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SUNDAY BOOK REVIEW
The Past Is Prologue
By JOHN GRAY
By Emma Rothschild
Harvard University Press: 354 pp., $45
Once again, we are coming to think of the free market as belonging in the past. In the decades after World War II, it was seen as irretrievably obsolete, a form of economic organization whose human costs and inherent instability had led to the Great Depression. Yet in the 1980s the free market became the rallying cry of a newly radical right-wing intelligentsia, and by the start of the '90s it had become the core of a new economic orthodoxy. Mainstream political parties throughout the Western world were united in the belief that free markets were the only way in which a modern economy could be organized. National governments signed much of their remaining control over their economies to transnational institutions committed to the new orthodoxy. The International Monetary Fund and the World Trade Organization set about remaking the entire global economy on a free market model. To many it seemed that a laissez-faire economy, reinvented and implemented on a global scale, was the future for humankind.
But not for long. By the end of the '90s the edifice of the global free market was shaking. The Russian default and the activities of Long-Term Capital Management, an over-leveraged hedge fund in which even some central banks had made significant investments, brought the jerry-built structure perilously close to collapse. New anti-capitalist movements, no less globalized than the system they were protesting, disrupted economic summits in Seattle, Prague and Davos. Yet it was not these developments that signaled the end of global laissez faire. That was marked by the arrival of George W. Bush in the White House. Impatient with international organizations and treaties, the new administration showed itself ready to abrogate them whenever it judged that they failed to serve American interests.
The Kyoto protocol on global warming was unilaterally renounced, arms control agreements declared redundant. The world beyond America's shores is now seen as dangerous and intractable, and an old-fashioned understanding of national interest has become the dominant force in American foreign policy. It can only be a matter of time before this unilateral approach to environmental issues and defense is adopted in matters of trade. In any event, without much fanfare but quite unmistakably, the project of a worldwide free market has already been dropped from the agenda. The United States is reverting to the attitudes and policies it displayed throughout much of the 19th century. It is returning not to a largely apocryphal era of laissez faire but to economic nationalism and the idea of laissez faire in one country. As for the global free market, that is history.
"Economic Sentiments" was written during the 1990s, and it reflects the assumptions and biases of that time. Again and again, Emma Rothschild declares that the debates and anxieties of the late 18th century are our own, altered by vast transformations in circumstances but recognizable nevertheless as the currents from which flow many of our hopes and forebodings. In the introduction, she writes that we live "in the new circumstances of the early twenty-first century, in a post-restoration world. Political institutions are more free of the fear of revolution now than at any time in the nineteenth or twentieth centuries. The rhetoric of the endlessness of commerce is more unquestioned. The political and economic thought of the late eighteenth century—the old, lost idyll of universal freedom—is itself, now, newly familiar." Here Rothschild gives the short-lived triumph of the free market in the 1990s a historical significance it does not deserve. That shabby and deluded decade will come to be seen, one suspects, not as inaugurating a post-restoration era of stability and prosperity but as an interlude, a moment of transition between two epochs of conflict.
Though she finds affinities between the late 18th century and the present, Rothschild's chief concern is to revise and refine our image of the past so we can command a view of the period as it was seen by those who lived in it. Taking as her chief subjects Adam Smith and the Marquis du Condorcet, Rothschild reconstructs the conceptions of economic life that were developed during that unquietly reflective time. The resulting views are as arrestingly different from our own as they are in some ways strikingly similar. The two thinkers came from different ends of the Enlightenment, conservative and utopian, Smith focusing on the passions that are mobilized in market exchange, Condorcet—at least in some of his writings—on the interactions of rational calculators. Yet both saw economic life as a highly discursive set of activities, with behavior in the marketplace resembling the shifts and turns of conversation more than any mechanical process of adjustment to changing prices. Neither could have recognized the idea that markets tend toward equilibrium, which has been the central source of controversy in 20th-century economic theory.
For these great Enlightenment thinkers, a market economy is not a device for the allocation of scarce resources but a way of life, heavily freighted with anxiety and hope. In her brilliantly illuminating and compelling reinterpretation of Smith and Condorcet, Rothschild presents a view of late 18th-century ideas through which we can ourselves re-envision the human realities of life in the market. In so doing, she has produced a masterpiece of the historical imagination. One of the most instructive aspects of Rothschild's reinterpretation of Smith is her demolition of the view of him—perennially popular among economists who know nothing of the history of their discipline and stridently echoed by the ideologues of the free market—as a theorist of the invisible hand. She shows that Smith rarely used the phrase himself, and when he did, it was with a light irony which pointed to the failings of the market as much, or more than, the unplanned coordination of human activity that sometimes results from its workings. Why then has he been so closely associated with the idea of the invisible hand?
The answer is that conservative ideologues have used Smith's insight—that market exchange produces an order in human affairs that no one has designed—to defend their free-market policies. Chief among them was F.A. Hayek, the Nobel Prize-winning Austrian economist who became one of the gurus of the intellectual right in the '80s. Hayek argued that the market evolves as an unintended consequence of human activity, claiming that it embodies wisdom inaccessible to any single generation and insisting that it must therefore be accepted as the basis of society. In a devastating critique of Hayek's views, Rothschild dissects the multiple ambiguities of his notion of social order and shows how removed it is from anything in Smith. Hayek believed that we must submit to the unfathomable workings of the market, but this blinkered reverence for social process was unacceptable to Smith, who viewed the market as a human construction. "There is very little in Smith," Rothschild notes, "which corresponds to Hayek's esteem for the unconscious, the blind, the untheoretical, the imperfectly understood." Smith was a scion of the Scottish Enlightenment, a secular rationalist who—in sharp contrast with Edmund Burke, the founder of English conservative thought—saw social institutions as useful conveniences, not repositories of immemorial wisdom.
Smith understood, as Hayek never did, that free markets undermine vital social values, including those on which the market itself stands. Free markets are powerful solvents of tradition; they dissolve established hierarchies and reward the successful whether they are virtuous or not. These features of market-based societies worried Smith. They explain his advocacy of government support for schooling and (less fashionably, but not obviously wrongheadedly) military conscription as ways of correcting the stunted sensibility and selfishness that free markets foster when they are left to themselves. Smith was not an enemy of commercial society like Rousseau or Marx. Yet, in contrast with his late 20th-century epigones, he had a brooding sense of its ineradicable imperfection.
Condorcet achieved fame by his pioneering contributions to the theory of voting and notoriety by his claim that happiness, knowledge, virtue and liberty are bound together as by "an indissoluble chain." He is often represented as a prototypical Enlightenment utopian, a devotee of reason who was carried away by an unreasonable certainty that stupidity, injustice and misery can be eliminated by scientific knowledge.
Rothschild does not deny that this affirmation of human perfectibility has some basis in Condorcet's writings, but she puts it in the larger context of his thought, where it coexists with an uneasy awareness of the uncertainties of the human prospect. The picture of Condorcet which emerges from Rothschild's account is at once more sympathetic and more problematic than the caricatures which appear in more conventional histories of ideas. It has long been known that the Enlightenment was a hugely complicated phenomenon, in which a heterogeneous mix of intellectual movements—rationalist and common-sensical, atheist and deist, perfectibilist and darkly pessimistic—contended inconclusively over several centuries in a number of very different countries. In her subtly nuanced account of Condorcet, Rothschild adds color to this view, thereby enhancing our understanding of the contradictory impulses which the Enlightenment has always encompassed. First and foremost, "Economic Sentiments" is a rich, profound and at times revelatory essay in the history of ideas which will undoubtedly become part of the academic canon. But it is also an inspiriting commentary on our own times, which can be read with profit by many outside the academy. Referring to the instabilities of free markets, Rothschild writes at the end of the book, "The insidious shortcoming of the liberal economic system is the system's own insecurity." Liberal market economies give rights of opportunity to all, and at the same time the restless dynamism which makes them such prodigious generators of wealth deprives everybody—but the poor especially—of security. The equality of hope they offer is mocked by the systematic inequalities they inevitably engender.
In the past, an awareness of these paradoxes led to the institution of countervailing powers. In Europe social democracy and in America the New Deal were—among many other things—efforts to tame the market and so reconcile it with the enduring human need for economic security. In the mood of hubris that went with the power of New Right ideology—a more starkly utopian Enlightenment creed than ever Condorcet entertained—these restraints were weakened or else destroyed. During the long boom of the 1980s and '90s, the resulting social and political upheavals could be contained without much difficulty. Now that the boom is sputtering to a close, the ideal of a worldwide free market is being unceremoniously shelved by a new Right more schooled in realpolitik than in the utopian schemes of free-market philosophes.
Today, national self-interest is the order of the day. American policy focuses on protecting itself against a dangerous world, securing the energy supplies it needs and maintaining advantageous terms of trade. The perceived arrogance of some of the Bush administration's recent policies has evoked hostility in Europe, the Middle East and Asia, where the United States is increasingly viewed as claiming the privileges of an imperial power while declining the responsibilities that go with them. At the same time, in many parts of the world, politics is dominated by fundamentalism and ethnicity—forces that free-market thinkers, like Marxists, have never really understood. Rothschild's magnificent book points to interesting affinities between the late 18th century and the present, but there may turn out to be closer parallels with the first decade of the 20th century, a plateau of seemingly permanent peace and prosperity which proved to be founded on sand.
John Gray is professor of European Thought at the London School of Economics and the author of "False Dawn: The Delusions of Global Capitalism" and "The Two Faces of Liberalism."