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Sunday, February 10, 2008

Do Free-Market Libertarians Understand the Need for Liberal Hegemony? 1st in a Series


Even though Prof Bug has been busy preparing the final article in the series on the revitalized economic performance of the small Scandinavian economies --- all advanced welfare-state systems, with high taxes, high social spending, and extensive market regulations in both labor and product markets --- he decided, earlier this week, to take some time off and post a lengthy comment at EconLog . . . a good libertarian economic blog, run by two economists: Arnold Kling and Bryan Caplan. The subject? Does extensive trade and exchange across borders --- in goods, services, investment flows, technology transfers, and at times mass movements of peoples --- spontaneously occur on its own, unless blocked by governments for a variety of reasons . . . or does it require, especially on a global scale, the existence of a dominant states, a hegemon?

Kling's Brief Answer

Highly unusual for an uncompromising libertarian, Kling --- a University of Chicago-trained Ph.D. and prolific blogger --- argued in his short think-piece that extensive trade does require a dominant state, no two ways about it. His argument was brief, you understand; and it proceeded in a fast, top-skimming manner that showed little grasp of the extensive literature outside economics that international relations specialists have developed for three decades now. Still, give credit where it's due. Kling's swift-moving commentary was laudable, an effort to prod libertarian devotees to be open-minded about something they are largely naïve about: how any extensive global or regional trade-system, whether past or present, depends heavily on the more basic military and security system of hegemony.

More concretely put, if --- to use terms Kling didn't --- a far-reaching system of trade across numerous states in a region or worldwide has ever emerged and lasted for decades or longer, it has almost invariably done so if a dominant state existed and was willing to substitute its superior military forces, diplomatic influence, and economic and financial power for the absence, in international life, of effective, institutionalized world government. A world government has never existed. Very likely, it never will. Someone, though, has to create the public goods --- like the protection of private property and traders --- that only government can do domestically. Hence the need of a dominant state to do this. One way or another --- whether through conquest and colonization or maybe the use of subordinate allied states or by creating international institutions like the WTO today --- the dominant great power will, at a minimum, have to open trade routes and police them against predatory states or brigands or terrorists or pirates, while providing financial and economic inducements to potential great power rivals to play along with the rules that the hegemon has shaped and sought to maintain for its own self-interested benefits.

An Ambiguous Concept

Note quickly that a hegemon is a Janis-faced concept . . . something Kling's article only superficially alludes to. It really refers to two very different ways that a dominant state in a region or world-wide can use it superior military, technological, and economic and financial power to drive ever greater trade in goods, services, investment flows, and technologies across state-borders.



(i.) Historically, from the emergence of territorial states with effective government some 4000-5000 years ago, a dominant state was invariably until the mid-19th century an imperial state that expanded militarily by conquering and colonizing others. Think here of the ancient Roman and Persian empires, the Arab empire of the 7th-11th century, the Aztec and Inca Empires in Latin America, or --- moving into the early modern age ---the European imperial colonizers from the 16th century on in the Americas, Asia, and the Middle East. More recently, think of the vast if short-lived Nazi empire in conquered Europe in WWII or, across the world, the short-lived Japanese empire in conquered Asia. More recently still, recall the long-lived Soviet empire in eastern and central Europe from 1918 until 1991.

Yet, after 1850 or so, something radically new occurred in the nature and ideology of state-dominance. Specifically, since then . . .


Pax Britannica

(ii.) A new kind of hegemon began to emerge in the latter half of the 19th century, once Britain was fully industrialized and converted to free trade in 1849.

In particular, thanks to its pioneer role in the industrial revolution and the great national wealth and financial power that followed, Britain --- even as it continued to expand imperially and aggressively in Asia and the Middle East during that century (while devolving home rule in Canada, Australia, New Zealand, and eventually South Africa) --- became the center of a new global financial and trade system, which encompassed the Americas and included its formal imperial colonies. For the first time in the history of the territorial state-system, with roots 4000-5000 years old, a fully global trade system materialized. And it largely operated, also for the first time, on free-market principles.

The era of Pax Britannica, as it's often called, lasted only a few decades: roughly from the late 1860s until the start of WWI in 1914. Militarily, moreover, it never enjoyed the kind of supremacy vis-à-vis other great powers, real or potential, that the Romans did for several hundreds years or, since WWII, the United States. Economically and financially, though --- together with British dominance in sea power that began to erode only after 1900 --- Great Britain was able to establish an effective, world-spanning trade and financial system that fell apart only in WWI. The five or six decades were long enough to provide numerous benefits to others. In particular, Britain policed the sea and trade-routes; it made the pound-sterling the key international currency and used its financial power to fund private and public investments all around the world; it served this way as something of a global central bank, a lender of first- and last-resort; in time, too, it transferred lots of its pioneering technologies and managerial skills to other countries in West Europe and North America; and its command of the seas and its open Empire allowed tens of millions of Europeans and an even larger number of Asians to move out of impoverished countries to the New World or, in the case of the Asians, all over East Africa; and gradually, despite the adoption of protective tariffs and subsidies in most of West Europe and their continuance in the rapidly industrializing United States, a global system of capitalist exchange emerged for the first time in history. And though several advanced economies never practiced free trade themselves --- the US, most of Continental West Europe, and later Japan --- most trade in goods, technologies, investment flows, and movements of peoples across borders did occur along free-market lines.

Observe swiftly a hitch here though. Britain's pioneer liberal hegemony creates a major problem for hegemonial theory.

How so?

Tersely put, in the late 19th and early 20th centuries, Britain was both a traditional and powerful imperial state and a radically new kind of liberal hegemon. Even as the country became the driving force of a global, market-based trade system, it continued its earlier, age-old policies of militarized colonial expansion in far-flung places like the Middle East, much of Africa, and much of Asia. What more, in a new era of colonial rivals after 1880 that emerged as France, Germany, Russia, Japan, and the United States rapidly industrialized, Britain proved to be the most aggressive and successful of imperial expansion. Its success culminated in the seizure at the end of WWI of most of Germany's small colonies and, more importantly, of the Arab remnants left in the wake of collapsed Ottoman Empire. Enter the theoretical problem for hegemonial theory. Separating Britain's two roles from one another --- a traditional colonial empire and a new liberal hegemon ---- is hard to do, and maybe impossible.

Not so for the second hegemonial state in world history, namely . . .

The US Hegemonial Role after 1945.

The historical record here is clear. Confined, originally, to the non-Communist world, victorious American dominance after in 1945 rested on the country's vast lead in industrial prowess, GDP, financial power, and military strength. It expanded its economic, financial, and security commitments in far-flung ways, creating for the first time in history a fully institutionalized rule-based system of free-trade in goods, services, investment flows, and technology transfers that was neither imperial nor exploitative and that persisted mainly because other major states --- Britain, France, West Germany, and Japan --- saw it in their own national interests to adhere to. The same, of course, was later true of post-Maoist China, neutral India, and post-Communist Russia after 1991. The institutional order is well-known: think here of the WTO, the IMF, the World Bank, the Marshall Plan, the support of democracy and capitalist markets (first in conquered Germany and Japan, later in Latin America and Asia), and --- at any rate for the democratic industrial countries in Asia and Europe --- entangling alliance systems and outright military protectorates, something that the Clinton administration rightly rushed to do in Eastern and Central Europe in the late 1990s. For that matter, despite all the disappointments that followed, it was both the Roosevelt and Truman administrations were the main driving force behind the creation of the United Nations.

Note the three crucial theoretical changes in American hegemony, compared even to Britain in the late 19th century.

  • Uniquely in history, at no time since 1945 has the US ever indicated one iota of interest in territorial expansion.
  • As a liberal hegemon, moreover, American policies in principle and usually in practice --- the latter depending on concerns about bipolar rivalry with the Soviet super-power --- stood behind the expansion of national independence in Africa, Asia, and the Middle East and in favor of democratic government there.
  • And by creating entangling alliances and international economic institutions, the US has been the first dominant state in world history to limit its freedom of action by binding itself to the rules that the IMF, the WTO, the World Bank, and NATO entail.

What, in turn, have been the major benefits to other states from this hegemony? In brief, to-the-point shorthand, three of them are worth signaling out in passing:

  • Containment and Defeat of the Communist threat . . . the continuance, really, of the two liberal hegemons' militarized victories over all non-liberal challengers: Napoleonic France, Imperial Germany, Nazi Germany, and Militarized Japan. The Soviet empire collapsed in 1991; Communism itself disappeared as a world-wide movement; even post-Maoist China shifted to largely state-directed capitalist development, with major openings to multinational investment from abroad, technological transfers, and extensive trade; and a global system of capitalism pervaded every nook-and-cranny of the world outside Communist North Korea and Cuba.

  • Vast Unparalleled Democratic Expansion: No less important, stable democracy spread everywhere in Latin America by the 1980s and early 1990s, and --- no less strikingly --- in most of Southeast and Pacific Asia outside China and Indochina, not to mention all over Eastern and Central Europe. The latter, new capitalist democracies in Europe were then given a military protectorate by NATO, thanks to a US initiative in the 1990s, and a huge stimulus to economic development by membership in the European Union . . . the latter supported continuously, with varying degrees of enthusiasm, by US administrations for 60 years now. And for the first time in history, all of Latin America with the exception of Communist Cuba --- its totalitarian system doomed to collapse soon --- has witnessed the full institutionalization of stable democratic government. Only in the Middle East has the US commitment to democratic development encountered major violent resistance, leaving open the question whether any Arab state has the cultural underpinnings for democratic self-rule . . . even of the inevitable corrupt sort that flourishes in much of Latin America, Asia, and parts of Africa.

  • And the Vast Economic Development of Billions of People. Above all, thanks to the continued expansion of global trade --- roughly 7% annually for the last 62 years --- most of Pacific Asia, India, and parts of Latin America have been able under American hegemony and the rule-based trade and financial institutional order it created to develop sufficiently effective economic institutions and polices that --- all depending on the skills and educational levels of their populations and effective limits to corruption and other predatory elite proclivities --- , have set them on courses of fast economic development.

Enough said by way of clarification. Shift your attention now and consider . . .


Our Aim in This New Buggy Series

Written for libertarians and other free-market enthusiasts, the central tenet of Kling's argument was sound enough --- anyway, as far as it went. The trouble is, as Prof Bug hinted a couple of seconds ago, it didn't probe very deeply. So when Prof Bug visited EconLog and read the piece, he quickly posted a lengthy, systematic set of theoretical and empirical comments. What you will find unfolding here in this new two-article buggy series incorporates those comments in a revised, wide-ranging exposition of the topic that Kling and Prof Bug discussed at EconLog: how, back to ancient times, extensive external trade across numerous independent or conquered territorial states always depended on the more basic system of military power, war-making, diplomacy, and security and, more specifically, how such power is distributed across states: diffuse and fragmented or concentrated on a very powerful regional or global state. It's something mainstream economics, never mind the more boisterous forms of free-market enthusiasm, has trouble appreciating --- or so you'll soon see.

Consider just in passing, nothing else, what the former book editor of Reason Magazine --- the chief libertarian mass-circulation print and online source --- once asked Prof Bug to do. Currently the number two head of the Interior Department of the US government since 2001, Lynn Scarlett --- a former Ph.D. student and teaching assistant of Prof Bug at UCSB --- told him in person that she was aghast at how naïve libertarians tended to be about the inseparable roles of state-power and regional and global market exchange across borders invariably were and requested that he write an article countering such naiveté. The buggy prof, as it happened, was too caught up in some deadline-driven scholarly work at the time to accede to that request. What follows, then, is a belated effort to do what Prof Bug couldn't do earlier.

How the Series Will Continue

At least three separate articles will be needed to do justice to the complexity of the topic. The next article's argument will confine itself to clarifying in a fair amount of depth what libertarianism is, and how it and all free-market enthusiasts who are suspicious of governmental intervention into the economy see the different roles of markets and government within and across countries. We'll focus strictly on rich industrial countries, all democratic moreover, like those in West Europe, Japan, and North America. It's important in any such analysis --- particularly when it is undertaken by someone who shares only part of libertarian thought like Prof Bug --- that the argument lays out the central tenets of free-market thought in a manner that libertarians and others would regard as fair-minded. Only in the end will Prof Bug indicate, without delving deeply into the reasons why, he cannot subscribe fully to their tenets.