattern of income distribution, and the least socially responsible overall management of any advanced capitalism in the world...
...Economists see the dread hand of politics only in those arrangements that limit the untrammeled workings of the market...
...In The End of Laissez-Faire Kuttner extends his inquiry from domestic to foreign economic affairs, thereby altering the analysis in an important way...
...In like fashion our mainstream economists and government officials denounce "industrial policy" — the underwriting of future technological leadership— because it is not a product of spontaneous market forces, but we look the other way as we smuggle in a commitment to future leadership through DARPA, the Pentagon's Defense Advanced Research Projects Agency...
...Other countries erect tariffs or introduce quotas to protect strategic industries against an unmanageable influx of competitive goods...
...We do not countenance such deplorable measures...
...It follows that international activity modeled on this paradigm is supposed to bring to the world at large the same benefits it procures for the domestic economy...
...The hegemonic currency must be "as good as gold" in fact as well as in formality...
...exports, a frenzy of takeovers that misdirected American managerial energies, government indifference to our deteriorating infrastructure...
...Kuttner says that politics is the only way...
...How can the desire of all nations to maximize their welfare be reconciled with a coherent system of rules for the trading system, even if those rules are not the rules of laissez-faire...
...The huge positive American balance of payments became by degrees the source of a deficit second in size only to that of the federal treasury...
...The End of Laissez-Faire does not refer to the end of a reliance on the market system as the principal means of mobilizing and guiding the energies of a modem economy...
...Kuttner is particularly irritated by the hypocrisy to which our ideological commitment drives us...
...It was not always so...
...t is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest...
...In a previous book, The Economic Illusion (1984), Kuttner discussed the consequences of laissez-faire for the domestic economic well-being of a nation like the United States...
...Europe and Japan, in short, are today examples of the managed capitalism that Kuttner himself depicted in his earlier book as the appropriate direction of change for the American economy...
...With the United States it was different...
...It is the much more serious damage of an inability to take an accurate measure of the contest in which the United States finds itself...
...The conflict of marketer against marketer and firm against firm is the means by which capitalism curbs and guides its explosive energy...
Vol. 38 • July 1991 • No. 3
