While I was writing about the Asian economy last week, I was struck by one fact: The only country of the 10 surveyed whose economy and stockmarket have performed well in the last few months is Malaysia, defier of the IMF, the currency markets and conventional globalist economic wisdom. Moreover, as reported by United Press International, a recent Center for Economic and Policy Research study shows that world growth in 1980-2000, the decades of globalization, was significantly lower than in the two prior decades.

What’s going on here? Is conventional free trade economics wrong? Does autarky work?

There are a number of examples to suggest that it might.

Conventional wisdom holds that the Japanese economy fell from grace in the 1990’s because of its failure to open up far enough or quickly enough to the rest of world. But it is more plausible from the data we have to suggest that the old autarkic Japanese model worked magnificently from 1950 to 1985, and then fell apart as wimps in the Japanese government bowed to Western pressures to open up.

Another example of successful autarky was the pre-1929 United States. Alexander Hamilton established the U.S. economy, over Jefferson’s protests, as a high-tariff, protectionist operation, limiting its dependence on international trade even further than was inevitable from the poor communications of 1790. The Republicans, in control after the Civil War, raised tariffs higher. The result was a flowering of American industry, probably greater than would have been the case in a free trade polity, against the heavy competition of Britain and Germany. Only in 1930, when the U.S. high tariff policy pushed the rest of the world into depression were there any obvious negative consequences of this policy.

A less respectable example was Nazi Germany. After 1933, Germany rebuilt its economic strength rapidly on the basis of limited trade, hostility to foreign involvement in German industry and tight exchange controls. By 1938, Germany’s was the economy to beat, even for the relatively successful British economy of the late 1930’s. It was not just a war economy — civilian infrastructure was also superb. As a teenage automobile buff in the mid 1960’s, I was struck by the fact that the then extant one hour on-road automobile speed record, worldwide, (not just British) at just more than 100 miles per hour, had been established by a British Lagonda V-12, technically standard but not what you’d call a mass-production model, on the Frankfurt-Mannheim autobahn in June 1939. A speed test representing, as it were, parts of the two economies.

(It throws an interesting light on 1930’s civilization to learn that this paragon of speed boasted a partition for the chauffeur, a cocktail cabinet in the back seat, and stylistically a strong resemblance to a hearse).

A very interesting speculation, therefore, is whether Nazinomics could have continued to work. If Hitler had retired from pursuing world domination at the end of 1938, having gained almost cost-free victories in Austria and the Sudetenland, then it seems likely that his Greater Germany would have continued to flourish economically, and would have drawn neighboring countries willy nilly into its sphere of influence — Bulgaria, for example, had established a special economic relationship with the Reich as early as 1935.

It’s a chilling thought. Post-1939 history would have been very different, but so, today, might have been our idea of received economic truth, an elusive concept if ever there was one.

It is quite clear, first, that autarky can be very damaging indeed if combined with poor domestic policy. Stalin’s Russia, Mao’s China and the post-war Warsaw Pact, far from setting an example to the world, actually failed to return to output levels that had been set decades before. They were only good at fooling people: My 1991 Economist Diary still states that in 1989 East Germany had per capita income higher than the United Kingdom, a quite remarkable claim to anyone who actually visited both countries.

Modern China is also good at statistical obfuscation, although in China’s case, at least, some of the growth since 1978 has been genuine and the insulation from the global tech downturn provided by autarky is also genuine, and currently very valuable.

In China’s case, some of the policies are autarkic, and some of the economic results are beneficial. As in most half-way situations, it is by no means clear which policies have caused what.

What is clear, I think, is that in a situation like the 1930’s, when others are pursuing autarkic policies and the global economy is running well below capacity, a certain amount of autarky makes sense. Britain finally abandoned free trade in 1932. In retrospect this abandonment was at least 30 years late, so that an abandonment of free trade immediately after Germany, France and the U.S. had swung to protectionism, i.e. around 1890, and a move at that time to Imperial Preference would have made Britain’s subsequent economic and Imperial history very much more successful.

Germany’s economic success under Hitler was real. So was Japan’s after 1949, at a time when Japan was heavily discriminated against by the industrialized West.

It is also clear, however, that autarky and protectionism are, in general and over the very long run, a negative sum game in which other countries lose more than the autarkic country wins. A world in which nations operate behind high tariff barriers is a world operating sub-optimally. The comparative advantage defense of free trade appears to be true, when considered globally and over a long enough period of time.

German and (limited) British autarky in the 1930’s damaged the economies of the rest of Europe, and still more those of Latin America, India and the Third World in general. To the Reich policymakers, of course, that would have been regarded as one of autarky’s attractions.

What conventional economics does not tell us is whether successful autarkic policies that produce genuine high growth in a particular country can generate such a positive feedback loop on that country’s economy that the world as a whole benefits. Two examples exist of where this might have happened: McKinley’s United States and postwar Japan. In both cases, the economies concerned grew far more rapidly than those of their competitors, and began to produce goods and services that were internationally attractive, often at costs far below those elsewhere available (think, Rockefeller oil, Carnegie steel, Sony transistor radios.) In such cases, it must be theoretically possible that total world welfare was increased by autarky.

Economists are very fond of reducing life to models, containing simple linear or exponential equations, which are the ones economists can solve, and then declaring as “revealed truth” the results of their simplistic analysis. Modern mathematics, however, has gone beyond this; with computer simulation we are now able to deal with complex systems, involving multiple polynomial equations, which exhibit bizarre “catastrophe” or “chaotic” behavior.

Economic theory has not yet caught up with this capability. One, therefore, must admit the possibility that in some cases, to be identified, successful autarkic policies, to be defined, can have such a strong and self-sustaining growth effect on the country concerned that they produce higher growth for the world as a whole.

This is not a plea for autarky, which will become all too popular if we are indeed doomed to a deep recession — already, U.S. trade, the total of exports and imports, is more than 5 percent below its 2000 peak. Certainly, most autarkic policies are nothing but special-interest protection — nothing whatever will be gained for the world economy by propping up the U.S. steel industry yet again. Western agricultural protection, too, is a subsidy to farmers which costs Third World countries far more than they gain by Western aid handouts, with a very limited benefit to the farmers themselves.

At the same time, the free traders cannot claim omnipotence. There is enough evidence to suggest that their models are not yet perfect and that occasionally, autarkic policies may help. We should regard calls for such policies, therefore, with suspicion but not, overall, with outright hostility.

Maybe, just maybe, with autarky Britain can once more produce a car as good as the 1938 Lagonda V-12.

-0-

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.