A Theory of History, Pt. 1: The Role of the State

Google vs. China, and America vs. Itself

Google’s confrontation with China over the freedom of access to information may evoke feelings of both moral and commercial satisfaction for residents of the free market West: Google simultaneously stands in for our disdain for Chinese political repression and for that country’s shortsighted understanding of the economic value of free information flows.

Tom Friedman suggests that a Chinese internal struggle, between “Network China” and “Command China” defines this dispute and may indicate something about the future of that country.

However we may frame it, the conflict should evoke for us as much introspection as satisfaction: We, too, currently struggle themselves to come to terms with the concept of “economy as network”: “a world in which the focus of value creation is effective participation in knowledge flows, which are constantly being renewed.”

Those who stand at the margins of this transformation call forth libertarian slogans in order to evoke a feeling of defiant individualism. They do not understand the dynamic of an economic system that demands the nurturing of relationships and the renewal of knowledge and that suggests that individualism does not flourish in a social vacuum. The more pragmatic brand of economic individualism favored by Wall Street lost all credibility in late 2008, of course, when financiers acknowledged their own dependence on the broader American social network.

Misunderstandings about the changing nature of our economy clearly extend beyond the right-wing: Democrats evince characteristic eagerness to conflate moral and economic arguments as they address needed health and energy reform. They thereby demonstrate a lack of seriousness with regard to the limited role the American state can play in correcting an economy newly susceptible to international capital flows and increasing foreign competition: America must enhance its ability to compete internationally if it is to address its social challenges sustainably.

We, just like the Chinese, require a new relationship to government for 21st century success. The old metaphor of government as a command center, whether encouraged by old guard communist leaders or well-meaning American reformers, or whether opposed by libertarians, no longer suffices. Government at its best will act as a node that has the potential either to complement or to hinder the flourishing of both domestic and international relationships. Understanding this reality, rather than adhering to old nostrums, will give us the greater measure of moral and commercial clarity.

The True Story of the GOP's Dissipation

Rapid global development and economic/financial change undermine the relevance of strict rightists and leftists: The need to adapt quickly to new technologies and new economic realities will reward adaptable, rather than orthodox, parties and regimes.

Edward Golberg of Baruch College, in today's Friedman column diagnoses the malaise of the Republican Party accordingly:

Globalization has neutered the Republican Party, leaving it to represent not the have-nots of the recession but the have-nots of globalized America, the people who have been left behind either in reality or in their fears . . . The need to compete in a globalized world has forced the meritocracy, the multinational corporate manager, the eastern financier and the technology entrepreneur to reconsider what the Republican Party has to offer.

Health care is one example of an area where government can play a productive role in supporting economic growth and human capital development.

Government intervention is only justified in the Right's worldview when the capitalist system is under threat (e.g. during ideological struggles with the Soviets, radical Islamists, etc.). They have no ideological context for coming to terms with the pressing national-economic needs of globalization.

Some on the left have a similar problem coming to terms with globalization but the left's solutions happen to be more pertinent at the moment. And, the anti-WTO, anti-trade wing of the Democratic party has receded, for the time being.

Why is the Health Care Debate Happening Now?

Because a Democrat is in the White House?

Because health care costs have skyrocketed?

Because free marketed ideologies have been discredited by the financial crisis?

Because Obama is especially charming?

The principal reason these debates are happening now is none of these things. The sea change in public opinion on health care over the past few decades is a result of the international predominance of capitalism and democracy.

Sound crazy?

During the Cold War, for instance, Americans were much more sensitive about socialist reforms. Now, a minority of Americans expresses such concerns.

At the same time, the idea of taking a huge economic risk in the midst of a focus on international political competition with, say, the Soviet Union or Islamic fundamentalists, was extremely frightening.

Finally, of course, the focus on human development has grown with the increase in the value of human capital in the global economy.

So, the global triumph of capitalism and democracy has (1) reduced ideological sensitivity, (2) shifted our focus away from international political competition, and (3) created the conditions for international economic competition, based on human capital investment, to take on increasing importance.

Prediction: Cuban Regime Will Fall Within Two Years

The Cuban regime has relied upon the sense of defiance of American imperialism to support its claims to political leadership. The American system can no longer look so convincingly monolithic to average Cubans. Won't the appeal of grasping the power that American voters have, to buck the establishment (whether it be the Clintons or the former WASP elite, be quite appealing to the Cuban people?

Are Castro's admittedly thoughtful words a strong enough brew to hold the Cuban system together, especially in the event of his apparently pending passing?

Castro:

Nobody can doubt the sincerity of Obama's words when he says he will make his country into a model of freedom, respect for human rights in the world and for the independence of other nations. . .

[But,] despite all the tests he has been put through, Obama has not faced the most important of all.

What will he do when the immense power he has grasped soon proves to be totally useless in overcoming the intractable, opposing contradictions of the (capitalist) system?

The final question may be interesting but I doubt that it will be sufficient to stir the Cuban people to defiance of the United States.

An Ironic Aspect of the Economic Crisis

One of the perceived causes of the crisis is that Americans do not save enough. Interestingly, many stimulus packages are designed to work only if Americans spend the money that they save.

American Competitiveness

Brooks on Michael Porter, of Harvard Business School, and his suggested response to the economic crisis:

Porter wrote that the U.S. economy has historically benefited from several great assets: an unparalleled environment for entrepreneurialism, a tremendous infrastructure for scientific research, the world’s best universities, a strong commitment to competition and free markets, decentralized regional economies, and efficient capital markets.

But, Porter continued, these advantages are starting to erode. The U.S. has an inadequate rate of reinvestment in science and technology. America’s confidence in free markets is waning. Lack of regulatory oversight has undermined capital markets. Universities have not sufficiently increased graduation rates. American workers do not have a credible safety net. Regulations and litigation have inflated the cost of business. Most important, there is no long-term economic strategy to organize responses to these problems.

Kagan on Europe: A Spicy Interview

Here are excerpts from a spicy interview with Robert Kagan in Der Spiegel. I particularly enjoyed the incisiveness of his critiques of European political blindnesses.

First:

Kagan: Correct. And, in that respect, ever since the surge, the additional troops we sent, there have been great successes…

SPIEGEL: …which are undeniable, though not necessarily sustainable. And this results primarily from the fact that the US government is paying bribes to tens of thousands of Sunni fighters to turn their backs on al-Qaida and no longer attack US troops.

Kagan: The money is really not the main issue. The issue is the entire new US military strategy, which establishes security and dramatically improves the lives of people. The New York Times recently reported that the overwhelming majority of al-Qaida terrorists have abandoned Iraq as a safe haven and that they are joining their fellow insurgents in Afghanistan.

SPIEGEL: The terrorists are undoubtedly concentrated in Afghanistan and in the border region with Pakistan, and some are certainly going to those places from Iraq. But this is not an entirely new development. The war against terrorism should have been waged in Afghanistan rather than Iraq, as Obama has said.

Kagan: You cannot acknowledge our successes in Iraq because Europeans can never admit that Bush is doing something right.

And:

SPIEGEL: An overwhelming majority of Europeans want to see Barack Obama become president…

Kagan: Yes, of the United States, although they would never elect someone like that in their own countries. But I understand the Europeans. I too believe that Obama would be an exciting choice, given America’s history. But also a risky one. He has no foreign policy experience compared with McCain, who has been to Europe dozens of times and is intimately familiar with world problems.

The Election: Summing It Up

I wish that I could say it this well.

Leon Wieseltier:

McCain feels with his heart, but he thinks with his base. And when he picked Sarah Palin, he told the United States of America to go fuck itself. I used to think of my dilemma this way: Obama's conception of America is better than he is, McCain's conception of America is worse than he is. But McCain is looking more and more like his America, which is Bush's America: a country of capitalists and Christians. I do not know how to explain what has become of him. . .

Obama is a smart man. He is a decent man. He is an undangerous man, in the manner of all pragmatists and opportunists. He reveres reason, though he often confuses it with conversation. His domestic goals are good, though the titans of American finance, the greedy geniuses of Wall Street, may have made many of those goals fantastic. He will see to it that some liberalism survives at the Supreme Court. This leaves only the rest of the world. What a time for a novice! I dread the prospect of Obama's West Wing education in foreign policy: even when he spoke well about these matters in the debates, it all sounded so new to him, so light. He must not mistake the global adulation of his person with the end of anti-Americanism. And he must not mistake his hope for the world with his analysis of the world. But OK, then: Obama, and another anxious visit to the ballot box, with--in the stinging words of Du Bois--"a hope not hopeless but unhopeful."

GEOPOLITICS, FINANCE, AND EDUCATION

In the upcoming weeks, world leaders will meet to begin to consider a new financial architecture for the world.

If they fail to found a cooperative framework, the threat of protectionism, economic decline, and the associated political challenges (which would not be small, and could be frightening) will be our biggest challenges.

If they succeed (as I suspect that they will), we will have taken a noticeable step to a more integrated world in which conflict between large nations becomes somewhat less likely. Challenges would still remain in that regard, to be sure, not least the endurance of petrodictatorships. Still, new issues will, after such a success, begin to come to the fore. I believe that one of the boldest dividing lines in a more stable (I take small group terrorism into account here.), integrated world will be the divide between the information technologically-able and the informational technologically-challenged. The would increase the importance of education, relative to international relations, as a defining issue for geopolitical stability.

What do you think?

"Spread the Wealth Around"

A propos of Obama's comment to a voter that he intends to 'spread the wealth around,' I would suggest that that comment will not prove as incendiary as it may have in an earlier age. For the time being (at least) the federal bailout has broken the US taboo of respect for individual responsibility. In a financial climate that reminds us of our interdependence, the concept that helping those in modest circumstances may be (even financially) beneficial to us all (expressed by Obama, though not as widely reported as his less politic, and less rigorous, statement, above) is not as seditious as it once might have seemed.

Conservatives and Liberals, Culture and Politics, US and Iraq

An excerpt from a note I recently wrote to Dr. Jonathan Haidt, author of "What Makes People Vote Republican?":

Your article on on "What Makes People Vote Republican?" should be read at every dinner party here on the Upper West Side of Manhattan. I quoted you extensively on my blog and, in conjunction with the Palin selection, much discussion was stimulated.

An interesting connection might be drawn between (simply put), on the one hand, the liberal focus on politics and conservative focus on culture and, on the other hand, the neoconservative (at least) focus on reforming Iraqi political arrangements and the liberal tendency to focus on, so to speak, "the long, careful evolution of culture that prepares the ground for democracy." I would argue that conservative sensitivity to cultural development leads to the supposition that cultural arrangements are the crowning achievement of political development, and that the inverted (no connotation intended here) liberal relationship to culture and politics, leads to the opposite conclusion.

Intimations of a New Global Order

David Ignatius:

The new interventionism isn't so much socialist as it is Confucian -- a belief that a public-private partnership of the wise ones will get us out of the mess. And if it's any consolation, the Chinese are becoming more like us, even as we are becoming more like them. . . .

One hopeful sign last week was that the Chinese were moving toward private ownership, even as America and Europe were moving away from it. The Chinese government announced a new rural policy aimed at allowing millions of farmers to own the land they have been working. This would create a huge new reserve of private wealth in China, which could power domestic spending and growth. [Read more.]

A focal point of this new order, which I will explain further later, will be the development of the economic potential of the mass of producers. The innovation will be that such focus will be justified in terms of the promotion of prosperity, not just through appeals to social justice.

A few suggested conversation topics:
What positive effects can you imagine coming out of the crisis?
Can democratic institutions respond to crisis with coherence?
What aspect of the financial crisis would you focus on if you were Paulson?

Iceland and China

. . . the government of Iceland is presiding over a massive default by all the country's major banks. This troubling development points not only to an even more painful recession than anticipated, but also to the urgent need for international coordination to avoid something worse: all-out financial warfare.

. . . Iceland's promise to guarantee domestic depositors while reneging on guarantees to foreigners may be just a first step. British Prime Minister Gordon Brown's decision last week to sue Iceland over this issue may escalate the crisis. The use of counterterrorist legislation to take over Icelandic bank assets and operations in the United Kingdom also has a potentially dramatic symbolic effect. (Peter Boone and Simon Johnson, "The Next World War? It Could Be Financial." The Washington Post, 10/12/08.)

There's a reason that the gestures by the US government have not sufficed to reassure financial markets: the US is no longer the unquestioned command and control center of the global economy. We have to take the imaginative leap that integrates rising developing nations into our paradigm of economic management.

Peter Boone and Simon Johnson, in today's Washington Post, point to the depth of the financial crisis in bracing detail but, unsurprisingly, fall back on nostrums about the power of the "the world's leading financial powers -- at a minimum, the United States, the United Kingdom, France and Germany" to reassure markets. Am I naive, or does US to China (between $1.5 and $2 trillion, I believe) qualify China as an important financier? How can anyone be sure that the Chinese, given their own fragile politics, will support any plan that comes from the West in a time of financial crisis?

"Crisis Marks Out a New Political Order" -- by Phillip Stevens

. . . from the Financial Times.

A Broader Perspective on the Financial Crisis

The response to this financial crisis will be both economic and geopolitical. The Great Depression called into question the stark laissez-faire approach of the industrial revolution and its aftermath. The US stepped into global leadership after World War II by leading the construction of a global financial system that has done a very good job at promoting stability and growth.

The change that we are facing now is not essentially about investment banks, mortgage lenders, or homebuyers. Rather, it reflects the transition of the global economy to an era in which the US cannot be the only hub at the center of the wheel.

C. Fred Bergsten and Arvind Subramanian, in today's Washington Post, help to explain how this process underlies the more obvious signs of crisis.

Beyond the short term, countries will need to develop a cooperative framework to prevent and resolve such crises, most urgently within Europe. There is inherent tension as finance becomes global but its regulation remains national. The current crisis originated in the United States but was importantly affected by massive savings surpluses in some countries and the resulting surfeit of liquidity, which drove down interest rates and encouraged irresponsible lending here. Those international imbalances were in turn partly caused by misaligned exchange rates. Global oversight of both financial regulation and currencies can no longer be neglected.

One way to understand this is that China, most importantly, has artificially increased its capital reserves by preventing its currency from appreciating to its correct market value. China sells more exports than it otherwise would, and buys fewer imports than it otherwise would. Ultimately, the Chinese money does make it back to the US, but in the form of payments for Treasury Bills (This is due to a Chinese concern about inflation as well as a concern that excess capital would lead to social unrest and/or uncontrollable wealth flows that could weaken Communist Party control.).

Simply put, it seems to me that the net consequence is that cash comes to the US Treasury rather than to, among others, US producers. The cash in the Treasury was then ultimately lent out at low interest rates, creating investment opportunities in a society in which wages were not appreciated significantly (because of, among other reasons, the fact that American products were not easily sold to countries that have maintained a high exchange rate of local currency to dollars).

The predicament in which consumers cannot afford appreciating assets in reminiscent of the pre-Depression years in which consumers could not afford proliferating production. The similar increase in consumer credit is an unsurprising result.

Essentially, a change in global financial architecture is needed, not only for the reasons mentioned by the authors, above, but also so that the US can benefit most fully from concentrating on the development of its human capital, the long-term sine qua non for economic growth and political stability.

Concerns about political stability should not be minimized. The inherent tensions between communities constituting a democratic society are generously lubricated by growing wealth. The sense of chaos that can percolate through a society in the absence of such a scenario lends itself to exploitation by authoritarian-minded regimes. I do not think that the US is on the brink of such a scenario but the 20th century taught us well that farflung events can have a dramatic impact on our society.

Irresponsibility in Government

There are many criticisms that can be made about the consequences to the market of a federal bailout (see George Will today, for instance) but I am certainly willing to take the lead of Paulson, Warren Buffett, etc.

Nonetheless, I do not credit most House Republicans with being thoughtful free marketeers. The sequence of events over the last week suggests that many had trouble understanding the crisis and that political calculation was predominant aspect of their thinking, despite the serious crisis. Michael Gerson points out, additionally, the many Democrats made similar calculations and that Pelosi's prevote speech was exceptionally poorly considered.

All in all, I agree with Gerson's estimation that the current political crisis in more frightening than the economic crisis:

America is left with one portion of one branch of government that does not seem to work. House Democrats seem temperamentally incapable of building genuine consensus on issues that matter. Many House Republicans seem so alienated from the mainstream policy consensus that they inhabit a different world. One wonders if any emergency short of an invasion of American territory would unite them. Even then, Pelosi would probably blame the conflict on cowboy diplomacy, House Republicans would talk of the natural fruits of McGovernism, and the vote on declaring war would be close.

Though some compromise may eventually be passed, it is now clear that American political elites have lost the ability to quickly respond to a national challenge by imposing their collective will. What once seemed like politics as usual now seems more like the crisis of the Articles of Confederation -- a weak government populated by small men. And this must be more frightening to a world dependent on American stability than any bank failure.

Class in America

The issue of why class politics, as such, have not taken a strong hold on the United States is much debated by socialists, Marxists, etc.

Here are two theories with which I'm familiar:

+ The vast resources (through the land itself and, later, through global power) of the country have helped to temper class resentments.

+The racial divide has prevented a strong unification of the working class.

Its interesting to note that the United States has long (since, at least, the late 19th century) had a relatively large proportion of "tertiary workers." This categories those who are neither owners of capital nor "professionals" nor factory laborers but who work, for instance, in "offices, shops, and services" (Hobsbawm, "The Age of Empire," p.115. New York: Vintage, 1989.)

Historically, such tertiary workers tend to be less class conscious than, say, factory workers and certain segments thereof tend to be open to cultural appeals for purity and righteousness.

A certain segment of the labor movement (Change to Win, since 2005) under the leadership of the Service Employees International Union has, in recent years, refocused efforts to organize the type of service workers that, in various forms, characterize American labor history. They have had some success but the jury is still out on whether a strong labor movement can be built from that millieu.

What's your point of view? What's the future of America's working and service classes?

The Invasion of Iraq: A Response to Sir David

I supported the invasion of Iraq and am aware of the resolutions that preceded it. Still, I would argue that the US has accepted an international cost in executing a war of choice that was not supported by the public opinion of the democratic world.

The effectiveness of the US to act as an international policeman is necessarily supported by the good opinion of fellow liberal democracies.

Russia's Antidemocratic Alliance

In the latest, tit-for-tat move between the US and Russia, Russia has announced that it may hold joint naval exercises with Venezuela. This is a clear (though unacknowledged) move to send a message to the US regarding its current naval activities in the Black Sea.

How many similar, anti-US regimes of consequence can the Russians reach out to? One potential step for Russian escalation of their defiance of US hegemony would be to strengthen Russia's ties to Iran. This would cause concern for Russia, though, as it fears Iran's nuclear ambitions and Islamic radicalism. Russia itself has Islamic minority nationalist movements that it sometimes struggles to control.

Fortunately for the West, Russia's connection to Venezuela does not have strong ideological underpinnings. Venezuela, ironically, is now the more 'socialist' of the two countries (Russia's is a brand of state capitalism.) and its brand of demagogic populism is likely to unnerve Russia's more austere leadership.

Another interesting development for the West is that Russia appealed for, but did not receive, support for its Georgia moves, from the Shanghai Cooperation Organization, whose only other weighty member is China. The Chinese, suspicious of all foreign interventions and protective of the perception of their neutrality, recognize at the same time that the future of their economic system (and of the Communist Party, whose legitimacy rests on economic growth) is tied up with the globalized market system as supported by the United States and the West. Is it possible that a resurgent Russia could, once again, push China closer to the more stable and predictable Western powers?