The Commanding Heights

Daniel Yergin, a Pulitzer Prize-winning historian of the oil industry, and Joseph Stanislaw, a global energy and economics adviser, trace the worldwide struggle between government control and free markets that reshaped economies across every continent in the second half of the twentieth century. Originally published in 1998 and updated in 2002, the book argues that the dominant trend of this period was a dramatic retreat of the state from the "commanding heights" of the economy, a phrase Vladimir Lenin coined in 1922 to describe the strategic sectors the Soviet state would retain even while permitting limited private trade. Adopted by Britain's Labour Party, India's Congress Party, and governments throughout the developing world, the phrase encapsulated an era in which state ownership, central planning, and regulation were considered the only rational way to organize modern economies.

The narrative opens in the aftermath of World War II, when Europe's devastation, the discrediting of capitalism by the Great Depression, and the apparent success of Soviet industrialization converged to make government control the economic consensus. In Britain, Clement Attlee's Labour government nationalized coal, steel, railroads, and utilities and built the welfare state on the recommendations of the wartime Beveridge Report, which called for comprehensive social insurance. In France, Charles de Gaulle insisted the state must control the economy's most strategic sectors, and Jean Monnet, a cognac salesman turned international statesman, devised a planning system that set investment priorities for reconstruction. In Germany, economist Ludwig Erhard abolished most price controls overnight in 1948, establishing the "social market economy," which combined free-market competition with a social safety net. The intellectual foundations for these systems rested heavily on John Maynard Keynes, whose 1936 General Theory of Employment, Interest and Money argued that governments must replace inadequate private investment through deficit spending.

The United States followed a distinctive path. Rather than nationalizing industries, the American government exerted control through economic regulation, a tradition that began with the Interstate Commerce Commission in 1887 and expanded dramatically under Franklin Roosevelt's New Deal. The Securities and Exchange Commission and similar agencies embodied what legal scholar James Landis called a necessary administrative branch of government staffed by experts. By the 1960s, confidence in the government's ability to fine-tune the economy through Keynesian fiscal tools reached its peak. Even Republican president Richard Nixon declared himself a Keynesian in 1971 and imposed wage-and-price controls. The 1970s brought chronic poor performance: oil shocks, stagflation (the simultaneous occurrence of stagnant growth and high inflation), and growing doubt that the Keynesian paradigm could deliver stability.

In the developing world, newly independent nations adopted state-led strategies modeled on European mixed economies and Soviet planning. India, under Jawaharlal Nehru, built an elaborate system of five-year plans, state-owned enterprises, and bureaucratic controls known as the Permit Raj, a maze of licenses and quotas that stifled entrepreneurship. A new discipline called development economics argued that only governments could mobilize the capital needed for industrialization. In Africa, leaders such as Ghana's Kwame Nkrumah pursued ambitious state-led projects like the Volta River dam, but authoritarian governance, corruption, and the suppression of market incentives produced stagnation. The oil crisis of 1973 and the wave of nationalizations that followed marked the high point of state power in the developing world.

The authors then trace the forces that produced a reversal. In Britain, Keith Joseph, a senior Conservative intellectual who cofounded the Centre for Policy Studies with Margaret Thatcher in 1974, challenged every premise of the postwar consensus. Drawing on Friedrich von Hayek and Milton Friedman, Joseph argued that the obsession with full employment rested on outdated fears and that wealth creation required entrepreneurship rather than state direction. Thatcher's election as prime minister in 1979, her victory in the Falklands War, her defeat of the coal miners' union, and above all her privatization program, which transferred two-thirds of state-owned industries to the private sector by 1992, established a model that influenced governments worldwide.

Intellectually, the shift drew on a neoclassical counterattack centered at the University of Chicago. Friedman argued that monetary policy, not fiscal management, was the key to stability. George Stigler demonstrated that regulated industries captured their regulators. Hayek, who had contended since the 1940s that central planning could never match the information-processing power of the price system, received belated vindication with his 1974 Nobel Prize in Economics.

The fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991 delivered the most powerful blow to state-centered economics. Poland's Leszek Balcerowicz implemented shock therapy on January 1, 1990, rapidly freeing prices and establishing market mechanisms. In Russia, Yegor Gaidar freed prices and liberalized foreign trade, while Anatoly Chubais implemented mass privatization through a voucher system that transferred thousands of enterprises to private ownership. The process was chaotic, with the controversial loans-for-shares scheme transferring prized state assets to a small group of oligarchs, but the authors argue it created an irreversible foundation of private property.

In East and Southeast Asia, the high-growth economies of Japan, South Korea, Taiwan, and Singapore demonstrated a blend of government guidance and market forces. Japan's Ministry of International Trade and Industry (MITI) coordinated industrial policy, while South Korea's government created chaebols, diversified conglomerates such as Hyundai and Samsung that received generous state credit and protection. The 1997-98 financial crisis, triggered by the collapse of the Thai currency, exposed the vulnerabilities of "crony capitalism," the overly cozy relationships among banks, business, and government, and forced painful restructuring across the region.

China's transformation under Deng Xiaoping receives extensive treatment. Beginning with agricultural reform in 1978, proceeding through the establishment of coastal Special Economic Zones to attract foreign investment, and surviving the 1989 Tiananmen Square crackdown, Deng's pragmatic program lifted more than 300 million people out of poverty and culminated in China's accession to the World Trade Organization (WTO) in 2001. In Latin America, the 1982 debt crisis discredited dependency theory, which held that international trade inherently exploited developing countries and prescribed import substitution, the replacement of foreign goods with domestic production behind high tariff walls. Reformers across the continent implemented stabilization programs, privatized state enterprises, and opened economies to trade. India's 1991 balance-of-payments crisis produced a similar turning point, as Finance Minister Manmohan Singh dismantled the Permit Raj and reoriented the economy toward global markets.

In Europe, the drive toward a single market and a common currency forced a retreat of state economic power. Jacques Delors, as president of the European Commission, championed the Single European Act, which removed hundreds of barriers to cross-border commerce, and the Maastricht Treaty, which committed member nations to the euro, introduced in January 2002. Privatization accelerated across the continent, with more than $420 billion in state assets sold during the 1990s. In the United States, Federal Reserve chairman Paul Volcker's conquest of inflation, the deregulation of airlines and telecommunications, and the bipartisan drive to eliminate the federal deficit similarly reshaped the balance between government and marketplace.

The book concludes by framing the central question for the twenty-first century: whether the shift toward markets will endure. The authors identify five critical tests: whether market economies deliver broadly shared prosperity, whether results are perceived as fair, whether the environment is protected, how societies cope with demographic pressures, and whether national identities survive globalization. They argue that the market system's moral legitimacy rests on two foundations: the results it delivers for ordinary people and the protection it offers against arbitrary power. If the system fails these tests, they warn, "surely there will be a backlash, a return to greater state intervention" (417). The outcome will depend on the balance of confidence between faith in markets and faith in government, shaped by the cumulative judgments of history and experience.