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Friday, November 7, 2008

Financial Crisis? Not so fast!

The Foundation for Economic Education is pleased to announce that Gennady Stolyarov II of Hillsdale, Michigan, is the recipient of the first Eugene S. Thorpe Award. His winning essay, “Globalization: Extending the Market and Human Well-Being,” earned him a prize of $2,000 and will be published in a future issue of The Freeman.

Mr. Stolyarov is a senior at Hillsdale College; a triple major in economics, mathematics, and German; and an immigrant to (and now citizen of) the United States from Belarus. He is well-advanced on his career path, having already passed four of nine examinations in actuarial science. He attended a FEE seminar last summer.

The globalization of culture, politics, and economics is arguably the defining characteristic of the past half century. English has become the international language of commerce. Chinese holiday toys entertain children in Nebraska and Norway. American political consultants sell their advice to candidates in Israel, and the Bollywood film industry holds its annual awards event in Bangkok. That an enormous expansion in global wealth has accompanied this increase in global interconnection is self-evident. That the former is a result of the latter is the Smithian premise.

One hundred twenty-nine authors responded to FEE’s Call for Papers in competition for the Eugene S. Thorpe Award. Their papers were judged in a blind review. With near unanimity they spoke to the benefits of globalization, the causal relationship between the expansion of markets and wealth creation, and the limited ability and frequently destructive consequences of governmental attempts to manage the process.

The choice of a “best” paper was difficult, and the selection committee wants to thank all the Award participants for their contributions. Only one paper could win, and we will let Mr. Stolyarov’s work speak for itself; but special recognition and honorable mention are in order for several of the runner-up contributors. In particular, two of them addressed the issue of “government facilitation” of globalization in a more sophisticated manner than most, recognizing that the concept of government facilitation can and should include not just the destructive mechanisms of market manipulation and management, but also the supportive and (for Smith) essential mechanisms of preserving and protecting the legal infrastructure necessary for free markets to function.

Lorenz Kraus of Albany, New York, in his paper “Liberty of Contract and the Division of Labor,” reminds us that “One of the great feats of intellectual history has been the discovery of the crucial connection between a thriving division of labor and a thriving civilization,” and that “the division of labor . . . depends on the laws and institutions a nation adopts.” Just so. Adam Smith was not an anarchist, and his vision of the optimal role of government was not that of no government at all. Two of the three legitimate functions of government he identifies are the national defense and the administration of justice. Darin Clark of Bradenton, Florida, in his paper “Cooperative Exchange, the Occurrence Necessary for the Division of Labor,” emphasizes that “voluntary exchange” can only take place when we have “a necessary framework of laws. . . . This framework of laws is the respect for contractual agreements and rights to private property.”

Government can play a positive role to “facilitate” globalization by enhancing the rule of law in those areas of the world where it is lacking and by defending property rights whether against the thuggery of high-seas piracy or the high-tech assault of electronic spam. Honorable mention to Messrs. Kraus and Clark for elaborating on this point.

And honorable mention likewise to Mark Hendrickson of New Wilmington, Pennsylvania, who offers the insight that government attempts to manage trade through bi- and multilateral trade agreements are a modern form of the mercantilism prevalent in Adam Smith’s time. “It turns out that a democracy can be as harmful as a monarchy to the economic well-being of a people, if special-interest politics force the common people to subsidize the privileged few and abrogate the right of a free person to buy from his or her seller of choice.” Mr. Hendrickson makes a powerful argument in favor of the unilateral removal of trade barriers.

The globalization of the world’s markets is almost certainly a Hayekian effect emerging from the technology of the twentieth century, but it is one that poses a direct threat to the power of governments to control individual behavior. Governments, whether democratic or autocratic, do not react well to loss of control and will act to retain their power by whatever means necessary. As the political environment in the United States shifts, and with the convenient excuse of recent disruptions in global financial markets (occasioned themselves by government interference), we can expect new efforts on the part of sovereign and meta-sovereign institutions to reimpose their control over international trade. Hayekian processes tend to persist over time-but the pace at which they proceed is more problematic.

Congratulations to Gennady on his winning article.

  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is