Walter Russell Mead On Why Lula Was Right

The truth is often shocking, and when Brazilian President Luiz Inácio Lula Da Silva told a shocked British Prime Minister Gordon Brown—and the world press—that the financial crisis had been created by "white-skinned people with blue eyes," he spoke the truth. Actually, it's even worse than what Lula said. "White-skinned people with blue eyes" aren't just responsible for the current crisis; the blue-eyed palefaces are responsible for saddling the world with a financial system that has a built-in tendency to crash. The modern financial system grows out of a series of innovations in 17th-century Netherlands, and the Dutch were, on the whole, as Lula describes them. From the Netherlands, what the English called "Dutch finance" traveled over the English Channel, as the English borrowed Dutch ideas to build a stock market, promote global trade and establish the Bank of England, going on to build a maritime empire of commerce and sea power that dominated the world until World War II. Dutch finance became "Anglo-Saxon capitalism," but otherwise went on as before. When the British system fell apart, the center of world finance crossed the water again, and New York and Washington replaced London and Amsterdam as centers of global politics and finance.

This financial and political system is the operating system on which the world runs; the Dutch introduced version 1.0 in about 1620; the British introduced 2.0 in about 1700; the Americans upgraded to version 3.0 in 1945, and as an operating system, it works pretty well—most of the time. The 300 years of liberal, global capitalism have seen an extraordinary explosion in knowledge and human affluence. Not everybody shares in these benefits, and there are environmental and social costs to the rapid progress. Still, not many of us would like to turn the clock back to 1610.

But the system has bugs—among them, a tendency to crash. Ever since the great Dutch tulip bubble of 1637, the economic system has been prey to roller-coaster-style booms and busts. From the South Sea bubble of 1720 to the subprime loan bubble of our own time, the financial system leads people into irrational behavior and fever dreams of wealth and of eternally rising prices for stocks, houses—and tulips. These episodes never end well, and as time passes and the financial system grows more complex, more global and more interdependent, the cost of these periodic crashes gets worse. Today's is one of the worst; millions of people are losing their jobs, and millions of families once on the edge of prosperity are falling back into poverty—not just in America and Europe but in China, India, Africa and, as Lula knows all too well, Brazil.

At moments like this, even "Anglo-Saxons" have doubts about the system; but much of the world doesn't like Anglo-Saxon capitalism even when it works. Liberal capitalism may have created mass affluence in Holland and America, but things don't look as good in Brazil—or in Haiti. In countries like France, the system has made the country prosperous, but the anarchy and inequality of Anglo-Saxon style capitalism have irritated the French since the Scotsman John Law gave them their first financial bubble in 1720 (the Mississippi bubble). In Latin America, the right denounced liberal capitalism for centuries as a plot against the Roman Catholic Church; the left denounces it as a plot against the poor.

Liberal capitalism is risky, unequal and destabilizing. Worse, over time, the countries that embrace it tend to grow powerful and rich. Those nations that embrace the chilly logic and brave the rough seas of capitalist development end up developing and exploiting new technologies, creating new industries and gaining more power. Societies that respond with more reserve don't prosper as much in the good times and often pay a higher price when things go wrong. Just ask the Argentines. Or the Russians.

Lula himself is an example of something else. He's a man of the left with deep concern for the poor, but he also understands that for all its shortcomings, the market isn't the enemy of the poor. Brazil's task, Lula believes, isn't to make war on the market, à la Venezuela's Hugo Chávez, but to harness its vast potential for the sake of the poor. This is new. Thirty years ago, Brazil, like most of Latin America, was polarized between a radical, antiliberal left and a radical, antiliberal right. Today Brazilian politics are different; both the left and the right are more committed to free politics and free markets than they used to be.

Brazil is better off for the change. Although the current crisis is beginning to bite, Brazil has overcome the stagnation and corruption that halted growth after the first oil shocks and the Third World debt crisis, and is now one of a handful of countries with the power to shape the new century. And this hasn't just been the story in Brazil; more and more "developing" countries are turning into the pacesetters of liberal global capitalism. So Lula is right: the global crisis emerged from a system built, with all its many flaws, by blue-eyed palefaces. But if countries like Brazil can stick with their own versions of Dutch finance, the future of the system will increasingly be shaped by people who look more like Lula—and the palefaces are going to have to run hard to keep up.

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