Writing the Rules for a New World

Government intervention has stabilized capitalism before. No modern society could accept the downswings that were routine in the 19th century, an era of much less intervention. The average length of a recession between 1854 and 1919 was 22 months. In the past two decades, by contrast, recessions have averaged eight months. Between 1854 and 1999, the U.S. economy went into a contraction every 49 months. In the past two decades, it has been 100 months between contractions. Many factors have contributed to these changes, but the chief explanation has been Washington's monetary and fiscal policies. Of course, the financial industry—the center of the current crisis—is unusual if not unique, since it is the lifeblood of the economy. As a result, it should be monitored especially carefully. In almost all the financial crises of the past 30 years (and there have been dozens of them) the government has had to intervene to restore trust and confidence. And it's succeeded.

Does this round of intervention mark a return to socialism, or even the old mixed economy? Well, 35 years ago governments in most countries controlled the value of their national currencies. They owned steel companies, car manufacturers, the telephone company and banks. They set the price of airline tickets, phone calls, stock commissions and cement. Tariffs in the industrialized world were several times higher than they are today. Does anyone really think we're returning to this era? Does anyone believe that governments would be any better at owning and running economies than they were in the past? There will be a return of regulation. But regulation is not socialism.

Capitalism is now a global phenomenon. It is being powered by the actions of companies and governments and individuals all over the world. And in the search for growth and higher standards of living, countries will continue to use free markets and free trade to power their rise. Governments have not liberalized their markets because Treasury Secretary Henry Paulson or his predecessor Robert Rubin ordered them to; they did so because they could see the benefits of moving in that direction (and the costs of not moving). This process will continue to be halting and episodic, depending on political pressures. But I suspect that over the next 20 years, most countries will try to free up their markets (in a controlled fashion) to get more growth rather than nationalize bits of their economies. Certainly the history of past economic crises shows that in their wake countries have conducted more-aggressive economic reforms to bring greater credibility to their systems, attract new capital and jump-start growth.

As all this suggests, the current debate about government and markets is sterile. Every serious thinker understands we need both. The question is how to balance the two to achieve growth, innovation, stability and social equity. The crucial need is not for big government or small government but smart government. How can we make government work for the vast majority of people, for future generations, for the broad welfare of society?

The real problem we face today is not a crisis of capitalism. It is a crisis of globalization. The new world coming into being is not going to go away. We will not return to a system dominated by a handful of countries around the North Atlantic. The factors powering the rise of the global economy, and thus the rise of the rest, are broad structural forces that have been at work for decades. They are not ephemeral and will not vanish in the face of one financial crisis or recession. They will endure, and in the process shift power away from established centers in the West.

But will this lead to a more stable world?

There is, of course, the age-old worry: that in times of transition, the world will get messy. Ever since Thucydides observed that the shift in power from Sparta to Athens was the fundamental cause of the Peloponnesian War, scholars have watched such moments with apprehension. But this time, if properly managed, the rise of the rest needs to be destabilizing. America is not sinking fast, about to be replaced by a single country. The Chinese economy remains one fifth the size of America's, and its military is even smaller. Most major powers share some basic interests and ideals with the United States. The real danger remains that Washington will overplay its hand, leading other countries to seek to balance it. The management of U.S. political and military power remains the single most important task for global stability. The United States must provide rules, institutions and services that help solve major global problems.