November 16, 2014 · 6:11 pm

Should the West Have Been Tougher on Russia in the 1990s?

If you ask Russians why they support Vladimir Putin, they often point to the alleged humiliation of Russia in the 1990s. Following the collapse of the Soviet Union, the argument goes, revanchist Western countries dismantled Russian power because they saw it as a threat, leaving the country weak and poor. A strong leader is therefore needed to confront the West and restore Russia’s rightful place among the great powers.

In a recent op-ed in the Washington Post, the historian and hawkish Eastern Europe commentator Anne Applebaum attacked this narrative. The West didn’t humiliate Russia, she argues, on the contrary: It granted it too much influence.

“In 1991, Russia was no longer a great power in either population or economic terms. So why didn’t we recognize reality, reform the United Nations and give a Security Council seat to India, Japan or others? Russia did not transform itself along European lines. Why did we keep pretending that it had? Eventually, our use of the word “democracy” to describe the Russian political system discredited the word in Russia itself.

 The crisis in Ukraine, and the prospect of a further crisis in NATO itself, is not the result of our triumphalism but of our failure to react to Russia’s aggressive rhetoric and its military spending. Why didn’t we move NATO bases eastward a decade ago? Our failure to do so has now led to a terrifying plunge of confidence in Central Europe,” Applebaum writes.

According to Applebaum, Russia should have been denied a seat in the G8 and the UN security council, and NATO should have been expanded more aggressively to protect Eastern Europe from Moscow’s clout.

In light of Russia’s invasion of Ukraine, Applebaum’s argument is compelling – but it is also dangerously ignorant of the realities of geopolitics. There is no doubt that Russia was granted more global and regional influence than the size of its economy warranted. But you could say the same about France and Britain, who are still allowed to play world power even though they effectively lost that status in the 1950s. And by the way, does anyone understand why Canada is in the G7?

The point was never to grant Russia an international status commensurate with its population size and economy, but to ensure geopolitical stability in a volatile time of transition. Historically, a country’s fall from great power status has always carried great dangers. Handling the transition properly is a matter of war and peace for world leaders.

Following World War I, Germany fell from being continental Europe’s largest military and economic power to being an impoverished state with virtually no army or foreign-policy clout. This feeling of humiliation was probably the single biggest factor leading to Hitler’s rise. In hindsight, most historians agree that the Versailles treaty was a colossal mistake – not because Germany didn’t deserver its terms or wasn’t responsible for the outbreak of the war, but because it ignored the psychological toll a sudden fall from power can take on a population. The world would almost certainly have been better off had the allied victors granted Germany a greater power status, one that it’s role as the loser of a war it started technically didn’t warrant.

Following World War II, the leaders of the United States and the Soviet Union learned from past mistakes. France and Britain have arguably remained successful, stable democracies in part because they were granted a slow, graceful retirement from world power status in spite of their diminished influence. France has always been prone to anti-Americanism, and it is easy to imagine nationalist demagogues gaining ground had Washington kicked France out of the UN security council or tried to stop it from developing nuclear weapons.

In Russia we are currently seeing the rise of a revanchist dictator in Vladimir Putin. But he is no Hitler. History suggests that the current rise of nationalism in Russia would be far worse if it had been denied the few vestiges of great power status it continued to hold. Keeping the country in the G8 and treating it as a regional power may have been more than its diminished size warranted, but it was nonetheless in everyone’s best interest.

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October 5, 2014 · 3:40 pm

Why rising home prices won’t devour the economy

Have you ever tried to rent an apartment in Brooklyn and come to the conclusion that rising home prices are ruining the world? Well, it turns out that may actually be true – at least according to Quartz’s Tim Fernholz.

In a recent article, Fernholz argued that the rising cost of real estate will eat up an ever larger share of the world economy, with potentially devastating consequences. Fernholz essentially lays out MIT economist Matt Rognlie’s critique of Thomas Piketty’s recent blockbuster book “Capital in the 21st Century”.

In his book, Piketty claimed to show that global capital has been accumulating in the hands of a small number of rich people since the 1950s and will continue to do so until inequality reaches dangerous proportions. This trend is inherent to capitalism, Piketty argued, and can only be stopped through government intervention.

Rognlie doesn’t dispute Piketty’s data, but claims the Frenchman misunderstood it. He points out that 80 percent of the wealth accumulation in Piketty’s data is due to real estate. If you take housing out of the equation, the growth in private wealth is quite small, putting Piketty’s argument in doubt (see graph).

housing-and-capital-in-germany-us-and-uk-private-wealth-housing-private-wealth-less-housing_chartbuilder-1

Whether we should believe Rognlie or Piketty essentially boils down to two questions: is capital easily substitutable for labor, and are different forms of capital easily substitutable for each other? Piketty answers both with yes.

Private wealth (or capital) can only eat up a growing share of the economy and heighten inequality if income from labor declines in relative importance. In (very) simplified terms: Apple can only dish out huge dividends to its stockholders if it doesn’t have to spend all its earnings to hire people. So far, technological advances have generally made labor less important and more replaceable. Rognlie believes this trend can only go so far, as capital depreciates over time and labor will always be needed to replace it. Piketty believes the trend can go a lot further. So far, the verdict is out.

The second question is more important in this context. Piketty doesn’t really care that much what the wealthy invest their money in. It could be gold, stocks, oil, real estate – the point is simply that their wealth is growing and that different forms of capital are in theory replaceable. Fernholz (i.e. Rognlie), on the other hand, claims that the accumulation of wealth is only due to a growth in the value of real estate and that other forms of capital could not record a similar growth.

Real estate prices have been growing because population growth and urbanization make land in cities scarcer. The growing inequality noticed by Piketty is thus really a growing gap between income from real estate and income from everything else, Fernholz claims. According to this reading, the rich are getting richer not because of any trend inherent to capitalism, but simply because they happen to own real estate. And as population growth and urbanization are expected to continue, growing home prices will consume an ever larger share of the world economy. This trend will suck capital from other, more productive industries and dampen growth.

The argument is compelling and relatable. It is also highly questionable – mainly because British economist David Ricardo made a very similar claim more than 200 years ago and turned out to be wrong.

Ricardo argued that explosive population growth in the early 19th century would make agricultural land increasingly scarce and valuable. After all, it had to feed a growing population. This, Ricardo argued, meant landowners could command ever higher rents for land to the point that rents would eventually make up an overwhelming portion of national income and stifle growth in other industries.

In hindsight, Ricardo underestimated the effect of technology. As new techniques and pesticides made agriculture more productive and trade globalized, farming land actually lost value compared to other assets.

Private wealth still accumulated in the hands of very few during the 19th century, as Piketty showed, but its composition shifted from rural land to urban real estate and industrial capital. In other words: different forms of capital proved more easily substitutable for each other than Ricardo thought and the rural landowners of the 18th century became the industrial tycoons of the 20th. Either way, private wealth grew tremendously as a share of the overall economy.

It is possible that Rognlie is repeating Ricardo’s mistake to underestimate the effect technology can have on land prices. Population growth and urbanization have driven up urban and suburban real estate prices, but will that trend necessarily continue? New construction techniques and the trend to build higher and denser are already lowering housing costs, as is improved transportation.

Office workers in Manhattan may have to pay a fortune for scarce apartments on the Upper West Side or Brooklyn today, but what if magnetic trains shorten the commute to the countryside to minutes within decades? As workers can move further and further away from their employment, land in urban centers will lose in value. Denser building has the same effect.

History suggests that growth in the value of a certain asset class is never as inevitable as it seems at the time. Ricardo was certain agricultural land would dominate global wealth, but the opposite occurred. 200 years later, Rognlie thinks the same of urban land, and he could end up being just as wrong and real estate’s share of total wealth could start falling.

If Piketty is right, global wealth will then simply shift to a new, growing asset class – as it did in 19th century Britain. The result would be the same: the rich become richer.

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August 6, 2014 · 9:50 am

Post-War Is Back

Burning allied bomber in 1942. Credit: John Atherton

Burning allied bomber in 1942. Credit: John Atherton

In geopolitics, a century can seem awfully short.

One hundred years ago this week, German troops crossed the border into Belgium, starting the First World War and setting the stage for the second. The paradox is that as more time passes, the great catastrophe of the early 20thcentury only seems to grow in importance. Most major wars and conflicts today are shaped by how its actors relate to the two world wars.

Take Ukraine’s civil war, where Russia and the rebels it supports use every opportunity to revive the memory of 1941. Moscow’s prolific propaganda depicts Ukrainian troops as fascists, showing its leaders alongside footage of Nazi war criminals on TV.

The rebels have clearly internalized the notion that they are protecting Eastern Ukraine’s Russian speakers from Nazi genocide. Rebel leader Igor Bezler recently said of pro-Kiev militants, “They are fascists! So why should we stand on ceremony with them? Questioning, an execution, that’s it.” In rebel-held Slovyansk, militia leader Igor Strelkov executed thieves and enemies based on martial law implemented by Stalin on June 22, 1941, as signed death sentences show.

Perhaps less obviously, the Western response to Russian aggression is also shaped by the experience of two world wars. British and American officials implicitly refer to Chamberlain’s failed appeasement policy in 1938 when arguing for a tough stance against Putin. Former U.S. Secretary of State Hillary Clinton made that connection explicit when she compared Putin’s invasion of Crimea to Hitler’s annexation of Czechoslovakia.

Germany’s foreign minister Frank-Walter Steinmeier, on the other hand, bases his more hesitant Russia policy on the experience of World War I. As The Economist’s Berlin office likes to point out, he argues that Putin must always be offered a way out through diplomatic channels to avoid the kind of irreversible escalation of tensions that led to the outbreak of World War I. Putin himself somewhat cynically used this argument in a speech commemorating World War I last week.

In East Asia’s simmering border disputes, World War II is just as present. Japan’s Prime Minister Shinzo Abe is trying to strengthen the country’s military capabilities by loosening the country’s post-war pacifist constitution. These attempts are accompanied by a campaign to teach schoolchildren a less apologetic narrative of the country’s role in World War II. China and the Korea are wary of a stronger Japanese army primarily because they were among the main victims of Japanese militarism in the 1930s and 1940s.

In Iraq and Syria, World War I serves as a reference point for the fighters of Islamic State. Their campaign to turn two separate countries into one Sunni caliphate is also an explicit attempt to redraw the borders imposed by Britain and France in the wake of the Ottoman Empire’s defeat in 1918.

World War II and the Holocaust played an important role in Israel’s decision to attack Gaza. Benjamin Netanyahu’s former national security advisor Yaakov Amidror recently explained that the Israeli Prime Minister is “a guy who has a historical view of events.”

“He understands that one of the most important differences between the past and the present is the ability of Jews to defend themselves,” Amidror is quoted in The New York Times. “If he feels that Israel might endanger its ability to defend itself because of the international community, he will decide to use the capabilities of Israel even against the international community.”

There are of course many conflicts today that have little to do with the events of the early 20th century. Still, the number of disputes with a direct link to the pre-1945 years is striking and marks a major departure from past decades.

The two world wars hung heavy over the Cold War, which dominated global politics between 1945 and 1991. But following the Soviet Union’s collapse, the international order appeared to have escaped from its post-war state.

Major armed conflicts in the 1990s and 2000s—the Balkan wars, the Rwandan genocide, the Congo wars, the U.S.-led invasions of Iraq and Afghanistan, the Russo-Georgian war—all had little or no direct connection to the two world wars. History had entered a new phase in which 9/11 replaced Auschwitz and Stalingrad as the 21st century’s great catastrophe, or so it seemed.

Now the world wars have staged their comeback. One reason is that many of the disputes that were fought over so violently between 1914 and 1945 are still unresolved today.

In Eastern Europe, both world wars were fought over one fundamental question: was the region part of Russia’s sphere of influence or should it integrate with Central Europe? This question is still at the heart of Ukraine’s civil war today–although the choice is no longer between Nazism and Stalinism, but between liberal democracy and Putin’s proto-fascism. This similarity makes it makes it almost logical that Russian propaganda evokes the memory of World War II.

In East Asia, the unresolved Japanese question–how much regional power the country should wield–is at the heart of current border disputes. Almost eighty years ago it led Tokyo to war with its neighbors.

But while unresolved disputes play a role, a more important reason for the continued importance of the world wars is their usefulness as propaganda.

Russian state media use the memory of World War II to stir up popular support for the Kremlin’s involvement in Ukraine and mobilize fighters. China’s government is using anti-Japanese sentiment rooted in World War II to strengthen patriotism and divert attention from its own corruption. And in the U.S., foreign-policy hawks are using the disastrous 1938 appeasement to discredit virtually all efforts of diplomacy vis-à-vis Russia or Iran.

After 1945, world leaders hoped the bloodshed of two world wars would be a lesson to mankind and allow for a more peaceful future. As transnational institutions like the EU and the UN flourished, their hope seemed justified.

Today, leaders are more likely to use the memory of two world wars to encourage violence and the killings of the past become a justification for the killings of the present. As world leaders commemorate the outbreak of World War I this week, we can only hope some of them remember how much progress mankind has made in the past 70 years–and how easily it can be reversed.

 

This article also appeared on the World Policy Journal’s blog.

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July 25, 2014 · 2:37 pm

Does Government Spying Matter? The Case of Kim Philby

Wars in Ukraine, Syria and Gaza – not to mention the latest immigration “scandal” – have pushed Edward Snowden’s NSA revelations to the very backs of our minds. But before we forget: there is still an important debate about the benefits and drawbacks of government spying going on. The latest, somewhat implicit contribution to that debate is well hidden in the final pages of this week’s New Yorker.

In a fascinating article, Malcolm Gladwell recounts the case of Kim Philby and the greatest spy scandal of the 20th century. Philby, the Cambridge educated son of a diplomat, rose to the highest echelons of Britain’s secret service M.I.6 in the 1940s and 1950s, before he was exposed as a Soviet double agent and forced to flee to Odessa in 1961. Philby had been head of the M.I.6’s anti-Soviet section and later became chief liaison between M.I.6 and CIA. There was little of import the spy service did in those years that Philby didn’t report to the KGB.

“What it comes to is that when you look at the whole period from 1944 to 1951, the entire Western intelligence effort, which was pretty big, was what you might call minus advantage,” the C.I.A. officer Miles Copeland, Jr.—himself a close friend of Philby’s—said. “We’d have been better off doing nothing,” Gladwell writes.

News of his defection triggered the predictable paranoia. The M.I.5 executive Peter Wright began suspecting most Labour Party ministers of being Soviet spies, clearly fearing for his country’s safety. But the real surprise in Gladwell’s article is that none of Philby’s work for the KGB mattered much in the end:

In a review of “Spycatcher” published in the journal Intelligence and National Security, the historian Harry Gelber made a similar point about the many betrayals and lost secrets that fuelled Wright’s feverish mole-hunting. Wright’s problem was that he was unable to assess the consequences of the intelligence losses. The Soviets got details of the Concorde’s electronics systems. Did this make any difference to the Soviet civilian or military aviation performance? Who knows if the Soviets even believed what they were told? The revelations about Britain’s atomic program leaked to the Soviets by Klaus Fuchs are believed to have accelerated the Soviets’ own nuclear operation by two years. In the grand scheme of things, did that two-year leap amount to anything? Gelber searched for some account of how the world would have been different if Fuchs or Philby or the Rosenbergs had never lived, and couldn’t find it.

He concluded, “One cannot help being left with the uneasy suspicion that, just possibly, a good deal of what he tells may have mattered less than hard-working, intelligent but sometimes narrow-minded participants like Peter Wright spent their professional lives thinking it did.”

If there was any period in history when government spying mattered, you would think it was the height of the Cold War in the late 1940s and early 1950s. And yet the KGB’s complete insight into British intelligence through Philby didn’t give the Soviet Union any strategic advantage.

Spying today may be very different from the 1940s. It is directed at different targets and transnational terrorists pose a very different kind of threat than the Soviet state. Still, Gladwell’s article leaves the suspicion that secret services tend to exaggerate the importance of their own work.

 

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June 22, 2014 · 10:44 am

25 Years Later, Still No “End of History”

Global democracy has not fared well in the past five years. While the Arab uprisings have led to civil war and military rule, countries like Turkey, Russia and Venezuela are veering towards authoritarian rule. The world’s rising power, China, has found success with a one-party state.

These developments seem to question the optimism of proponents of liberal democracy following the fall of the Iron Curtain in 1989 – most famously that of Francis Fukuyama.

Almost exactly 25 years ago, the U.S. political scientist published an infamous essay titled “The End of History?” in which he declared the final triumph of liberal democracy. In his own words:

“I argued that History (in the grand philosophical sense) was turning out very differently from what thinkers on the left had imagined. The process of economic and political modernization was leading not to communism, as the Marxists had asserted and the Soviet Union had avowed, but to some form of liberal democracy and a market economy. History, I wrote, appeared to culminate in liberty: elected governments, individual rights, an economic system in which capital and labor circulated with relatively modest state oversight.”

Now Fukuyama has published an essay in The Wall Street Journal revisiting his initial argument. And, perhaps not surprisingly, he finds that he was right and democracy still stands largely uncontested.

There may still be authoritarian regimes and some democracies are crumbling, but decades ago things were much worse, he argues. More importantly, he writes:

“In the realm of ideas, moreover, liberal democracy still doesn’t have any real competitors. Vladimir Putin’s Russia and the ayatollahs’ Iran pay homage to democratic ideals even as they trample them in practice. Why else bother to hold sham referendums on “self-determination” in eastern Ukraine? Some radicals in the Middle East may dream of restoring an Islamist caliphate, but this isn’t the choice of the vast majority of people living in Muslim countries.”

China’s model isn’t a real alternative either, according to Fukuyama, because its cleptocratic tendencies will inevitably cause discontent. Since liberal democracy still has no ideological rival on a global scale, Fukuyama concludes that his “end of history” hypothesis still stands.

But does it? A different look at the past centuries and millennia suggests that the spread of liberal democracy may be historical accident, rather than the culmination of history, and could be reversed sooner than we may like.

In the paragraphs below I will argue that the largely uncontested spread of democracy is the result of an unprecedented period of peace in large parts of the world. Once the global powers go to war again, as they seem likely to do at some point, democracy could easily find itself on the defensive.

Historically, democracies have gone in decline not because other political models offered a higher quality of life, but because authoritarianism proved to be more efficient at warfare.

The ancient Athenian democracy collapsed because the strictly hierarchical model of Sparta was better at mobilizing resources for war, beating Athens in the Peleponnesian War and ending its hegemony. Rome’s patrician republic fell and made way for monarchy because its collective leadership model was inferior in warfare to Julius Caesar’s charismatic dictatorship.

There is a reason why all the world’s armies have hierarchical leaderships under the dictatorship of a general, rather than a democratic decision-making process: authoritarianism and coercion are simply better at making people risk their lives and kill others, as well as mobilizing resources in wartime.

World War II is another prime example. The war is generally regarded as a victory for democracy, but that is only partially true. Nazi Germany army was far superior than that of similarly sized France and had the Western world on the brink of defeat, largely because of a level of propaganda, coercion and national mobilization only possible under authoritarian rule. Moreover, it was defeated first and foremost by the Soviet Union, another state that used its authoritarian model and tremendous coercion to secure victory.

As long as countries are peaceful and compete only on an economic stage, liberal democracy may not have any serious ideological rivals. But history shows that during times of prolonged warfare authoritarian regimes tend to have an advantage, while democracies go in decline.

This brings me back to the present and Fukuyama’s argument. The triumph of liberal democracy after 1989 has coincided with the longest period of peace between major world powers in the past centuries.

Some political scientists argue that this period of peace is the results of the spread of liberal democracy, since prosperous democracies are less likely to go to war with each other. But this is at best part of the explanation.

In essence, peace between major powers has been so long lasting because of war weariness after World War II (the founding of the EU is the most notable example), because of the threat of mutual assured destruction through nuclear bombs and because of U.S. hegemony in large parts of the world until 1989 and virtually everywhere after.

But as China’s military and economic rise threatens U.S. hegemony, war between world powers has suddenly become a possibility again – albeit a distant one. Consider the territorial disputes in the East China, where China has vowed to assert its claims and the U.S. has vowed to defend its ally Japan.

There seems to be a growing number of historians and political scientists who argue that a third world war is becoming increasingly likely.

If war does break out between superpowers, history shows that democracy may well lose its global, ideological edge in the face of ruthless authoritarian militarism. What if an authoritarian China proves exceptionally adept at mobilizing resources for war, defeating Japan as easily as Nazi Germany defeated France in 1940? Other countries will get the message, and may conclude that they have to revert to authoritarian methods themselves if they want to survive in a military struggle.

This scenario is of course speculation, and it may well be that global democracy can survive another world war. But my point is that we need to consider the exceptional circumstances under which democracy has triumphed post-1989, and that these circumstances can change from one day to another. It has happened before.

 

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May 18, 2014 · 3:08 pm

Why It’s Time to Start Calling Putin a Fascist

Here’s another post I wrote for the World Policy Journal’s blog:

Russia’s President Vladimir Putin has thrown the term “fascist” around a lot lately, especially against pro-Western Ukrainians. To him, Kiev’s government is a “fascist junta,” and Russian (state) TV likes to show them alongside footage of Nazi war criminals.

Needless to say, Putin is using the term more as a swear word than as an accurate description of a political ideology. Ukrainians supporting democracy and European integration are as far away from fascism as you can get.

But let’s remember for a second that fascism isn’t just a swearword, but an actual political movement. A brief look at the core features of fascism shows that Putin shares all of them.

It may be time to start calling Putin a fascist. Doing so would help people around the world understand what kind of a threat they are dealing with.

Fascism started off as a political movement in Italy during World War I and spread across Europe during the 1920s and 1930s. Italy’s Benito Mussolini, Germany’s Adolf Hitler and Spain’s Franco are all considered parts of the fascist movement.

At its core, fascism was a reaction to the spread of Western liberal democracy and its values. While Western democracies in France, Britain or the U.S. were based on individual freedom and small government, fascists emphasized the national collective.

They sought a strong state with a powerful army, headed by a dictator who controlled most aspects of life, including press, arts, and sports. Their nationalist myth was rooted in history. Mussolini saw himself as successor to the Roman emperors, and Hitler to the Germanic leaders and medieval German emperors.

Fascists despised what they perceived as decadent Western values, including everything from democracy, press freedom over expressionist art to homosexuality. Among Hitler’s most forgotten victims are homosexuals, who were murdered in concentration camps by the thousands.

Following World War II and the mass murders by Hitler and his allies, politicians mostly stopped calling themselves fascists. But that doesn’t mean fascism as an ideology disappeared. In fact, we are currently seeing its resurrection in Putin’s Russia.

Like Hitler and Mussolini, Putin views a strong state headed by a charismatic leader controlling the press and most aspects of social life as superior to Western democracy. Since assuming power in 2000 Putin has rigged elections, bullied NGOs, expanded state-led social organizations, taken control of media and increased the powers of the President to the point where he appoints governors and virtually nothing can be done in Russia without his consent.

Like the fascists of the 1930s, Putin believes in the importance of a strong military and is currently overseeing the largest investments in the Russian army since the fall of the Soviet Union.

He also shares the fascists’ historical myth-making by implicitly putting himself in a line with past rulers like Peter the Great and Stalin, of whom he speaks admiringly. Putin’s nationalism is well documented, and it has recently taken an expansionist turn similar to Hitler’s.

Much like Hitler justified his invasions of Austria and Czechoslovakia with the argument that both regions were once part of the German empire and thus historically German, Putin has employed history to justify his actions in Ukraine. In his May 9th speech on Crimea, he argued that his invasion had “righted a historical wrong,” and he has repeatedly pointed out that large parts of Ukraine were historically part of Russia. His apparent desire to unite all ethnic Russians in the Russian state is equally reminiscent of Hitler’s attitude towards German minority groups in Eastern Europe.

Perhaps the greatest similarity between Putin and the fascists of the 1930s is his hostility towards what he perceives as decadent Western values. His crusade against homosexuals and artists, including Pussy Riot and Pyotr Pavlenski, as well as his touting of “Russian values” as superior to Western ones exhibit a fundamental tenet of fascism: the belief that a strong leader is needed to keep the nation pure and save it from the harmful influence of Western culture.

If Putin shares all major features of fascist ideology, it is about time to start calling him one. He may not refer to himself as a fascist, but neither did Hitler. He may admire the Soviet Union, but he only admires it for its strong state and its fostering of Russian greatness. Whether he would admit it or not, Vladimir Putin is a fascist.

Acknowledging this can help us better understand his appeal. Many separatists in Ukraine don’t merely want to join Russia, they want to join Putin’s Russia with its autocratic state and anti-gay laws.  A surprising number of separatists interviewed by Western media have ranted against the “Euro-gays” in Kiev. This indicated that their separatism isn’t just about nationality, but also about ideology and culture. As in the 1930s, fascism as an explicit alternative to Western values appeals to many.

More importantly, calling Putin a fascist could help dispel the myth that Putin’s ideology is offering something new. A number of Western commentators, including the influential German columnist Georg Diez, have argued that Putin’s Russia is part of a new wave of state-sponsored capitalism spearheaded by China. But while China’s model of authoritarian capitalism under a communist guise is genuinely novel, Putin is merely recycling ideas from the 1930s.

If people understand that Putin is promoting an ideology that has been tried before and led to disaster, they may be less likely to view him as a hero.

I propose that when Western politicians talk about the threat Putin is posing to the West, they should call that threat by its name: fascism. Independent media should start referring to Putin as a fascist much like they refer to David Cameron as a conservative. Unlike Putin’s use of the term, it wouldn’t be mere name-calling. It would simply be a recognition of the facts.

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May 4, 2014 · 4:14 pm

Why Thomas Piketty’s “Capital” Could Revolutionize Economics

Almost anyone with access to media has by now heard of Thomas Piketty’s “Capital in the 21st Century” – a book that is already being hailed as possibly the most important work of economics of the decade.

The book looks at 200 years of economic data and argues that free markets lead to growing economic inequality in the long run. It has made headlines for its main argument, and for its call for a global wealth tax to combat inequality. But just as importantly, it marks the return of history in economic analysis. This is a very, very big deal.

For the last few decades, mainstream economic thought has existed in a sort of timeless vacuum. Millions of college students, me included, read textbooks that presented macroeconomic laws as eternal truths, impervious to historical change: output always returns to its fixed, natural equilibrium; government intervention only ever affects prices in the long run; economic crises always solve themselves by lowering labor costs. These “laws”, textbooks imply, were as true in 1914 as in 2014.

Economics wasn’t always this ahistorical. In the 19th and early 20th century, leading economists like David Ricardo, Karl Marx and Joseph Schumpeter all analyzed economics within a larger historical trajectory, and their theories centered on change over time.

But the rise of neo-liberal economic thought has pushed history out of the profession. Modern economists, beginning with Alfred Marshall in the late 19th century but really taking off at the University of Chicago in the 1950s and 60s, have sought to turn economics into a science, with fixed laws based on math. If the laws of physics and chemistry don’t change over time, their thinking went, why should economic laws?

It’s not that these economists never referred to history to support their claims, but their theories still ended up being completely ahistorical.

While neo-liberal economic theories are far from universally accepted, they have succeeded in transforming the profession from a social science into a want-to-be natural science.

The main problem with this approach is that many of these scientific models in economics are based on unrealistic assumptions – perfect competition, completely rational actors and equal access to information, to name just a few – and therefore hardly ever work in reality.

Following the 2008 financial crisis, economists who take a less natural-science based approach to economics and base their theories on the recognition that markets aren’t perfect and actors not always rational have received more attention. The buzz surrounding Piketty’s book is the culmination of that trend.

Bringing history back into the study of economics may cost the discipline its scientific veneer, but it also offers a better understanding of how economic forces truly work, and how they change over time. As Piketty put it in his introduction to “Capital in the 21st Century”:

“To put it bluntly, the discipline of economics has yet to get over its childish passion for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. (…) This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”

 

 

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April 20, 2014 · 6:38 pm

Are Financial Crises Caused by Governments? Probably Not.

Ever since financial markets imploded in 2008, preventing the next crisis has preoccupied governments and academics across the globe. Most have argued for stricter government oversight of financial markets, claiming that unregulated markets are prone to irrational exuberance, which will inevitably lead to the next boom and bust.

In its recent cover story, The Economist takes a radically different approach. The paper argues that too much government involvement – rather than a lack of it – was to blame for the recent financial crisis. The editors base this argument on an analysis of five financial crises: 1792, 1825, 1857, 1907 and 1929.

Each crisis led legislators to bail out financial institutions deemed systemically important. This in turn encouraged banks to take on more risk, making every next crisis worse than the prior. Since banks (and other institutions) had reason to believe they would be bailed out anyway, they had little incentive to invest prudently.

Moral hazard created a spiral of worsening crises. This could have been prevented, the editors argue, if governments had let banks go bust and let the markets take care of themselves.

Blaming crises on governments is popular among neo-liberal thinkers, partially because it is such an easy claim to make. Since governments are always involved somewhere somehow, no one can disprove the claim that crises wouldn’t happen if markets were completely free.

But just because a theory can’t be disproven doesn’t mean it makes sense.

The Economist is certainly right to argue that bailouts encourage risk-taking and my do more harm than good in the long run. But its argument against government intervention in general is far more flimsy.

If government intervention encourages risk-taking while unregulated markets are more prudent, as The Economist claims, we should be able to find historical evidence for this. But the paper fails to present any.

In fact, much of the irrational risk-taking that led to crises was done by individuals and institutions that were hardly regulated and had no prospect of ever being bailed out. The markets crashed in 1929 because individuals took bets on overvalued stocks. These speculators were hardly regulated by the government and knew they would never be bailed out, and yet they still took risks.

In the lead-up to the 2008 crisis, largely unregulated private-equity funds and mom-and-pop investors were just as eager to jump on sub-prime mortgages as were more heavily regulated banks.

Moreover, The Economist itself points out that the financial crisis of 1907 was caused by investment trusts, which were far less regulated than banks.

It may well be that certain forms of government intervention, especially bail-outs, play a role in making financial crises successively worse. But history shows that unregulated financial actors are at least as prone to irrational exuberance as their more regulated counterparts. Rather than argue against government regulation in general, a more prudent argument can be made in favor of regulation that truly discourages risk-taking.

The Economist makes a convincing claim that deposit insurance and bail-outs encourage risk taking and should be done away with. But other regulations, such as stricter capital requirements for banks or rules forcing lenders to keep some of the mortgages they originate on their books, discourage risk-taking. Getting rid of them would almost certainly do more harm than good.

In Its defense, The Economist does acknowledge in passing that not all forms of government intervention are bad. But at the same time the paper criticizes laws that discourage risk-taking, such as the Dodd-Frank Act or transaction taxes. This leaves the impression that The Economist’s argument is driven more by anti-government dogma than by a calm assessment of which regulations help and which don’t.

We may all crave simple solutions. But, sadly, getting the government out of the markets won’t solve all our problems.

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April 13, 2014 · 2:31 pm

The Ukraine Crisis Could End Globalization

Remember The Economist’s claim that our era of largely peaceful globalization could come to an end? Four months into the new year, the similarities between 2014 and 1914 have become a bit more obvious.

The magazine was wrong to assume that old-school geopolitics would make its return in East Asia, where disputes over maritime borders could still lead to war. Instead it was Ukraine – the site of the 20th century’s most horrific violence – that cast doubt on the stability of our current world order.

Brookings fellow Thomas Wright recently wrote an article that convincingly explains how much of a threat Russia’s annexation of Crimea is to globalization.

The annexation and following sanctions against Russia brought the world “to the cusp of a period of de-globalization,” he writes.

“The logical response to the prospect of economic warfare is for states and major companies to hedge against the risk of vulnerabilities created by interdependence. They will adopt a strategic approach to integration—pursuing it where it works to their benefit, but stepping away from it when it exposes them to potential actions by a hostile government. This will be a sea change in international economic policy and U.S. grand strategy more generally.”

This selective approach to interdependence would differ sharply from previous decades, when countries strove to participate in the global market as much as possible. Wright argues that this “sea change” would have happened anyway, even if Russia hadn’t invaded Crimea:

 “Globalization was always especially vulnerable to geopolitical shocks. The great power comity of 1991 to 2008 was never going to be permanent. It is perhaps better that this realization comes in a stand-off with Russia, the world’s eighth largest economy and one that has already been distancing itself from the global economy, than a crisis involving China, the second largest economy, which could do real damage to the United States and its allies.”

In theory, a more selective approach to globalization could lead to a boom in protectionism across the world. This is exactly what happened after 1914, when geopolitical disputes ended decades of unfettered globalization and ushered in an era of closed-off national markets and recurring economic crises.

But Wright is optimistic that history won’t repeat itself in this case. He argues that countries will seek to diversify trade rather than not trade at all, which will give them more security without having to resort to protectionism.

“Major powers will identify areas where interdependence creates a real strategic vulnerability—especially on finance, energy, and cyber—and reduce them gradually over time. Rather than erecting barriers, diversification could achieve the same effect with much less cost.  As they look to deter Russia, the United States and Europe should also be cognizant about the precedent they are setting.”

 (…)

 “Done right, a more strategic approach to integration and international order can put interdependence and globalization on more stable footing, which will serve the world well as it faces what could become a competitive and volatile couple of decades.”

Let’s hope he is right. But history – and Putin’s current foreign policy – show that governments often don’t act as rationally as we would like.

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March 16, 2014 · 3:52 pm

Putin’s foreign policy is scarily similar to Stalin’s

Here’s another post I wrote for the World Policy Journal’s blog:

Angela Merkel is right: Russia’s President Vladimir Putin is living in another world. But what world exactly is this? As the Crimean crisis drags on, it is becoming clear that Putin’s thinking is somehow stuck in 1930s Europe. Replace Putin with Stalin and you get a good sense of what Russia’s leader is doing and, more importantly, how he can be stopped.

Much has been written about how the Soviet Union shaped Putin’s thinking. To him, Russia’s immediate past is not just a tool to foster patriotism. It is a model he is hoping to emulate.

Putin has long tried to recreate Soviet greatness by invading neighbors (think Georgia 2008) and building a Eurasian economic union. Along the way, he has also adopted a way of thinking that is strikingly similar to his Soviet predecessors.

In fact, he invaded Crimea for much the same reasons that Stalin invaded eastern Poland in 1939. Comparing the two invasions not only helps us make sense of a complicated situation, but it also offers clues on how Putin’s expansionism can eventually be defeated

After storming the winter palace in 1917, the Bolshevik leaders set out to export communism across the globe. They founded the latest Communist International and supported socialist movements in a number of foreign countries.

But the world revolution never happened. Instead, fascist takeovers in Italy (Mussolini), Germany (Hitler) and Spain (Franco) left the Soviet Union increasingly isolated. This presented its leaders with a monumental conundrum: how could a system whose success seemed to depend on world revolution survive alone amid a hostile world? Stalin, who assumed power in the late 1920s, found an answer. He called it “socialism in one country” – a maxim first put forth in 1924 and then gradually adapted.

Instead of trying in vain to subvert other countries, Stalin argued, the Soviet Union should focus on securing its borders and becoming autarkic. Its best shot at growing more powerful was rapid industrialization at home and gradual growth by annexing territories at its borders.

This philosophy culminated in the Molotov-Ribbentrop Pact of 1939, in which the Soviet Union and Nazi Germany shocked the world by pledging mutual non-aggression. A secret clause divided Poland up between the two states.

Contemporaries saw the pact and eventual Soviet invasion of Eastern Poland, the Baltic States, and Moldova as a sign of Soviet strength. They were wrong. By agreeing to the pact the pact, Stalin gained some territory east of the so-called Molotov-Ribbentrop line, but he also gave up all hope of turning Poland or Germany communist – a hope that had all but faded anyway. The treaty was an acknowledgement of his failure to export the Bolshevik revolution.

Eventually, this failure doomed the Soviet project. Stalin’s autarkic model worked more or less for a few decades, and he won over a number of satellites in Eastern Europe. But the world’s largest economies remained capitalist, and the Soviet Union became more or less isolated from a growing world market. This isolation bred stagnation, decline, and then collapse.

With the benefit of hindsight, we know that Stalin’s autarkic vision was doomed to failure. We can apply this lesson to Putin’s invasion of Crimea.

Putin is no communist, and never wanted to export a revolution. But much like Stalin, his system depends on gaining allies abroad. While Stalin wanted to turn Western European states communist – and then into Soviet satellites – Putin has been working hard at winning over post-Soviet countries.

Surrounded by what he perceives to be a hostile West, Putin’s vision of a powerful Russia centers on the Eurasian Union. So far the economic union set to launch in 2015 only includes Russia, Belarus, and Kazakhstan. Drawing Ukraine into the club was meant to be Putin’s ultimate triumph. After Ukraine’s President Viktor Yanukovych ditched the EU and signed an economic-cooperation agreement with Moscow last fall, it seemed like he had succeeded.

Then protesters chased Yanukovych out of the country, and Putin saw his ideal of Eurasian greatness fall to pieces. Much like Stalin in the 1930s had to accept that Germany wouldn’t become a communist satellite, Putin today understands that Ukraine has fallen out of his orbit for the foreseeable future. He can still exert economic pressure, but a new pro-European government in Kiev will never join his Eurasian Union.

It appears Putin drew the same conclusion Stalin had drawn 80 years earlier: if he couldn’t have it all, he should at least take what he could get. So he invaded Crimea.

Most Western observers have interpreted the invasion as a sign of Putin’s strength. It is in fact a sign of his weakness. By invading Crimea, he may have won some territory, but he also acknowledged that his Ukrainian policy has failed. There is virtually no chance following the invasion that Ukraine will seek closer ties to Moscow anytime soon. Instead, the country is likely to turn west–as it already has.

Like Stalin in the 1930s, Putin has given up an increasingly elusive hope for allies abroad in exchange for modest territorial gains. By doing so, he chose isolation: call it “Putinism in one country.” Even if Russia avoids sanctions, it is now far less likely to attract much-needed foreign investment and has scared off its neighbors, including Ukraine.

Understanding this weakness should guide any Western response to the Crimean crisis. We know from Soviet history that choosing isolation is unlikely to succeed, no matter how many tanks or how much natural gas you have.

Instead of rushing to punish Russia, the West should just let Putinism defeat itself. Investors fleeing Russia in the wake of the invasion have already cost the country dearly.

The U.S. and EU should support Ukraine and other post-Soviet states fed up with Putin, drawing them closer to the West. An already weakened Putin will be left with nothing but a peninsula and the isolation he chose. It will breed stagnation, decline, and eventual collapse.

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