December 17, 1997
"Asia's Financial Foibles Make American Way Look Like a Winner," announced a front-page headline in The Wall Street Journal on December 8. "Asia's Surrender," read the front page of The New York Times six days later. The recent news of East Asia's financial woes may have shaken the confidence of investors around the world and caused fears of a global economic slowdown, but in some quarters it has inspired another sort of response. The collapse of currencies and financial institutions from Thailand to South Korea to Japan, the unprecedented $57 billion bailout of the Korean economy by the International Monetary Fund, the accord signed in Geneva by 102 nations committing Asian countries to open up their financial markets, the move by Japan's ruling party to bolster the humbled Japanese banking industry -- all have prompted observers in the United States to claim victory for Western-style capitalism over the competing economic model exemplified by Japan and its emulators who have shunned laissez-faire in favor of economic nationalism and protectionist trade policies.
South Korea especially has been the focus of attention during the past two weeks. Having developed into one of the world's most formidable economies in the course of a few decades, Korea was seen as perhaps the fiercest of the "Asian Tigers" poised to tip the global balance of economic power toward the Pacific Rim at the start of the twenty-first century. But as The Wall Street Journal noted, the United States-backed IMF bailout is forcing the government in Seoul "to accept a sweeping set of structural changes that would begin to dismantle a Japanese-style financial system and replace it with American-style capitalism." And as The Times pointed out, "the United States clearly sees a chance to use Asia's crisis to score some economic points and some philosophical ones as well." It appears that Adam Smith is reaping his revenge.
Related articles from The Atlantic's archives:|
"What Is an Economy For?," by James Fallows (January, 1994)
"We know the answer: to grow so that we can all buy more and keep the world economy spinning. Asians have a different answer: to grow so that a country can produce more -- whoever buys the goods -- and keep the country's, not the world's, economy spinning."
"The Capitalist Threat," by George Soros (February, 1997)
"What kind of society do we want? 'Let the free market decide!' is the often-heard response. That response, a prominent capitalist argues, undermines the very values on which open and democratic societies depend."
"The Revolution Upon Us," by Lester C. Thurow (March, 1997)
"'All that is solid melts into air' -- Karl Marx could have been describing the forces unleashed by the first truly global economy." A review of William Greider's One World, Ready or Not: The Manic Logic of Global Capitalism (1997).
"The Vanity of Human Markets" (February 26, 1997)
An Atlantic Unbound interview with Robert Kuttner, author of Everything for Sale: The Virtues and Limits of Markets (1997).
Be that as it may -- and there is no shortage of detractors from the gospel of Adam Smith -- it remains to be seen whether the gloating noises emanating from this side of the Pacific are premature. What is more certain is that Wall Street's triumphalism reveals a certain ignorance of, or disregard for, economic history.
In The Atlantic Monthly's December, 1993, cover story, "How the World Works," James Fallows -- then the magazine's Washington editor and now the editor of U.S. News & World Report -- argued that although Americans may believe that the laissez-faire principles of Anglo-American economics are "natural laws," the truth is that there is another legitimate model for economic development, one that America itself used to follow. Sketching out the contours of two "clashing world views" -- represented by the theories of Adam Smith on the one hand and those of the lesser-known German economic thinker Friedrich List on the other -- Fallows pointed out that whereas Smith has reigned virtually unchallenged in the English-speaking world since the end of the Second World War, many countries, including Germany and the United States in the nineteenth century and Japan in the twentieth, have followed the thinking of List. Fallows's conclusion still resonates:
What America actually did while industrializing is not what we tell ourselves about industrialization today. Consumer welfare took second place; promoting production came first.... The United States trying to catch up with Britain behaved more or less like the leaders of Meiji (and postwar) Japan trying to catch up with the United States.... The great industrial successes of the past two centuries -- America after its Revolution, Germany under Bismarck, Japan after the Second World War -- all violated the rules of laissez-faire. Despite the obvious differences among these countries ... the underlying economic strategy was very much the same.Pointing to the example of postwar South Korea, Fallows continued:
in order for Korea to get enough money into the hands of its industries, it needed to bend the rules. The crucial thing about this undertaking ... is that it was not some Korean quirk. Every country that has caught up with others has had to do so by rigging its rules: extracting extra money from its people and steering the money into industrialists' hands.Whether or not the current crisis in Asia represents the end of an era and the reordering of the global economy, Fallows's point is well taken. When it comes to our faith in the infallibility of laissez-faire capitalism, we in the West ought to remember that there are other ways to structure an economy -- ways that have been proven to work in the past and may hold lessons for the future.
Fallows's Atlantic article went on to form a central part of his book Looking at the Sun: The Rise of the New East Asian Economic and Political System (1994).
Copyright © 1997 by The Atlantic Monthly Company. All rights reserved.