Will Global Capitalism Fall Again?

In this article for think-tank Bruegel, Jeffrey Frieden of Harvard University compares the collapse of global capitalism before the First World War and asks whether history could repeat itself. 

The period before World War One (from 1850 to 1914) was also one of unprecedented economic integration, with capital, goods and people moving more freely than at any other time, argues Frieden.  

But, the author explains, after the war, the system could not be restored due to the fact that the economic requirements of the 19th century’s global economy were incompatible with the politics of post-WWI societies. Economic shocks had, in the past, been compensated for by rapid downward movements in wages and prices – a price that organised and politicised workers and farmers of the more democratic era that followed WWI were unwilling to pay.

The Bretton Woods system of rules that came into force after WWII acknowledged the legitimacy of governments’ commitments to social insurance and redistributive social policies as well as their commitment to greater economic integration. However, the system fuelled protests when international financial integration, based on the stability of the dollar standard, began to interfere with governments’ abilities to run autonomous macroeconomic policies tailored to their individual state’s needs.

The article concludes that if our current era of globalisation is to be sustained, lessons must be learned from the previous era of global economic integration. Backlashes against globalisation, if not justified, are at least understandable, and it would be unwise to ignore the costs of globalisation. However, Frieden warns that ignoring or failing to promote the potential benefits of globalisation is just as perilous. A balance must therefore be sought between international economic openness and the legitimate concerns of those harmed by the international economy.