How an Economist Predicted Today’s Politics in 1944

May 11, 2017

If markets don’t produce outcomes in line with what voters want – and if politicians won’t (or can’t) address those problems – people tend to reach for more radical solutions.

Donald Trump is only one example. The past year has seen a surge of nationalist populism, from Brexit, to Donald Trump, to Marine Le Pen making the final round of the French presidential election. Not to be overlooked, nationalist-populist parties already control the governments of Poland and Hungary.

These movements have arisen in part from frustration over governments’ inability to deliver jobs, material security, and a rising standard of living. Nationalist-populist parties want to fix this problem by breaking market ties and reorienting states inwards. While controversial, this approach does address the core problem facing the global economy today: the fact that markets – which do not inherently respond to democratic wishes – have more say over how our lives unfold than our democratically elected leaders.

These movements appeal to disaffected people across the political spectrum. They are united by a shared distaste for globalism and, in some cases, an enthusiasm for what is known as “welfare chauvinism” – the idea that welfare states should protect “our own” before looking after others, like refugees. They argue that governments must protect the nation by eliminating foreign competition for scarce resources (like jobs) and refusing to cede decision-making capacity to international organizations.

By appealing to both ends of the spectrum, nationalist-populism has conducted an effective pincer movement on the old parties of the postwar status quo – especially the center-left. Evidence abounds: Britain’s Labour party is in disarray over how to respond to Brexit and risks being routed in June 8’s snap election. Dutch Labour had a catastrophic result in March, losing more seats than in any other election in its history. The Socialist Party in France was all but wiped out of the first round of the presidential election, with its candidate failing to even reach double-digits. In the US, it remains to be seen whether the Democrats can capitalize on widespread opposition to Trump.

We are experiencing what the Hungarian political economist Karl Polanyi called a “double movement:” a moment where society protests bad economic outcomes by reasserting political control over markets. People dislike being treated as low-cost commodities – if they are, they tend to seek out political leaders who promise to change their lot in life. FDR’s New Deal was an example of a double movement in action. So was the rise of Adolph Hitler. These reactions are inevitable, Polanyi says, not necessarily desirable.

After 1945, policymakers decided that the only way to prevent bursts of reactionary politics was to “embed” the market within society: to bend markets to society’s wishes. The postwar order was built on this idea – though the ability of states to actually influence markets waned as globalization (particularly financial globalization) accelerated in the 1970s.

So how do we redress the imbalance today?

Trump, the Brexiteers, and Le Pen offer one answer: chop up the global economy by reasserting national barriers and dismantling international institutions. By shrinking the globalized market back down to a national scale, governments gain more control over outcomes. The alternative is to move in the opposite direction: toward more internationalism. In theory, global governance – not global government – could fix the power imbalance between states and markets by scaling some state powers up to the supranational level.

While the enthusiasm for the first option is palpable, political leaders have been wary of taking up the defense of internationalism.

Centrist parties in 2016 assumed a defensive crouch, hoping to avoid the ire of the restive populists. Opponents of Brexit focused on the economic cost of leaving the EU rather than defending the broader concept of membership. Hillary Clinton actively hid her dream of constructing a common market spanning the Western Hemisphere. This fear twisted the debate in an unexpected way: it is impossible to make an informed choice when only one option is articulated.

The Trumps and Le Pens have had the field to themselves – but this may be starting to change.

In France, centrist Emmanuel Macron has campaigned on an unashamedly pro-EU platform, using that to propel him into the Élysée. He isn’t the only one to find such success in the internationalist center: the two most pro-EU Dutch parties (D66 and the Green-Left) saw the largest gains in their national elections and the British Liberal Democrats have experienced a minor resurgence as the only mainstream British party to oppose May’s hard Brexit plans. All see close international cooperation as essential when combating humanity’s collective problems, such as the refugee crisis, the excesses of global capitalism, climate change, and the ongoing threats of terrorism. These movements represent the best counterargument to the nationalist-populists – and the only way to stop them at the ballot box.

After all, the fundamental argument for economically restrained global governance is as strong as it has ever been: we coordinate through bodies like the IMF, World Trade Organization, and European Union precisely because of what happened in the early 20th century, the last time the global economy descended into overtly nationalist competition. Of course, these organizations and the governments that support them have made mistakes. Not least of these has been their insensitivity to the downsides of global capitalism – particularly for those hurt by outsourcing, urbanization, and automation. Especially in its post-1980 guise, the benefits of the postwar system were far too concentrated and the elite far too disinterested in addressing that problem.

However, it would be a mistake to overlook, as nationalist-populists do, the monumental achievements of the liberal postwar order: the creation of a relatively prosperous and peaceful international system that generally raised living standards around the world. That’s a record worth campaigning on.

This article was originally published on the RUG Economics faculty blog.