“Trade is a social act.”
—John Stuart Mill

If only all of John Gray’s False Dawn were as good as the first two pages of Chapter 6! In them, our author succinctly and accurately diagnoses why communism in Soviet Russia failed.

“Between 1918 and 1921,” Mr. Gray writes,

the Bolsheviks attempted to transform Russia into a communist economy. The War Communism which the Bolsheviks tried to impose on Russia during those years embodied an authentic Marxian vision. It aimed to abolish capitalism, in which private property, market exchange, and the institution of money are central, and construct an economy that was collectively owned and rationally planned.

The attempt, of course, failed disastrously, and even the compromise with the market forced on Lenin, Stalin, and their eminently forgettable successors led only to a delay in communism’s inevitable collapse.

What lesson should be drawn from communism’s failure? One might think the answer obvious. Should we not throw in our lot with the free market, demonstrably superior to its socialist rival? Such seems the verdict of common sense, but it is altogether too simple for the Professor of European Thought at the London School of Economics.

We should not conclude that capitalism works and socialism fails, says Mr. Gray. Quite to the contrary, we should view both systems as expression of a common “Enlightenment project.” According to the capitalist variant of this nefarious project, only one set of institutions, that mandated by classical liberalism, has any legitimacy. Away with all local customs and traditions! The market must reign over all. In the paeans to freedom of Herbert Spencer and Friedrich Hayek, John Gray believes, lie the seeds of totalitarian control.

How can Mr. Gray say that free institutions engender tyranny? Quite easily, he responds. Classical liberals destroy all competing ways of life. You must be a capitalist—or, more likely, a proletarian—whether you want to or not.

The argument proceeds largely by verbal trickery. A free market does not force anyone to seek money avidly, to abandon local customs, to work for a manufacturer, or any of the other dire outcomes the author laments. Rather, it is a framework in which people may voluntarily engage in any transactions that they think will be to their benefit, so long as these do not violate the rights of others. If, like Mr. Gray, yon dislike or distrust multinational corporations, nothing compels you to deal with them. He is totally wrong, then, when he claims: “A global free market presupposes that economic modernization means the same thing everywhere. It interprets the globalization of the economy—the spread of industrial production and interconnected market economies throughout the world—as the inexorable advance of a singular type of western capitalism—the American free market.”

The “force” exerted by capitalism is of a rather peculiar sort: It leaves people free to depart from the arrangements that Mr. Gray prefers them to have. They would not enter the global market unless they wish to do so. This, for him, constitutes the spread of compulsory Enlightenment rationality. Mr. Gray would have done well to study economic theory more, if need be by reducing his perusal of Heideggerian banalities. He crucially misunderstands a central theorem of economics, Ricardo’s law of comparative costs.

As suggested already, a basic argument for the free market is that it provides a framework for mutually beneficial trades. Ricardo showed that space for such trades exists even if one party to the exchange is in all respects more efficient than his trading partner. A surgeon who is better at taking the temperatures of his patients than his nurse may find it more to his advantage to concentrate on his operations, leaving the less skilled task in the inferior hands of his aide. This phenomenon extends the benefit of mutual gains from trade to those absolutely less fit and thus should be welcomed by all friends of the less fortunate.

And so it was by free-market economists such as Ludwig von Mises. He termed Ricardo’s principle the “law of association” to emphasize its importance as a rule promoting general welfare. Mr. Gray misses the nature of this principle entirely. Far from being the key to social cooperation, it is in his view something that holds good only under very restricted conditions.

He contributes the following incredible paragraph:

In the classical theory free trade capital is immobile. Ricardo’s doctrine of comparative advantage . . . says that when comparatively inefficient enterprises or industries shrink in any country, others will grow, absorbing the capital and labour released from the declining activities. Within each trading country capital will move to those economic activities in which it is most productive. Ricardian comparative advantage applies internally in trading nations, not externally between them.. .. Ricardo understood that this could be true only so long as capital is not to any significant extent internationally mobile.

No, no, Mr. Gray! The whole point of Ricardo’s theorem is that both parties in a trade —both countries, in international trade—benefit if each concentrates on the product it can make better, when compared with the other trader. Gray has things the wrong way round: what counts is not “most productive” activities considered just internally.

Mr. Gray’s error leads him to the risible assertion that if capital is mobile, then the “effect . . . is to nullify the Ricardian doctrine of comparative advantage.” Again, the reality is just the reverse. Both in trade with immobile capital and in international capital movements, the mutual advantage of all parties to an exchange is the fons et origo of economic activity. If all parties did not expect to benefit, no trade would take place.

If our author has misunderstood Ricardo, he has at least not done it in so egregious a way as in his earlier study. Liberalism, where he located Ricardo within the Scottish Enlightenment. But I should not be too kind to Mr. Gray, who commits equally awful lapses in False Dawn. We learn, e.g., that Russia “abolished serfdom in 1861, a year before slavery was abolished in the United States by Abraham Lincoln.” I hope it is not considered an exercise of sterile pedantry to point out that the Emancipation Proclamation did not abolish slavery; in any case, Mr. Gray has got the year wrong.

Regardless of the author’s mistakes, though, does he not have a case that I have so far underestimated? I have argued, in a naively rosy fashion, that since trade under capitalism is voluntary, all parties to an exchange are, by their own expectations, better off. But what about third parties not directly involved in an exchange? If my small bookstore cannot compete with a local branch of Barnes and Noble, surely I will not think my situation improved as I tearfully board my windows.

If, in fact, free market capitalism led to massive and permanent dislocations, no doubt a strong indictment could be brought against it, but no such case is raised here. Instead, Mr. Gray simply points to high unemployment rates in various European countries. True enough, the rates are lower in the United States, but this fact ought not to induce in us a false complacency: “Lastly, all estimates of America’s employment record must take into account America’s incarceration rates — over a million people who would be seeking work if American penal policies resembled those of any other western country are behind bars in the U.S.”

Once more, Mr. Gray appears ignorant of economic theory. If workers cannot find jobs, why will they not bid down wage rates until it becomes profitable to employ them? If laws and union regulations prevent them from doing so, why blame the free market? Mr. Gray’s example of the prison population rests for its force on the assumption that only a fixed number of jobs exists. If so, then those in prison would, if free, compete with those already employed for a limited number of jobs. But why assume this? Why not assume that a greater labor supply would find new jobs not now occupied?

I have not shown that the more optimistic assumption should be adopted, nor have I responded to Keynesian claims that, in some circumstances, bidding down wage rates will not relieve unemployment. But the merits of the capitalist case are not here the primary point. Rather, my contention is a more limited one. The issue between the free market and its foes involves economic theory: It will not do simply to point to various statistics, as Mr. Gray has done. These must be subsumed within some relevant theory, and this Mr. Gray has not done. When one contemplates what he has made of Ricardo, perhaps it is just as well.

Mr. Luttwak has a much firmer grasp of economics than the Professor of European Thought. Readers in search of a good, brief account of Ricardo’s law can hardly do better than to consult Turbo-Capitalism:

Import barriers artificially preclude efficiency gains identical to those achieved by better technology, better organization or any other source of domestic productivity. That goods or services originate from a point on the surface of the planet that happens to be classified as foreign at a given time . . . is an entirely meaningless attribute in purely economic terms.

Luttwak, accordingly, advocates market capitalism, but not for everyone. If a country labors under inefficient restrictions, then by all means let the market operate. “In poor countries, given favorable circumstances including foreign investment, free trade can drastically alter the total economy, lifting much of the population to a much higher level of income.” No doubt the market dislocates people used to a certain way of life, who now find they must suddenly adjust to changed conditions. Given their low level of wealth, the difficulties are worth it, he says. But Luttwak refuses to join forces with Mises and Hayek. Though capitalism benefits the less well-off nations, this is not, for him, the full story.

In more prosperous nations, such as the United States and the countries of Western Europe, economic dislocations caused by the market may be socially too much to bear. What of those thrown out of work by foreign competition? Are their losses canceled by the slight gains in consumer welfare that come to those who already have a high standard of living?

Free-market capitalism, Luttwak argues, is good, but directed capitalism, as it has existed in the United States and Europe in the decades since World War II, is even better. A wise government can cushion the shocks of an unfettered market, and governmentally planned research and development can achieve wonders beyond the scope of the market. Mr. Luttwak knows full well the main objection to his proposals:

The case against industrial policy can be summarized in one word: bureaucracy. More specifically . . . [the] unitary decisions [of efficient bureaucrats] will lack the blind wisdom contained in the sum total of competing firms and entrepreneurs. And, of course, efficiency and honest)’, let alone wisdom, cannot be taken for granted.

Nevertheless, he will not abandon his case. Does not the success of Japan’s industrial policy show what air efficient bureaucracy can achieve? Unfortunately, Luttwak does not fit his observations within a theory but relies instead on anecdote and authority. (For the Japanese case, he appeals to Chalmers Johnson.) But facts do not interpret themselves, and, absent a theory of how his directed capitalism works, Turbo-Capitalism is ultimately no more of an effective challenge to the free market than John Gray’s False Dawn.


[False Dawn: The Delusions of Global Capitalism, by John Gray (New York: The New Press) 262 pp., $25.00]

[Turbo-Capitalism: Winners and Losers in the Global Economy, by Edward Luttwak (New York: HarperCollins) 290 pp., $26.00]