DRI-465: The Road to Utopia

Utopia is the state of human perfection. Man has sought it for thousands of years. Theologians and prophets, wisely despairing of earthly success, preferred to locate it in the afterlife. Sir Thomas More’s take on the subject began a relocation process that picked up speed in the eighteenth century, when rationalist philosophy posited a human mind with the ability to comprehend itself and construct its own future. When human reason replaced God, politics supplanted religion as the road to utopia.

Of all the impediments blocking success of the utopia project, war has loomed largest. Throughout recorded history, war has been conducted between nation states. It seemed natural to equate nationalism with chauvinism, and many thinkers have done so. T. H. White’s famous parable had Merlin urging Arthur to see his land as if he (Arthur) were a bird in flight, to which boundary lines are invisible.

Modern political science has viewed national boundaries with ill-concealed distaste while mostly continuing to indulge its utopian leanings. The growth of the size and scope of government has made government policy the major outlet for the utopian urge. That urge has found its strongest expression in the obsession with ending war.

In the 20th century, the primary tools fashioned for this purpose were foreign policy and foreign aid. It is instructive to compare the effects of these political tools with those of the decidedly non-utopian science of economics, deployed to the same end.

World War I and Postscript.

The prevailing foreign policy prior to World War I revolved around preserving a military balance of power between nations. To that end, major powers like Great Britain, France, Germany and the Austro-Hungarian Empire interwove a fabric of military alliances with each other and lesser powers. This strategy allowed the assassination of an archduke in MIddle Europe to drag the world into war.

Blame for the decimation of European manhood in the trenches of France and Belgium was laid on the losers and on the institution of war itself. Pacifists and statesmen like Cordell Hull steered foreign policy into the opposite direction by negotiating treaties like the Kellogg-Briand pact, which supposedly outlawed war as an instrument of national policy.

The victorious Allied powers – Great Britain, France and the United States – were able to dictate terms to the losers – Germany and Austria-Hungary. French leader Clemenceau wanted to exact revenge and monetary remuneration for France’s defeat in 1871. Great Britain’s Lloyd-George wanted to offset Britain’s massive war debt. The duo demanded that German be forced to pay huge reparations to the Allies.

The Transfer Problem

Forcing World War I reparations on Germany was one of history’s truly bad ideas. At the time, though, almost nobody knew it. One of the few who did was John Maynard Keynes, one of the leading British economists. In 1919, he wrote one of the most influential books of the century, The Economic Consequences of the Peace. Today, Keynes is famous as the father of macroeconomics, but the truth is that he was not a brilliant or original theorist. His book relied on the theory of international trade developed by classical economists in the eighteenth and nineteenth centuries and refined by his mentor, Alfred Marshall.

The salient idea is that a financial transfer between nations must have a real counterpart – that is, a corresponding transfer of goods or (possibly) services. It simply cannot end the matter to say that “the German treasurer writes a check to the British/French treasury.” The check will be deposited in the government’s bank account and the bank will exchange the money for units of its own national currency. The foreign exchange dealer who makes the exchange does so in the expectation of being able to “sell” the German deutschmarks to people who want to buy German goods. Eventually, that happens, and English and French citizens buy German goods. In effect, the German government has given away real goods as punishment for its war-related sins.

Popular grasp of economics was no better then than now, and most people of the day probably had some vague notion that the reparations would be paid by “the German government” or even the Kaiser himself. Instead, they were paid by the population at large, whose living standards were reduced by the fact that they had fewer goods available at higher prices than would otherwise have been the case.

Keynes also claimed that Germany would suffer a secondary burden. In order to send goods abroad, its exports would have to rise relative to its imports, and this would mean that its terms of trade – its export prices compared to the prices it paid for imports – would deteriorate. This wasn’t necessarily true. But what is beyond debate is the fact that Germany suffered terribly under the reparations imposed by the Allies. And that suffering was worsened by the refusal of Britain to allow imports of goods competing with its own manufacturers, which forced more of the burden to be borne by German price changes.

The WeimarRepublic, Hyperinflation and Hitler

In an attempt to cope with falling prices and net monetary outflows owing to reparations, the German authorities under the WeimarRepublic printed vast quantities of money. This caused one of the worst hyperinflations of modern times.

The WeimarRepublic’s hyperinflation discombobulated the nation so badly that Adolf Hitler’s Fascist Party (modeled on Mussolini’s Italian version) found increasing favor with the German public. In 1933, Hitler was democratically elected to replace outgoing German Chancellor Paul von Hindenburg. Throughout that decade, Germany pursued a policy of rearmament and territorial expansion. Meanwhile, Britain and France maintained their anti-war policies by appeasing Hitler’s expansionist demands.

In sum, the post-World War I foreign policy of pacifism and economic punishment meted out to the citizens of “aggressor nations” was as disastrous as the pre-war policy of militarism has been. Economic disintegration merely produced more militarization and war.

Runup to World War II – the Roots of Japanese Aggression

The 20th century’s first major war was between Russia and Japan in 1904-05. Russia sought to consolidate its hold over Manchuria in order to enjoy year-round, warm-water trade out of Port Arthur. The Japanese coveted Manchuria and Korea as a buffer against territorial encroachment by the Tsar.

The result was a short but bloody war. It was ended by the intervention of U.S. President Theodore Roosevelt, whose Nobel Peace Prize did not reflect the disenchantment felt by both the principals. The Russians would be fighting externally within the next decade and succumbed to Communist revolution in 1917. Meanwhile, Japan was launched on a program of imperialist aggression that spread to China and the whole of Southeast Asia.

The Japanese finally met their match when they took on the United States in late 1941. Once again, U.S. foreign policy and trade both figured prominently. President Roosevelt and his advisors were desperate for an excuse to intervene militarily on England’s behalf against Nazi Germany. Despite Hitler’s blatant provocations, treaty violations and internal persecutions of Jews, Americans overwhelmingly opposed entry into the European war. Ethnic and trade ties to Germany were very strong in the U.S. In fact, several prominent American corporations continued to do business with the Third Reich even after hostilities eventually broke out.

The Roosevelt administration developed a plan to provoke an attack by the Japanese. The plan, written down in a memo to the President by Lt. Commander Arthur McCollum, recommended eight specific provocations. One of these was an embargo on oil exports to Japan by the U.S. The actions were adopted beginning in October 1940. Japan’s attack came fourteen months later.

Looking back at the interwar period, it is noteworthy that the suppression ofinternational trade with Germany and Japan led to desperation and war. But where trade was already established – between Nazi German and the U.S. – the outbreak of war was not powerful enough to halt it completely. This latter fact is customarily viewed as shameful. Yet if war is indeed the greatest scourge known to mankind, as Gen. MacArthur claimed in his speech at the Japanese surrender ceremony, shouldn’t we celebrate the fact that trade relationships can withstand a declaration of war? This does, after all, suggest that trade can reduce the threat or likelihood of war.

Japan and Germany After World War II

After World War II, both Japan and Germany were forbidden from raising standing armies. This left them free to devote their resources to peacetime pursuits; e.g., the production of non-military goods and services.

At first, the Germans were hamstrung by the fact that their production and transportation infrastructure had been devastated by Allied bombing and tactical operations. Just as devastating was the system of wage and price controls instituted by the Allied governors who oversaw the program of de-Nazification and gradual transition back to local control.

In 1948, German chancellor Ludwig Erhard defied the Allies and all of his own advisors except one – free-market economist Wilhelm Ropke. Overnight, Erhard abolished all price controls. What followed has become known as the “German Miracle.” Germany became the bellwether of the European Common Market, a customs union designed to promote international trade among its members and forerunner of today’s European Union.

The Japanese were similarly hampered by the new constitution designed by their Allied governor, Gen. Douglas MacArthur, who modeled it after Franklin Roosevelt’s New Deal. Gradually, however, they learned to cope with the fact that their institutions were not well-suited to free markets. They set out to study Western production methods, particularly the ideas of statistician W. Edward Deming, who became their quality-control guru. Starting in the 1950s, Japan became the international economic powerhouse of the Far East, building an economy heavily dependent on exports. They rose steadily to the position of the second-leading world economy.

It seems that both German and Japan became roaring successes and benefactors to the world almost as soon as they quit practicing foreign policy and began engaging in international trade on a large scale. Sometimes this is cited as a complaint, as if they were freeloaders who were benefitting from options not available to other countries. Others object that the two countries were forced to desist from military operations – but this had also been true of German between the World Wars. The difference was that the Versailles war reparations eviscerated their economy and delivered them into the hands of fascism, which re-militarized the country in defiance of the peace treaty.

The Foreign Aid Fiasco

The failure of foreign policy to usher in a peaceful utopia did not discourage proponents, who adopted another policy tool with the same goal. Foreign aid was designed as a kind of international income and wealth redistribution policy. By appropriating taxpayer funds in developed countries and handing them over to less-developed countries (LDCs), utopians were purportedly practicing “economic development,” the use of government policy to cause per-capita real income to grow regularly larger.

The middlemen in this crusade were primarily international lending agencies like the World Bank and the International Monetary Fund – both of which had originated with other mandates but whose bureaucratic chief executives knew a reliable source of funds when they saw one. The general idea was that the Bank and the IMF would seek out needy countries and administer loans to their governments – while carrying large staffs of university-trained economists and earning hefty fees, of course.

The foreign-aid gravy train ran like a railroad – but with even less success – for over fifty years. Observers like the late Lord Peter Bauer and William Easterly have meticulously chronicled the crashing failure of aid programs to promote economic development. Large-scale infrastructure programs did not mesh with their surrounding capital structure. Aid funds were siphoned off by corrupt dictators, their cronies and relatives. Little or no attention was paid to the conditions necessary for free markets to gestate and thrive. The biggest failures were those who, like India, received the most money and attention and seemingly possessed the raw material necessary for success.

That does not mean that there were no economic development successes during the 20th century – only that they weren’t achieved via foreign aid. In Southeast Asia, the “Asian Tigers” rose from the ashes of the Vietnam era to become regional powerhouses. They did it mostly by practicing free trade in free markets. Belatedly, India awoke from decades of post-colonial torpor by starting to free up domestic markets and beginning to export its own labor services. China achieved some of the fastest economic growth in history by largely renouncing Communist economics and wresting the title of world’s export powerhouse away from Japan.

The Pattern

The pattern that emerged over the course of the 20th century is shockingly clear. The tools of foreign policy and foreign aid were intended to foster world peace, by way of achieving prosperity and fairness. Instead, they encouraged and actually caused war, the very thing they were supposed to eradicate. But the most warlike countries became paragons of virtue – peaceful, prosperous and beneficent – when they practiced international trade. It was only when they were denied the benefits of trade that they turned to war.

Utopian attempts to minimize the meaning and importance of borders have failed miserably. Political borders exist because they serve the useful purposes of separating populations into harmonious groups and keeping governmental units small and manageable. Allowing free trade across political borders lets us have the cake of efficient political borders while eating the economic benefits of free trade. Those benefits are efficient production along lines of comparative advantage and optimal consumption resulting from voluntary exchange.

The beauty of this arrangement is that it does not require that people resolve irreconcilable differences of religion, politics or ethnic history. Bitter enemies can become staunch trading partners – thus minimizing the likelihood that their disagreements will lead to all-out war.

The Long (Capitalist) Peace

Does this sound like just another utopian dream? Don’t look now, but it has already happened. According to scholars from disciplines like political science, philosophy and psychology, we are in the midst of a Long Peace. As Harvard psychologist Steven Pinker points out in his recent book, The Better Angels of Our Nature: Why Violence Has Declined, we may be living in the most peaceful era in the history of mankind.

Wars between economically developed nations have dwindled to virtual non-existence. (Even counting the Korean War yields only one such war in the last 67 years.) Wars in general are at a historic low. Violence of all kinds has declined dramatically. Murder, rape, riots, and child abuse are down worldwide. Slavery and human sacrifice are effectively extinct. This phenomenon began to attract notice some three decades ago and is still holding good.

True, scholars have been slow to recognize the part played by free international trade. Political scientists have found political causes; psychologists see the answer in psychology. (Pinker himself claims to find changes in brain evolution that have permitted us to access “the better angels of our nature.”) But that is changing. Scholars now speak of the “Capitalist Peace” – an idea Pinker describes as “a shock to those who remember when capitalists were considered ‘merchants of death’ and ‘masters of war.'” One such scholar ended a presidential address to his academic organization with the phrase, “Make money, not war.”

This outcome would not have surprised the classical liberal economists of the nineteenth century (today’s libertarians). They maintained that free trade would eliminate the primary causes of war – first, by enabling nations to make the best use of the human and non-human resources possessed by all; second, by vitiating the need for warfare to gain access to trade routes or scarce raw materials or minerals; and third, by making it counterproductive to fight nations that supply consumption goods and vital production inputs.

Recently, the volume of world trade reached its all-time high. This fact was not celebrated by the press, which preferred to stress the political and military tensions involving countries like Afghanistan, Iran, Iraq, North Korea and the Sudan. The technological revolution has raised our fact-gathering capabilities to undreamt-of heights, letting us pinpoint the world’s discontents at a moment’s notice. Without the guidance of historical perspective, however, we might fail to realize that the discontents of our modern civilization are minute in number and miniscule in size and scope compared to those of the past.

And without the counsel of economic logic, we wouldn’t understand exactly what has made the Long Peace so peaceful. It wasn’t the astute foreign policy formulated by presidents and prime ministers and advisors. It certainly wasn’t the trillions of dollars of foreign aid lavished on less developed countries by the Western developed nations. It was trade – not aid – that did it.

World free trade is not a utopian concept because it is a process, not a defined state. Freedom is the absence of coercion, not the achievement of pre-set goals. The attainment of peace through trade is another case in which the best way to get what you want is not by aiming directly at it. This should not be surprising, because maximizing freedom leaves the most options open to us.