Sunday 20 November 2016

Yes, It’s 1979 All Over Again

It is amazing to see how people change. With Donald Trump's victory, we are fortunate enough to witness this amazing phenomenon once again. We are fortunate because it happens pretty rarely. In fact, such a radical change of mankind's spiritual condition occurred only three times in the past 150 years. In order to understand the significance of Trump's rise to power, it is useful to revisit these past epochs.

I really wanted to put a beautiful photo of "Mr Trump holding a mining helmet at a West Virginia rally" here but was unable to agree with Getty Images on the price. Maybe I should have consulted "The Art of the Deal" before I started bargaining. Fortunately, a prolific and highly influential hobby photographer came to my help (credit: Gage Skidmore).

"She called it the gold standard"

Departing from London to go round the world in 80 days, Phileas Fogg told his fellow club members with whom he had made the famous wager that “I am taking a passport with me, so that the various visas it will bear will enable you to check my itinerary when I return.” Notice that Fogg did not take the passport with him to be able to travel across the globe. It only served to document his journey – and even this was considered “unnecessary” by his friends, who would as well have trusted his “word as a gentleman”. A couple of days later he was once more reminded of the “futility” of passports by the British consul in Suez: “You know that a visa is useless, and that no passport is required?" This happened in 1872, before either Egypt or the Suez Canal came under British control.

In important aspects, the turn of the 19th and 20th centuries witnessed a more integrated and globalized world than the turn of the millennium. Not only could a British gentleman have traveled around the world without a passport. In relative terms, the international flow of labour was higher than today, and so was the proportion of international trade to GDP. The freedom of international capital flows was enabled by a monetary system based on the gold standard. In this system, each national currency could without limitation be exchanged for gold at a given rate. In the absence of capital restrictions or the danger of devaluation, international investors could safely expect to have unlimited access to the full value and proceeds of their capital even if invested abroad. Trade imbalances were dealt with by deflating the domestic currency, which led to periodic recessions with very high unemployment. In a sense, the risks of international trade were borne by the working class.

Disrupted by the First World War, this globalized economy never really recovered. The main reason for this was that the economic burden of deflation could no longer be placed on the working class in the context of universal suffrage. Relying on their recently gained political power, the masses demanded that their national governments protect them from the risks of capitalism. Domestically, this meant the expansion of the welfare state. In terms of international trade, the protection was provided through capital restrictions and currency devaluation. In fact, the economic history of the short 20th century could be described as the variation of basically protectionist policies. The tumultuous trade wars of the 1930s, which culminated in actual war, were replaced by the Bretton Woods system in 1944. This system set up a framework for organized devaluations while capital restrictions remained in place. This, together with extensive regulation on the national level, led to a continued segmentation of world markets.

In the mid-1970s, the mood changed again. The Bretton Woods system collapsed and doubts about the sustainability of the welfare state began to emerge. The tipping point came in the year 1979, which not only saw Margaret Thatcher winning the general election in the UK but also the seeds of Ronald Reagan’s upcoming presidential landslide being sown. These parallel victories of neoliberal policies on both sides of the Atlantic ushered in a new era of globalization. By 1989, a new economic consensus was formed and its teachings – cuts in welfare spending, deregulation and trade liberalization – were being spread across the globe. Barriers of international trade were eliminated at a breathtaking pace. Capital flows became less and less restricted by national borders and regulations.

The policy shifts were accompanied by sweeping technological changes. The information revolution lowered the costs of investing abroad. Even more important, container shipping reduced transportation costs to the point that they no longer made up more than a negligible part of the price of merchandises. This enabled companies to relocate their manufacturing plants away from their markets to wherever production could be done the cheapest. What ensued was far more than global trade: in a sense, industrial production itself became globalized.

"The forgotten men and women"

By enabling the world-wide exploitation of comparative advantages, globalization generated enormous economic benefits. These benefits, however, were unevenly distributed. Corporate leaders and professionals, who were tasked with managing the globalized production, earned huge profits. The working class of industrialized Western nations, whose job prospects were seriously undermined by foreign competition, was clearly on the losing side. 

This problem, although known from the beginning, was for a long time suppressed by the mainstream narrative. The assumption was that the information revolution represented the next stage in mankind's rise to full mastery of the world. The industrial working class seemed nothing more than collateral damage on this triumphant march towards the future. At most, Western leaders hoped that the new information age would in the long run create enough high-skilled jobs to substitute for the loss of manual labour.

Similarly, the working class' longing for the protections it had enjoyed during the Bretton Woods years were at serious odds with the cosmopolitan thinking that came to prevalence in the age of globalization. The elite's perception was that you could make a fortune by reaching out to different cultures and building relationships all around the world. They wondered why this potential had not been realized before and thought it was because people of old had been blinded by nationalistic prejudices. They concluded that nationalism was the sordid past, cosmopolitanism the bright future. Logically, they embraced foreigners trading with – and also moving to – their country. The working class' deep resentment over these policies was dismissed as the last remnant of a dark age.

Ultimately, minorities came to be regarded as the main agents of human progress represented by globalization. This led to the rise of identity politics, which, instead of the old distribution battles, focused on symbolic wars over the inclusion of certain sociocultural groups. The underlying assumption seemed to be that material problems had already been solved.

Of course material problems had not been solved. The promised high-skilled jobs failed to appear or they were of little help to those who did not have the qualification to perform them. At the same time, large-scale migration began to cause serious conflicts between natives and newcomers, as it would in every human society. In this context, the narrative that globalization was a historical necessity just increased the frustration of many ordinary people. They felt they had lost control over their lives and communities amidst the free flow of capital and goods. Then came the global credit crisis of 2008, and history took an unexpected turn.

"Where is the element of surprise?"

To my knowledge, the global business consulting firm McKinsey was among the first ones to recognize the historic dimensions of the crisis. In an article published in the McKinsey Quarterly in December 2008, the firm announced that "the future of capitalism is here, and it’s not what any of us expected". The authors went on to outline four possible scenarios for the world economy. The most pessimistic one envisaged that "trade and capital flows continue to decline for years as globalization goes into reverse, and the psychology of nations becomes much more defensive and nationalistic”. McKinsey deserves enormous credit for being able to imagine such a scenario in 2008. Many still struggle to believe it now as the most pessimistic scenario is unfolding before their eyes.

In retrospect, the 2008 crisis dealt a fatal blow to globalization. Western countries fell into stagnation and anti-establishment movements have since been on the rise. The tipping point came in early 2016 when, almost simultaneously, two populist movements scored resounding victories in the Anglo-Saxon world. In June, the people of the United Kingdom voted to leave the European Union despite the elite’s overwhelming support for remain. At the same time, Donald Trump, running on an explicitly anti-globalist agenda, secured the GOP nomination for president of the United States. The unexpected success of both movements were propelled by the frustration of working class voters who wanted to take back control from a globalist establishment. It is remarkable how strongly the notion of borders as a symbol of self-determination figured in both campaigns.

It was clear that the Trump-campaign and Brexit could not be mere accidents. Taken together, they must have constituted a trend. Accordingly, Mr Trump's winning the presidency should have been considered a real possibility since at least June. He ran as an outsider against the embodiment of the political class in a year in which 57% of all primary votes of the major parties were cast for anti-establishment candidates. Historical precedent was in his favour. His strategy of coalition-building – securing the Republican base while expanding his appeal to blue-collar workers – made perfect sense. The only indices telling against him – opinion polls – should have been treated with a great deal of caution, especially in view of the huge crowds his rallies consistently drew.

Despite all this, the elites were in denial of the possibility of a Trump-presidency to the bitter end. They simply could not imagine history deviating to such an extent from the trajectory their ideology taught was inevitable. They were so certain of the validity of their narrative that they staked the whole outcome of the election on one card, the strength of which depended on this very narrative: identity politics. Mrs Clinton's campaign consciously gave up appealing to blue-collar workers – the traditional base of the Democratic Party – and concentrated all efforts on reminding minorities – including women – of the insults they suffered from Mr Trump. Essentially, they confined themselves to reciting the ideological framework of an outgoing era while Mr Trump was talking about the material problems giving rise to the new one. It should be no surprise that the latter approach proved more effective.

After his victory, the elite feels this is the end of the world as they know it – and they are right. This is the same feeling most Europeans felt as the world of the gold standard collapsed in the First World War or that Western societies felt as the certainties of the welfare state were called into question in the 1970s. At their height, both of these eras believed that they represented the fullness of time, the crowning achievement of human progress. Both failed to notice the yawning abyss at their feet. The same is happening with globalization: The elite believed its cosmopolitanism was the fulfilment of the enlightenment project. In fact, it was just the latest cosmopolitan era in the alternation of spiritual ages. There is no direction in history.

But there is a rhythm.

Remarkably, globalization is coming to an end the way it began: By a double victory of radically new policies in the UK and the US. This time, the new policies are populist ones focusing on national sovereignty. Last time when the Anglo-Saxons changed course together – in 1979 – the whole world followed suit. This is going to happen again. 2016 will be remembered as the year in which the concept of national sovereignty returned to the world stage – with a vengeance.

It is amazing to see how people change.


  1. When you are a top dog you demand free trade, when you are weak you hide behind a wall. It could be argued that the world was more globalized in the 16th century when Legazpi and Urdaneta linked New Spain (Mexico) to Manila and therefore China, see Charles C Mann's: 1493. When 11.5 million Africans were shipped to the Americas, potatoes to Europe, sweet potatoes and maize transformed China. Globalization is not new. Migration is not an issue as a fact of globalization, but it is central to our nationalist imagination, fantasies. There are stats showing that inter-EU migration is less than inter US, and Australia labour movement. The masses are not on the move. The fantasy of foreign no-go areas dominated by by Muslims and other alien gangs is as alive as the folklore of Superman and Spider-Man. The real sea-change is the decline of US manufacturing from 50% of the Bretton Woods agreement to the 17% of today. The US may build up its walls, but the world is not going to follow suit, China is and will keep producing and trading thus keeping a world economy alive. The Anglosphere will need to come to terms with its insecurity and panic attack triggered by the feeling of weakness and the realisation that the leading status is slipping away from its hands. The West may try protectionism, but it can hardly dictate or lead global dynamics. Yes the working class is in revolt, but Brexit was won by 52%, and Hillary won the popular vote, panicky nationalism won but not by a landslide, so perhaps there is some hope left that we wont see a "socialism in one country"/"free world in two countries" model triumph.

    1. This is a fair point. The question to ask, however, is whether "globalisation in one country" is possible. I doubt it. At the time of the gold standard, Lenin thought "the chain of imperialism" could be broken by striking at the weakest link in the chain. With the help of the war, this coup actually worked. And Trump, who has shown a political genius comparable to Lenin's, struck at the - still - strongest link in the chain. After his success, the chain is very likely to break up. Based on my modest knowledge, China and the United States are economically interdependent. If this is true, China will not be able to play the same game further after the United States want to play a different game. China and other emerging nations have their own economic and social problems. But the real issue, I think, is not even an economic or social one. The change occurs on a spiritual level, and doesn't have any ultimate cause to point to. It happens simply because people tend to change and thereby frustrate the expectations of ideologues. This is the real revenge of history.