On November 9, 1989, the embattled communist government of East Germany announced that, for the first time in three decades, its citizens were free to visit West Germany. That night, millions of people the world over watched on TV as jubilant young Germans tore down the Berlin Wall with hammers and shovels and bare hands. It was the moment the Cold War ended.
In January, less than two decades after the collapse of the Soviet bloc, the citizens of Eastern Europe took to the streets once again, this time in reaction to a tanking economy. Anti-government protests turned violent in Riga, Latvia, on January 13; the following night, riots broke out in the Bulgarian capital of Sofia; and two nights after that, protesters tried to storm the Lithuanian parliament building in Vilnius. In all cases, the protesters demanded the resignation of the government. But in reality, the protests were aimed at something bigger than any given government; they were a loud, violent expression of discontent with the results, 20 years in the making, of that economic and political freedom.
There is a growing sense these days in Eastern Europe that the public was misled by the euphoria of post-communist freedom. But it is not only Eastern Europeans who are beginning to question free-market dogma, because it was not only Eastern Europeans who were led astray. Western civilization as a whole was led down the garden path by the collapse of communism.
Eastern Europe’s democratic revolutions were so unanimous, and the economic and political disintegration of the Soviet Union that followed was so rapid and so complete, that it was hard not to see its significance in exaggerated terms. To Westerners, whether they admitted it or not, the collapse of the Soviet Union tainted all ideas from the political left, and legitimized all ideas from the right. Two decades later, it’s becoming clear that that simplistic philosophy has led us to the brink of economic ruin.
History tends to have a reductive effect on our understanding of the world. We simplify things in order to make them easier to digest. In the case of the Cold War, the zeitgeist that formed after the fall of the Berlin Wall presumed that what the West had when it prevailed over Soviet communism was a purely capitalist economy. It didn’t. To see what the West actually had when it won the Cold War, we need to look a little further into the past - to the early decades of the twentieth century, when communism’s mild-mannered cousin, socialism, was a potent force in Western politics.
Back then, the basic tenets of socialist political parties were a laundry list of policy positions: Laws against child labor; workplace safety standards; a forty-hour work-week; mandated vacation times and weekends; a minimum wage; retirement pension plans; and universal health care. If none of that strikes you as particularly radical or left-wing, it’s because nearly all of these basic tenets of socialism have now come to be accepted in Western, free-market countries.
The sort of economy that had developed in the West by the time of the fall of the Berlin Wall is what economists call a “modified free enterprise” system (a term rarely mentioned these days) — essentially, a free market economy tempered by some sound and popular socialist principles. The elected governments of Western Europe and North America had to respond to popular opinion, and over years and decades, they brought in numerous socialist ideas to temper the vagaries of free market economics.
Meanwhile, in the totalitarian Soviet Union, there was no pressure to alter the economic system in favor of popular opinion. The deeply flawed communist economy muddled along for decades, until its senseless contradictions eventually bankrupted the country, and the USSR ceased to exist.
So when the West won the Cold War, it wasn’t the victory of capitalism over communism; it was the victory of moderation over extremism. And that is the lesson we lost in the years after the Berlin Wall fell.
The undisputed conventional wisdom became that capitalism works, and that it works in all circumstances. The colorful and sometimes tragi-comic history of market economics – from the South Sea Bubble of the eighteenth century, to the Long Depression of the 1870s, to the Great Depression – was swept out of the Western consciousness, and replaced with a naive, narrow-sighted faith in free market economics.
Thus, banks were deregulated; crucial public utilities were privatized; public pension plans were invested in questionable assets; and regulatory bodies were reduced to rubber-stamping whatever businesses wanted. But perhaps worst of all, the West’s long-running left-versus-right debate over economic policy was stifled. In the new era of free-market orthodoxy, the West became like the USSR: A place where questioning the economic dogma was tantamount to heresy. The balance between free market economics and market-tempering policies was disrupted. By allowing the unbridled free reign of market forces, the West shifted from economic moderation to economic extremism.
Today, with the collapse of the financial sector spilling over into massive job losses, the consequences of that extremism are becoming abundantly clear. The good news is that the economic crisis means that for the first time in decades, economists and politicians are daring to suggest that free markets aren’t always a good thing. But now, as we cast around for a new economic vision, we run the risk of repeating the same mistake — abandoning one simplistic dogma for another.
This is the pitfall we need to avoid. Running from one extreme position to another guarantees only a different kind of catastrophe. If we want to regain the balance that made us prosperous in the first place, we need a broader, more inclusive political debate on economic policy. With the fall of the Berlin Wall in ‘89 and the Great Recession of ‘09, the one-dimensional myths known as “capitalism” and “communism” have finally been blown up.