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The Wrong Lesson We Learned From the Fall of the Berlin Wall

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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.

That year, the communist regimes of Eastern Europe fell in quick succession, in mostly peaceful revolutions that ended half a century of planned economies and political oppression, and heralded a new era of economic and political freedom.

I was fourteen years old when it happened, an immigrant to Canada from behind the Iron Curtain (Poland) watching the world change on the TV right in front of me. To me, the point was simple: It was the victory of freedom over oppression, and it was the victory of free-market capitalism over centrally planned state socialism. In the years since, I've realized that was too simple a lesson to learn.

Of course, in the years since, much has changed. Successive recessions and financial crises have taken some of the sheen off capitalism for the people of Eastern Europe, and while only the aging and sentimental yearn for a return to communism, many feel they were misled by the euphoria of post-communist freedom.

It's not only Eastern Europeans who have questioned free-market dogma in recent years; anyone who personally felt the sting of the 2008-09 financial crisis has certainly had to wonder where it all went wrong.

Well maybe it all went wrong that night in November, 1989, when I and so many people around the world saw what we thought was the unmitigated victory of the free market.

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History tends to have a reductive effect on our understanding of the world. We simplify things in order to make them easier to digest. And in the case of the Cold War, the zeitgeist that formed after the fall of the Berlin Wall came down to this: Capitalism won and communism lost, proving that capitalism works and communism doesn't.

This is a reductio ad absurdum. It presumes 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 20th century, when 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 labour; workplace safety standards; a 40-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 all of these basic tenets of socialism have now come to be accepted in Western, free-market countries. Even the ultra-capitalist United States takes most (though not all) of these things for granted. With a few exceptions, these "socialist" principles are a given, and are neither debated nor even considered to be socialist any longer.

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 favour 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 here is the point: 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, that it works always, and it works in all circumstances. The history lessons of the Great Depression and countless other economic collapses were forgotten, and replaced with a naive, narrow-sighted faith in free market economics.

So banks were deregulated; crucial public utilities were privatized; public pension plans were invested in questionable assets; regulatory bodies were reduced to rubber-stamping whatever businesses wanted; and the balance between free market economics and market-tempering policies was disrupted. The West shifted from economic moderation to economic extremism.

The result is all around us: Growing wealth and income inequality; unstable banking systems that collapse (in Asia in 1998 and the U.S. and Europe in 2008) requiring government bailouts; economic growth that leaves entire sections of the population behind.

What worries me most in all this is the growing sense that the public, and the politicians who represent the public, have ever less capability to do anything about it. Between the influence of big money over politics, the constraints of countless trade treaties and agreements, and the desire to remain economically competitive with countries that provide few social services, there is little room to bring balance back to our extreme economy.

In the face of it all, our Western, democratic governments are beginning to share some alarming characteristics with the Soviet Union of days of old, or maybe the Roman Empire in its last centuries: Dithering, unresponsive, incapable of change. We already know from history where that leads.

The good news is that the economic crisis of recent years has exposed some of these flaws in ways which no one but Fox News and the Koch brothers can deny. For instance at this point it's a given, within public opinion, that banks are not to be trusted, and left to their own devices, will cause disaster.

That changes the public debate. For the first time in decades, economists and politicians are daring to suggest that free markets aren't always a good thing, and that opens up an opportunity to cast around for new ways of doing things, for new solutions to old problems.

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.

This blog is adapted from an article that appeared in This Magazine, May, 2009