Free Markets and Societal Death

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All Societies Die.

None live forever.

Ancient Rome died.

Byzantium died.

The Old, Middle and New Kingdoms of Egypt died.

All of the dynasties of Ancient China died.

The Aztec Empire died.

So did the Mayan and Incan Empires.

Our modern “society” is in fact a transnational society. It involves an extensive set of collaborative synergistic relationships between the nations of Western Europe, the former settler colonies of Western Europe – the United States, Canada, Australia and New Zealand – and one late arrival to the Rich Nations Club – Japan.  Some social scientists refer to these regions as the “core” of the “modern world system”. The process of economic and technological progress that created our modern world system began in the 1300’s with economic revivals in the Low Countries and in Northern Italy. It expanded throughout Western Europe and then to the other nations in the list. At one point, Spain was the dominant nation, then the Netherlands, then Great Britain. Now the current hegemon – which is under some competitive challenge – is the United States.

    

Other nations have risen with the rise of this Euro-American economic core. There has been both spillover economic growth and spillover technological development. These have provided massive benefits to Eastern Europe, Latin America, the Middle East and Asia as a whole. But there have also been relationships of exploitation and economic underdevelopment that have added elements of conflict and tension to these relationships.

    

That said, the permanence of the Euro-American world system is no more guaranteed than was the permanence of the Roman Empire or the Han Dynasty. Three hundred years from now, five hundred years from now, a thousand years from now … will there be a rich prosperous Western Europe, a rich prosperous United States with both having comfortable standards of living and global power?

    

Will there be a rich prosperous ANYWHERE with comfortable standards of living, let alone comfortable standards of living and global power?

    

Most of us, when we think of what will end it all, think of either an ecological disaster or nuclear war.

    

I would not rule any of those out.

     

But most societal deaths in history died of other things besides ecological disaster or nuclear war.

    

My book All Societies Die: How to Keep Hope Alive reviews those causes of death in extensive detail.

   

The partial preview here involves the role of free markets in societal survival.

     

That free markets were a fundamental cause of the massive economic growth that characterizes the modern world system is beyond dispute.

    

Free markets are amazing things.

    

The markets in Western Europe, the U.S. and Japan were not 100% free. There was some meddling of the government in the economy. Much of that meddling was beneficial. But the overall predominance of free markets was one of the key advantages of the West.

    

What really mattered was having a free labor market. Slave societies were economically stagnant. Capitalist societies with free labor markets had dynamic growth. The obvious illustration of this is the relative growth of North America versus Central and South America. North America had free labor markets. Central and South America had slavery. The parts of the United States that had slavery actually resembled Central and South America during the period when slavery was legal. The Northern states had far more impressive economic growth than did the Southern states.

    

What were the advantages of North America and the Northern States within the U.S.?  Wages were set in a basically free market (with minor fiddling on the side by labor unions and employer collusion). If workers were productive, they got paid more. If workers were unproductive, they got paid less. Workers who raised their productivity by getting educated, acquiring skills and putting in long hours were rewarded for it. Workers improved themselves and disciplined themselves voluntarily. Their reward was their paycheck.

    

Slave societies had slaves doing the work. They would only work when they were coerced. They had no motivation to work, since they kept nothing from their labor. Therefore, they didn’t. Plantation owners had to pay for large expensive superstructures of foremen and whip hands to get the slaves to do what they were told.  The slaves were uneducated. Their productivity was low.

    

Worse – since slaves received no paychecks, they never bought anything. In countries with free labor markets, workers bought all sorts of consumer goods – since they had cash. North America grew because it had a consumer base that would support entrepreneurialism. Would-be entrepreneurs in Central and South America had limited markets because there were few consumers. Business formation was low. Investment was low.

    

Free markets in the North also reduced the cronyism associated political interference with business decisions in the South. Less regulation also provided fewer opportunities for corruption.

    

But …

(There is always a but …)

   

Most countries with high rates of economic growth had “some” government meddling in the economy. Often that meddling was critical to the generation of prosperity.

    

The wacky case is governments which have a superlative track record in using state planning to determine national investment plans. We all remember the countries where the government made a hash of trying to run a centralized economy. Russia under Communism was an economic disaster. Most of Eastern Europe was not much better. In many poor countries, the government bureaucracies that regulate the economy turn into giant swamps of corruption and cronyism. (I mention no names here to protect the guilty.)

    

But there were a few countries that were just the opposite. Americans forget about these. These were countries with brilliant governments whose economic and investment plans that were superlatively well conceived. The government bureaucrats told private capitalists what to do - - - but in this case, the bureaucrats were right.

    

The classic example of this was Japan. Japan was closed off from the world until the nineteenth century. It is a fully industrialized nation today. Once Japan was forced open, it had the fastest modernization and economic growth that had ever been seen. They grew much faster than had any previous economy in the West. The industrialization program came from a number of enlightened ministries. MITI, the Ministry of International Trade and Industry, was particularly important after World War II. They were responsible for creating the incredible car industry Japan has today and allowing Japan to break into a number of industries that were previously dominated by the United States. The Ministry told companies what to invest in. It provided capital to companies at submarket rates. It provided government protection for those companies. It kept foreigners from buying Japanese companies. This created economic giants such as Toyota and Mitsubishi that are key players in the global economy today.

    

China was fully aware of the Japanese model. China imitated the Japanese faithfully. China was and still is a Communist country. China had seen the Soviet Union fail. It knew how government bureaucrats can foul up the process of economic development. Their answer was to decentralize control of the economy to individual provinces and cities. The provinces and cities would try running their regional economies. If any of them failed, the national government in Beijing would fire the ineffective economic developers, and replace them with technocrats who had a better plan. This is in contrast to the Soviet Union, where the same tired old bureaucrats ran the Russian economy for decades with lame results. The Chinese government (or rather governments) gives direct orders to capitalists just the way Japan did. China has the fastest economic growth rate in the world. It is hard to argue with policies that have produced the fastest economic growth in the world.

    

But what about the Western countries that did not have highly intrusive government economic planning? They too have their government meddling in the economy – although that meddling is much more subtle.

    

The economies of Western Europe, the United States, and Japan all developed excellent education systems. More educated workers were more productive workers. Two economists, Bowman and Anderson have shown that no economy developed historically until at least 40% of its labor force was literate. Government financed and paid for the systems of education that facilitated national improvements in science and technology.

    

No country grew without the development of major transportation infrastructure. In the nineteenth century, governments built railways. In the twentieth century, governments built highways and airports. None of these basic structures was provided entirely by the private sector. Either the state built these things directly, or they heavily subsidized private companies who were contracted to do the building.

    

The hegemonic powers required strong defenses. A country like Switzerland or Sweden could use diplomacy to get other powers to cover for their defense. Sometimes this worked. (Think Norway during the Cold War.) Sometimes it didn’t. (Think Norway and the Nazis in World War II.) The major powers, such as the Britain, the United States and France, all had to protect their overseas economic interests by the direct projection of military force.

    

Successful countries require science. Scientific research was and is generally paid for by the government. In the United States, this takes the form of the National Science Foundation, the National Institute for Health, the Pentagon and state provision of publicly funded universities. Germany, the other major scientific power of the late nineteenth and early twentieth century had its own public universities, government research collaboration with industry, and from the 1930’s on – its own government science foundation. 

    

Free markets are wonderful – but they are not enough.

    

Free markets and profit-maximizing private firms are excellent at providing goods and services that are profitable. Growing grain and selling hamburgers is profitable. The free market does an excellent job of generating a food supply, improving the yield of food producers and providing an endless variety of new and interesting things to eat. Making clothing is profitable. The free market provides lots of clothing, at a good price, and changes the styles regularly to keep fashion interesting.

    

Education, infrastructure, defense and science are not profitable. Private schools for the elite are profitable because they can charge their customers sky-high tuitions. Schools for everyone else are not profitable. Without the government, schooling would be scarce and very expensive. The same applies for the other items on the list.

    

It should be mentioned that government has generally played a huge role in supporting the cultural system of most societies. Most societies (the U.S is an exception) have had a state religion. This religion was important in maintaining national cohesion. Most of the impressive buildings that are linked to national identity have been built by governments. This would include the Eiffel Tower, the Colosseum, and nearly every medieval cathedral. (Remember Catholicism was a state religion.) In the United States, the government has built most of the sports arenas. (Hey, don’t knock the unifying effects of a winning team.)

 

*  *  *

What does all of this imply for societal death?

    

If an economy tanks – and that economy tanks long enough – this can be the beginning of the end for a society. Rome was in steady economic decline for the last 200 years of the Empire. The Byzantine economy was on a steady downward trend between 1100 and the sacking of Constantinople by the Ottomans in 1453. A strong economy is central to paying for a strong military. Without a strong military, a country cannot defend the strategic resources that lead in turn to a strong economy. Without a strong economy, the society has a hard time maintaining its educational system, maintaining its technological advantage, or even some of the aspects of its national culture. Even though nationalists and sentimentalists will defend a nation’s heritage to the end, young ambitious people will immerse themselves in the culture of whatever country currently has the hottest economic prospects. Nineteenth century Americans imitated the British and the French – who were richer than they were. Nowadays, bright students from all over the Global South want to study in American universities, learn American culture, and if they can, live in America and be Americans. If America’s economy tanks, and China’s economy is wonderful, guess where all of these students are going to want to go.

  

Keeping the economy strong is critical.

  

But free markets are not enough to keep a national economy strong. I have already referred to those countries where superior governments were able to supercharge lagging economies that were not otherwise promising. But largely, the defense of the economy depends on the defense of education, science, infrastructure, and frankly, defense. Without government carrying its fair share of the weight, the private sector cannot shoulder the burden alone.

    

Nearly every major story of the fall of a society or an empire, contains a sub-story of the failure of a government. Often this failure was a fiscal failure. The government did not have enough money to pay its bills.

    

Government is also going to have to play a role if we in fact do run into a savage ecological problem. Effective government was just needed very recently – in order to fend off the public health threat of COVID-19. COVID-19 will not be the last example of our ecosystem throwing a challenge at the humans that will kill off those humans if they do not respond adequately.

    

Government will also have to be effective enough at diplomacy and geopolitics to fend off the threat of a nuclear war. Currently, the nuclear threats posed by North Korea, Iran, India and Pakistan are completely under control, right?

    

Without strong, well-funded, competent governments, the chance of economic, environmental or thermonuclear disaster increases astronomically. No matter how strong and well-functioning the free market will be, the free market cannot do governments’ job.

    

Not all governmental screw-ups produce societal death – just as not all disease causes human death. But you don’t want to have too many of these things. Shrinking the government is like shrinking one’s muscles. One does not want to do that before going into a fight for survival. Eliminating government waste improves efficiency. There is nothing wrong with that per se.

    

But the blind formula that everything involved with business is good and everything involved with the government is bad is intrinsically dangerous. Ask yourself how happy you would be with two hundred to three hundred years of declining economic growth, declining educational and scientific capacity, and ever-increasing geopolitical chaos from nonstop wars that can’t be controlled.

For More Information

There are other causes of societal death besides weak government. For a discussion of what else can go wrong, see All Societies Die: How to Keep Hope Alive. (2021, Cornell). That book also contains some of the historical and scholarly defense for the arguments presented here.

    

On the modern world system and the concepts of core and periphery, see the Wiki article on World Systems Theory https://en.wikipedia.org/wiki/World-systems_theory.

    

The governments that produced dramatic economic growth in East Asia are called developmentalist states. A basic explanation of the phenomenon can be found in Robert Wade’s Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. (1990, Princeton)

    

The requirement of 40% of the population being literate for growth to occur comes from Bowman, M.J. and Anderson, C. A. 1963. "Concerning the Role of Education in Development". pp. 247‑269 in Clifford Geertz (ed.), Old Societies and New States. Glencoe, Free Pres