Paul Krugman calls 1913 the high-water mark of the First Global Economy. He notes, that over the preceding century, the world economy had been transformed by technology and the widespread acceptance of the belief that free markets, with secure property rights, were the best way to achieve economic progress.
After 1913 the market atrophied -- long-distance trade shrunk, private international movements of capital virtually disappeared, and a third of the world rejected private property.
How does one explain this reversal? Perhaps, more importantly, how does one explain the even more astonishing reversal of fortune that, at the start of the 21st century, the world has returned to more or less the same ideology of free markets, small governments, and sound money that prevailed at the beginning of the 20th.
The answer to the first question must be that bureaucracies replaced alternative institutional arrangements, primarily markets in the first half of the 20th century because they outperformed them. How? Presumably, or so Alfred Chandler argues, because of technological innovations that led to massive economies of scale and/or scope.
What were the changes in technology that caused bureaucracies to out-perform markets? Here the surprising answer is changes in organizational arrangements themselves. That is: changes in organizational design, personnel systems, operational engineering, accounting systems, and control technologies. This answer reflects the currently fashionable view among economists that the comparative advantage of institutional arrangements boils down to a question of information costs and that actual arrangements are solutions to information problems &emdash; the costs associated with search, bargaining, monitoring, and enforc ...