The rise of economic nationalism

The ingredients are in place, in the UK and elsewhere, for a return to atavistic "politics of the so

I seriously worry when thoughtful people portray the current lapse into large-scale state intervention as heralding the arrival of a progressive nirvana. Whatever George W Bush is doing nationalising mortgage lenders and insurance companies and bailing out banks he is not promoting socialism (though some of his fundamentalist Republican allies fear so). Whatever George Osborne means by "the end of laissez-faire" he is not discovering Keynes, let alone Marx. The idea that statism is inherently enlightened defies all our knowledge of its many malignant mutations. Prominent among them is nationalism.

Throughout recent history, chronic financial crisis has evolved into economic crisis, which has in turn led to popular demands for the state to intervene, often by adopting beggar-my-neighbour policies in relation to foreigners or discrimination against indigenous minorities.

One of the first recognisably modern financial crises was the South Sea Bubble in 1720. Many thousands of sane British citizens - including Sir Isaac Newton - invested their savings in a scam and were impoverished when it burst. There was much anger and parliament debated the proposition that the promoters should be sewn into a sack with poisonous snakes and thrown into the Thames. Then, as now, the contagion spread through Europe. The financial crisis led in turn to economic depression, which in England fuelled an already inflammatory dispute about the impact of imported Indian calico on the jobs of weavers in London. In the face of riots, parliament resolved to ban Indian textile imports. In a classic protectionist response, competition with low-wage Indian labour was deemed to be unfair and Indians were relegated to the role of supplying cotton to the British textile industry.

Two centuries later, history repeated itself on a global scale when the Great Crash of 1929 led to economic distress and unemployment. One of the consequences was a deteriorating political climate, which allowed the Smoot-Hawley Tariff Act to be passed by Congress, increasing protectionist trade barriers. The UK, France, Germany and Italy retaliated, Mussolini rising to the challenge of economic nationalism with particular relish. Although the impact of these measures on the Great Depression has been much debated, they certainly didn't help.

History never quite repeats itself and we still do not know what the full impact of the current crash will be. That, in turn, raises the question of where the inevitable anger will be directed. Despite the current UK national sport of "kick a banker" there is, as yet, no obvious mobilisation around a programme of income and wealth redistribution. Leading union leaders are looking perkier but they know the constituency for a round of industrial strife is small. To be sure, there are articles in the most improbable newspapers about "City greed" and the "evils of the bonus culture" but these are likely to be framed with accounts of immigrants living in luxurious council houses or Muslim preachers living an affluent life on the dole.

The collapse of discipline was a reminder of how close to beggar-my-neighbour economics we are

In fact, the ingredients are in place, in the UK and elsewhere, for a return to atavistic "politics of the soil": the politics of identity, and old-fashioned economic nationalism. I am sure the British Tories have already drawn up their Plan B for if Gordon Brown's confident response to the financial crisis disrupts the smooth cruise back to power. Immigrants are an obvious target for them (with attacks framed in scrupulously politically correct language). Liberal immigration is one deeply unpopular laissez-faire free-market policy for which the Labour government can unambiguously be blamed. Much more palatable than soaking the rich. No doubt the British National Party is girding itself for battle, too.

Immigrants are a useful scapegoat across Europe. But in some EU countries economic nationalism runs deeper. France's Nicolas Sarkozy requires little encouragement to denounce "free trade", especially in agriculture. Italy's finance minister, Giulio Tremonti, has recently published an influential book with a modern version of ideas that would have appealed to Il Duce: a European fortress against the world, standing firm against the yellow peril (now China) and the Muslim hordes. (I caricature only slightly.)

In the United States a backlash against trade is building up in Congress and, if Barack Obama wins, he will struggle to control it. A powerful head of steam has built up around the idea that Chinese manufacturers are driving down not just prices, but also American wages, and imports should be stopped or slowed. That China has become a responsible lender of last resort to the US treasury, based, it is believed, on reserves accumulated from trade surpluses with the US, is less likely to excite gratitude than resentment. Faced with this flexing of nationalistic muscles at this early stage of the crisis the structures of global governance suddenly look very puny. The WTO trade negotiations have collapsed and are unlikely to resume soon. The Bretton Woods institutions - notably the IMF - have been marginalised. The UN is invisible and powerless on economic and social issues. Even the EU is struggling to maintain its internal cohesion. The total collapse of discipline in the face of a panic, led by Ireland, to secure retail bank deposits was an alarming reminder of how close to anarchic beggar-my-neighbour economics we are.

The big new players on the global economic stage - China, India and Russia - have only recently emerged from near-autarky and all three slip easily into a mercantilist world in which trade becomes a tool of state policy rather than a mechanism for mutual development. None of them has shown any great enthusiasm for multilateral trade disciplines or other forms of global economic governance. It is not difficult to envisage a world in which the US, the EU, Japan, China, India and Russia, with their various spheres of influence, jostle for economic advantage with varying degrees of aggression.

These emerging economies can all be characterised as "state capitalist", whatever labels their leaderships use. The commanding heights of the modern economy - finance and energy - are essentially in state ownership and/or control with a mixture of rich oligarchs and small businesses fighting over the rest of the economy. The nationalisations of recent weeks and the energy security scares that preceded them have led western economies to show similar features; almost in spite of themselves, the Anglo-Saxon countries are moving in a state capitalist direction.

The politics of nationalism and the economics of state capitalism make a rather more plausible narrative for the future than either the liberal internationalism or socialism to which our leading UK political parties officially subscribe. That some triumphalists claim this as a victory for "state intervention" over "markets" begs the whole question of what state institutions will be used for. When the most likely ideological glue for various types of state intervention is some form of national/Europe-wide aggrandisement, the consequences will be messier and nastier than those who are prematurely celebrating the End of the End of History believe.

Vincent Cable is the Liberal Democrat shadow chancellor

This article first appeared in the 20 October 2008 issue of the New Statesman, My year with Obama