Globalisation's poison pill

The 20th century witnessed a massive experiment in the social sciences. We observed the performances of two quite different types of economic system:the centrally planned economies of the Soviet bloc and the much more disordered, market-oriented ones of the West. On any scientific criteria, the latter proved decisively superior.

Yet, almost paradoxically, the triumph of capitalism has created a flourishing market in books that denounce this system in evermore ingenious ways. Noreena Hertz's book is a splendid example of this genre. The main theme of the book is clear. Politicians have become, during the past two decades, subordinate to the colossal power of transnational corporations. Democracy itself is threatened in a world in which companies are more important than governments.

Hertz does tend to race through example after example of the evils of global capitalism in a way that makes for invigorating reading, yet she rarely acknowledges that many of the same points have been made in previous generations. Nevertheless, she does raise a range of interesting questions. How might the problems she believes are unique to modern times be dealt with?

She notes that western electorates could put pressure on politicians, but worries that people might not want to pay higher prices for goods if western labour rights are enforced in the rest of the world. She approves of consumer pressure to keep companies in check, then agonises that such groups might get things wrong, citing Greenpeace's classic misguided attack on Shell over Brent Spar . Moreover, consumer power is market-based, almost the ultimate sin, for Hertz argues that this can "easily result in tyranny by those who can protest most effectively".

Any work of this kind requires its Nirvana, a foreign place where things are so much better ordered than they are under brutal Anglo-Saxon capitalism. Sweden, West Germany, Cuba, the Soviet Union have all served this function over time. Hertz opts for the incredibly poor kingdom of Bhutan, where "the king and his queens direct the economy and take responsibility for their citizens' lives". But even "this last Shangri-La is being infiltrated" and may fall victim to capitalism.

The book poses far more questions than it answers. But a much more serious weakness is an apparent lack of understanding of some of the most fundamental insights of economics. It is not necessary to subscribe to free-market theory to appreciate the power of these arguments. Two examples will suffice. Hertz spends considerable energy denouncing the fact that "technological advances have allowed machines to replace people". The perspective of economics on this view is interesting. Two hundred years ago, at the start of the industrial revolution, the early economic theorists struggled to understand the impact of the then new technology - what they called "machinery" - on the working class. Some thought it would impoverish them. Others believed that, while those who lost their jobs would suffer in the short term, eventually everyone would benefit immensely.

We now know that the optimists were correct. The present prosperity of the West has in essence been brought about by technological advance. The institutional structures of capitalism have encouraged such innovation in ways that no other system of economic organisation has ever achieved.

The second example is the statement by Hertz that "increases in tax have become politically untenable, ensuring that governments must fund public services through sleight of hand dependent on continued economic growth". But it is precisely economic growth, rather than redistribution or reallocation of resources, that permits continued growth in the public services. In a static, growthless economy, even if people were willing to pay more tax, there would be a cast-iron ceiling on the level of public services. Once public spending reaches 100 per cent of the economy, by definition it can expand no more. Continued economic growth is a necessary condition for continued higher expenditure on services of any kind, whether public or private.

This demand for analytical rigour may be thought too harsh. Hertz, after all, is writing in a more swashbuckling tradition of political economy than the dry-as-dust tomes that serve the needs of Economics 101 students. Yet even here problems come to mind. On the very same day that I read her opinion that "behemoth corporations stifle nations with their imperial rule", the case was settled between the South African government and the pharmaceuticals companies over patents and the provision of Aids drugs. In the one corner, the government of a small, poor nation. In the other, some of the world's most powerful companies. No contest, one might think. Indeed, this turned out to be true, with the defeat and humiliation not of the politicians, but of the corporations.

Again, we are told that "once, if powerful men overstepped the mark, governments stepped in to curb their power; but today, apart from the Microsoft ruling, we see little evidence of that". But Microsoft is not just something that can be swept aside in parenthesis. It is one of the largest companies that has ever existed, and the United States government has taken it to court.

Despite these flaws, the passionate and committed style will ensure the appeal of the book to a wide range of readers. Students will thrill to its denunciations of the legacy of the Thatcher-Reagan era before they disappear to serve the interests of global capitalism at BP or Goldman Sachs, or wherever. The 1960s generation will be filled with nostalgia for many of its old favourites. "The 100 largest multinationals now control 20 per cent of global assets"; "the sales of General Motors and Ford are greater than the gross domestic product of the whole of sub-Saharan Africa"; "all the goods we buy or use are increasingly controlled by corporations, which may at their whim choose to nurture or strangle us". I almost dusted down my bell-bottoms for that last one.

Overall, however, the book lacks any real structure and flits at speed from one point to the next. It is in essence a less theoretical version of Will Hutton's The State We're In .

Paul Ormerod is a director, Volterra Consulting.