On The Ruins of a Great Illusion: Why is the West losing?

The decline of communism ushered in a new era of globalisation, characterised by the rapid transfer of technology and capital, the liberalisation of migration flows, and the division of global production into technological zones engaged in intense cooperation and trade. However, the non-Western world did not adopt capitalism in the form that had developed in the West by that time, but in its earlier, more ‘wild’ forms, unconstrained by norms and rules, by the ideology of inclusivity and political participation, or by notions of justice and human rights.

At the same time, Western capitalism continued to move further in the direction of self-limitation through new regulatory and fiscal norms, restricting its own room for manoeuvre. These diverging trajectories predetermined the competitive advantages of ‘new capitalism’ over the ‘old’, advantages that over time began to translate into political capital. Moreover, the archaic and assertive ‘old capitalism’ began an active reverse expansion into the West itself, compelling Western elites to return to its rules and to abandon the normative practices they had previously internalised.

These processes stand in sharp contrast to the expectations of the ‘end of history’ that shaped Western thinking 35 years ago. The radical rightward turn now visible in the West represents a logical reaction to the resulting competitive disparity and an attempt to free itself from the norms that the West imposed upon itself and which are increasingly perceived as its cause.

The West today faces a difficult task: to restore its competitive advantages in competition with the global South without dissipating the accumulated capital of its social and civilisational development, argues Vladislav Inozemtsev, co-founder of the European Center for Analysis and Strategies.

By the end of the first quarter of the 21st century, we have gradually returned to an era of harsh economic and political confrontation, unprincipled great-power rivalry, and pervasive legal and ethical nihilism. What is unfolding today differs strikingly from the aspirations of the late Cold War period, when it seemed that ‘good’ in the form of an effective Western market society, with its primacy of law and universality of democracy, would finally triumph over the ‘evil’ of a planned economy with its shortages, ideological unification, and totalitarian politics.

Why have the realities of the new century diverged so sharply from those expectations? Are the ambitions of the leaders of so-called revisionist powers to blame? Is it the desire of societies who have not ‘fitted in’ to modernity to drag the whole world into a new Middle Ages? Is it a surge of religious fanaticism, a reaction to the destruction of many former behavioural norms? Is it the arbitrariness of capital, which in our time has acquired unprecedented power and the capacity for non-coercive control over millions of people? Looking back, I would venture to suggest that this evolution can only be explained from a more complex perspective.

I.

The opposition between the free world and the communist system implicitly assumes that a market economy generates the rule of law and democratic institutions in much the same way as a planned economic ‘base’ produces an authoritarian and ideologised ‘superstructure’. In reality, however, market principles, whose history can be traced almost to the disintegration of primitive social orders, have by no means always been associated with a liberal society. The limitation of the ruler’s authority, which became the first step towards democracy and the rule of law, was not motivated by economic circumstances. Indeed, the market may be regarded as the most elementary form of social connection and interaction, emerging at virtually any level of economic development and driven by economic expediency. By contrast, a democratic society governed by law is the product of a long social evolution and arises from the crystallisation of values transmitted from generation to generation.

In every Western country, the emergence of democratic society was the result of political, social, and intellectual processes unfolding within society itself. It was not an automatic consequence of economic growth and not even a direct outcome of technological progress. The assumption that the defeat of communism could lead to the transfer of all elements of the Western system to the rest of the world was therefore profoundly mistaken. European civilisation at different times spread across the globe only together with Europeans themselves. For this reason Angus Maddison, who explicitly described former settler colonies as ‘European offshoots’, was entirely correct, while Daniel Treisman and Andrei Shleifer, who believed that the predatory privatisation associated with Anatoly Chubais would transform Russia into a ‘normal country’, were mistaken (→ Maddison: Contours of the World Economy; Shleifer, Treisman: A Normal Country). Simply ‘transplanting’ the Western model beyond the Western world at the end of the 20th century was no more realistic than it would have been in the middle of the 16th century.

Moreover, by that time, Western societies themselves had long since ceased to resemble the self-regulating market systems they appeared to be to most reformers of the time. Over several decades they had steadily incorporated elements of a socialised economy, not socialism in its Soviet form, but a system in which economic activity was increasingly guided and regulated by the pursuit of fairness and by collective long-term goals. There was nothing inherently problematic in this approach. Citizens of Western countries were clearly entitled to high-quality insurance-based healthcare, adequate pensions, and a liveable natural environment. Yet all this required funding, and as a result both the tax burden on the economy and the regulatory burden on business increased with each passing decade.

Between 1928 and the early 1990s, in the United States, government expenditure rose from 4.3% to 20.1% of GDP, and in European countries it increased from 10–13% to an average of 47% across the European Union. ‘Capitalist’ countries thus became markedly more ‘socialist’: the share of GDP devoted to social programmes increased from less than 3% in all Western countries in the mid-1920s to 14% in the United States and 33% in Sweden by 1996. Environmental legislation became a central instrument of economic policy, often placing noticeable constraints on economic efficiency. Democracy, while remaining one of the key elements of social identity, also began to be circumscribed, primarily in order to prevent the rise of populist and extremist parties, and to be ‘enriched’ by approaches reflecting group rather than individual interests, ranging from multiculturalism to preferential policies for sexual and other minorities. Without condemning any of these trends, I simply note that by the end of the twentieth century Western societies could no longer be regarded as embodiments of the free market and classical democracy in the way they were perceived by many observers.

II.

Even so, these developments alone would probably not have produced the troubling outcomes we observe today had they not coincided with a major technological trend that had been developing over previous decades and came to full fruition just as the communist experiment was coming to an end.

This trend, described by Daniel Bell as the advent of the post-industrial society, implied a departure from the economy of mass industrial production, where the adoption of technological achievements was fairly straightforward, and ‘catch-up development’ was the classic pathway for reducing the social gap that separated the leaders from the laggards (→ Bell: The Coming of Post-Industrial Society). The late 1980s, remembered in the post-Soviet world primarily as a period of the defeat of communism and the collapse of their homeland, the USSR, were for many Western economists marked above all by the failure of expectations that Japan would become the leader of the world economy by perfecting Western industrial technologies (→ Inozemtsev: The Limits of ‘Catch Up’ Development).

The collapse of communism and the passing of the industrial system coincided in time by no means accidentally. The world that by the end of the twentieth century appeared to have become informationally, socially, and ideologically unified in fact fragmented technologically and innovatively into three distinct types of economy: those centred on information and services, those based on industrial production, and those focused on the extraction of raw materials. This fragmentation became the principal foundation of globalisation, understood as an intensive economic interaction among these three systems that was almost entirely devoid of a political dimension, unlike the westernisation of the 19th and early 20th centuries → Von Laue: The World Revolution of Westernisation). A radical decline in the cost of raw materials and logistics, combined with the sudden disappearance of information scarcity and the incorporation of vast supplies of low-cost labour from the global periphery into a single world market, produced an unprecedented surge in international trade, information exchange, and migratory flows.

However, it soon became apparent that open borders and a unified world had become a ‘double sentence’ for Western civilisation, and for Europe in particular.

The first trend in this direction was the outsourcing of industrial production, which took place with astonishing speed (→ Luttwak: The Endangered American Dream). In the 1970s, European countries (excluding Soviet satellites) accounted for 25% of global industrial output (including almost 25% of global shipbuilding, 31% of car production and almost 38% of the total value of chemical industry output). As recently as the mid-1990s, astonishing as it may now seem, Nokia, Siemens, Ericsson and Alcatel controlled more than 55% of global mobile phone production (→ Waters R., Daniel C. Bad Signal // Financial Times. 14 June 2001). Of the 20 largest companies in the chemical industry, 12 were European, while the capacity of European metallurgy was twice that of China (→ Marsh P., Alden E. A Lot to Hammer Out: Efforts to Cut Global Steel Capacity Must Face up to U.S. Protectionism // Financial Times. 17 December 2001). By 2024, however, not only Europe’s share but the combined share of Europe and North America in global shipbuilding had fallen to 2%, to 23% in automobile production, to 25% in the chemical industry, and 67% of mobile phones are now manufactured in China, with less than 3% in the EU and the United States.

One may of course take comfort in the fact that Western companies (admittedly primarily American ones) remain technological leaders, and investors value them more highly than ever (the US stock market's share of global capitalisation now reaches 50%, surpassing even the levels of the 1980s, and only six of the world’s 30 most valuable corporations are non-American), but the condition of the global economy cannot be reduced to financial indicators alone. Manufacturing capacity and entrepreneurs continue to relocate as taxes rise and social and environmental regulation tightens, with numerous examples at both the national level, such as the United Kingdom, and the regional level, such as the outflow of business from California. In other words, successful and progressive societies have artificially constrained their own competitiveness while simultaneously opening their markets to the global South.

A second trend, no less consequential, has been the policy of broad Western absorption of migrants from developing countries. This has been justified by both economic considerations, cheap labour that supports economic activity, and humanitarian ones, concern for human rights, for the victims of conflicts and dictatorships, and for the populations of former colonies. It soon became evident, however, that a significant share of these migrants does not contribute to economic development in proportion to its size. In Germany, for example, it is now officially recognised that almost half of the resources of the social funds, around €23 billion annually, are spent on supporting migrants. At the same time, these communities actively advocate principles of multiculturalism and the primacy of group interests over the principles of classical democracy.

In my view, the migration issue better than any other illustrates the transformation of Western countries into a kind of ‘captured economy’, where social values outweigh economic rationality and, if the trend continues, may ultimately eliminate the prospects for economic development. Unlike many alarmist commentators, I do not address the demographic dimension or questions of identity, including religious identity, focusing exclusively on economic issues. To this can be added even more unusual forms of economic self-harm, such as environmental policies aimed not at protecting the domestic environment, as was the case with the first major environmental laws in the United Kingdom [Clean Air Act, 1956], Germany [Wasserhaushaltsgesetz, 1957] and the United States [Clean Air Act, 1963], but rather at attempting to change global trends. Despite the fact that rivers in the Philippines alone carry around 12% of all global plastic waste into the oceans, which is almost 100 times higher than the figure for Europe, and China burns 30 (!) times more coal than all EU countries, it is Europeans rather than the rest of the world who ban plastic bags and limit the temperature of water in homes.

In other words, over recent decades the continuing shift of Western countries away from the classical market towards a regulated economy, and from liberal principles towards abstract humanistic experimentation, has led to a sharp and largely self-imposed decline in the competitiveness of the ‘free world’, one that risks its eventual marginalisation, first economically and then socio-politically.

III.

This raises the most important question: can circumstances be imagined under which such a sacrifice might be considered justified? In my view, this would only be the case if a system based on principles of equality, humanism, and morality were to spread across the world, ensuring durable peace and harmonious development. In other words, Fukuyama’s ‘end of history’ might arguably have been worth the price of relinquishing Western dominance. The problem, however, is that nothing of the sort, neither an ‘end of history’ nor recognition of this ideal by the non-Western world, has in fact occurred. Why?

The ‘unification’ of the world that took place in the 1990s, accompanied by the removal of most borders, helped spread across the planet only those principles that were easily replicated and capable of taking root in almost any social environment, namely the principles of the free market. Yet these principles, unaccompanied by the social and humanistic experience of the West or by the institutions of a democratic state governed by law, produced something very different from the Western capitalism that had effectively ‘released’ them at the turn of the 1980s and 1990s. The only successful examples of transformation, as had also been the case centuries earlier with the so-called Western offshoots, were those countries that were politically incorporated into the Western sphere through accession to the European Union.

Across the rest of the world, market logic began to guide not only entrepreneurs but governments as well. Everything became subject to buying and selling: morality, power, courts, the press, and even human life. Russia became perhaps the most striking example of this new internalised market corruption, while China, which disregarded virtually every conceivable norm of trade relations and intellectual property protection, offered an equally impressive illustration of the operation of the ‘wild market’ on the external perimeter.

In a situation where the rejection of virtually all rules combines with market incentives, the resulting system is almost certainly more competitive than one in which every economic action requires regulatory approval and becomes an object of taxation. Moreover, by choosing to treat the societies of ‘wild capitalism’ (as equals, transferring technology to them, opening Western markets to their goods, observing the supposed ‘rules of the WTO’, and even allowing disputes among their entrepreneurs to be adjudicated in Western courts), Western countries placed themselves at a structural disadvantage. In the eyes of these competitors they appeared weak, thereby preparing the ground for political challenges to the West’s global role.

Yet the most significant development was not even that Western powers began to lose economic competition and political confrontations to countries on the global periphery. Rather, a sense of the surreal gradually spread within Western elites themselves, accompanied by a vague feeling that they too should be permitted what had become so widespread in the global periphery.

It is precisely this sentiment that has provided the foundation for the ‘unexpected’ ‘right-wing conservative’ turn observed in recent years. It is no coincidence that it began in the United States, where elements of entrepreneurial culture have long been valued more highly than in Europe and where equality of opportunity has traditionally been preferred to equality of outcomes. ‘Trumpism’, on its second attempt, has introduced into politics practices that until recently seemed inconceivable: migrants, it turns out, can be expelled using methods reminiscent of those associated with Vladimir Putin; the head of a Venezuelan drug cartel can be seized in ways similar to those employed by the cartels themselves; tariffs can be imposed on the rest of the world similar to those long applied against Western goods; pointless international organisations can be abandoned without regret; and even a kind of ‘special military operation’ can be launched against a country that has long been viewed unfavourably. And that is not all, you can bring underage girls to a beautiful island in a manner not entirely dissimilar to practices observed in Russia; appoint billionaires to government or rely on them to control the ‘free’ press; accept gifts worth hundreds of millions of dollars from foreign governments and even issue crypto tokens, while combining business interests with presidential duties.

When the leaders of the current American administration lecture Europe about the need to get ‘onto the right path’, they are in effect acknowledging the failure of the dream of a harmonious new world and urging their historical partners to recognise that it is impossible to continue praising rules that constrain one’s own societies while benefiting everyone else, all the while continuing to follow them and even tightening them when no one else intends to observe them. So the emergence of this new trend, with its emerging ideology of ‘dark enlightenment’ and something approaching a new moral doctrine with certain authoritarian and quasi-fascist features, is therefore a natural consequence of the collapse of the illusions formed forty years ago. It appears less as an accident than as a major, perhaps the defining, trend of the first half of this century. Grotesque in some respects and even morally troubling in others, this movement has arisen not from a desire to destroy the values of the Western world, but from a blunt attempt to defend the societies built upon them from both external and internal challenges.

IV.

Looking back, it seems that several basic conclusions can be drawn. First, what happened after 1989 was not a historical mistake but largely the natural course of events. The problem is not that the world arrived at the wrong destination, but that most of us were unprepared for the trajectory it ultimately took. The underlying reason is that Western societies greatly overestimated their transformative potential (as Finnish President Alexander Stubb said last week). Much of the rest of the world proved more interested in economic growth and the unchecked enrichment of elites than in ensuring sustainable development and social justice.

The second conclusion is that without maintaining advanced economic growth, technological superiority, and the highest possible level of innovation, Western societies will be unable to preserve what is probably still their existing military and political advantage. This is particularly well understood in the United States, whereas in Europe it often appears that many have already reconciled themselves to its loss. Economic priorities will therefore inevitably take precedence over the social agenda, environmental issues, and the promotion of ideas associated with ‘identity’ and ‘equality’. A refusal to substantially rebalance these priorities in the present circumstances would amount to a historical sentence on the Western world and the Western way of life.

The third conclusion is that the new rightward wave, which has emerged in response to the pronounced leftward shift of the contemporary agenda, should not be idealised. It carries its own risks of excess and distortion. While it can be explained as a reaction to the West’s growing competition with a world shaped by a new form of ‘wild capitalism’, this explanation does not justify the large-scale and systematic reproduction of practices alien to modern Western societies. The dichotomy between left-wing humanitarianism and right-wing corporatism, precisely the polarisation that has characterised Western politics in recent years, is both counterproductive and destructive. The future is more likely to lie in a centrist course and in the reassertion of common sense as expressed in classical liberal theory. The core elements of that tradition, the rule of law, the concept of fundamental economic freedoms, political representation, and the affirmation of the rights of citizens and individuals, have been tested by time and do not need to be modified.

This ‘return to the roots’will not be easy, but there is no real alternative. It will require acknowledging that inequality, especially in a society where ability and talent rather than origin or status are decisive, is not only acceptable but also just. It will require recognising that state regulation cannot place entrepreneurs and consumers at a structural disadvantage compared with their counterparts in other countries. It will require admitting that progressive taxation is a misguided idea insofar as it violates the very principle of equality that so many claim to defend. It will require ensuring that the welfare system does not reward idleness more generously than socially useful activity. It will require recognising that respect for someone’s rights and values does not justify the dismantling of social norms developed over centuries, and that migrants should adapt to those norms rather than transform them. It will also require affirming that citizens must under no circumstances be deprived of the right to political participation, as some advocates of corporate dominance occasionally suggest, while at the same time making the acquisition of citizenship more demanding than it is today.

The dream of all opponents of Western civilisation – a society that has been grounded in laws and norms for a millennium – is a world without rules, in which they hope to win an easy victory (it is no coincidence that this was the title of a report by the Valdai Club in the memorable year of 2014). Were the West to adopt this approach, it would abandon its greatest advantage. Its task today and in the future is, therefore, to preserve the rules and principles that made it what it is. These rules must not place it at a disadvantage relative to its competitors, and these principles should not be altered merely to accommodate supposedly ‘equal’ cultures and traditions. The fate of humanity today depends on whether Western societies succeed in reconstituting themselves on this basis.