1. ## Money as Empire?

Comments Off on Money as Empire?

#### Money and Empire: Charles P. Kindleberger and the Dollar SystemBy Perry MehrlingCambridge University Press, 2022

Money makes the world go round, or as Karl Marx put it, Geldgespräche, Quatsch-Spaziergänge. How does this work at the global or international level? Perry Mehrling’s elegantly written biography of the MIT economist Charles Poor Kindleberger illuminates the relationship between money and the global structure of economic and political power. Kindleberger, a distinguished economic historian, was in many ways, and to his own surprise, a central and founding figure in the political science subfield of International Political Economy (IPE). Breaking with the emerging abstract economic models of his time, he developed an empirical and practical approach that emphasized the importance of the political infrastructure underpinning global financial markets, and the ever present possibility of crisis. Lurking in the background of this biographical narrative is a greater story about empire, left whispering in the softest possible voice—a Straussian sotto voce.

### Servant of empire?

Empires run on money. In durable empires, that money pays bureaucrats who run the empire, so empires need people as well. Kindelberger’s early life trajectory was well suited to the bureaucratic needs of the mid-twentieth century American empire. As Mehrling repeatedly notes, Kindleberger was a WASP through and through. WASPs—White Anglo-Saxon Protestants—were the original ethnonational core of the Thirteen Colonies, in a definition that expanded enough to encompass the initially “foreign” German and Dutch settlements in the mid-Atlantic colonies but never enough to include the subsequent wave of immigrant Irish Catholics, let alone enslaved Africans.

WASPs dominated New England and New York politics and finance, and through that the American state. The pinnacles of American higher education—a small set of private schools for secondary education and Harvard, Yale, and Princeton for tertiary—were WASP enclaves well into the twentieth century. In both novels and reality, the archetypical employee biography in the World War II Office for Strategic Studies (OSS) (the predecessor to the Central Intelligence Agency (CIA)), runs something like this: WASP New Englander attends Phillips Academy, goes to Yale, adds formal foreign language study to complement a childhood of summers spent in Europe, is recruited through his father’s network into the OSS, and moves smoothly up the CIA hierarchy as the US state routinized a global diplomatic, military, and intelligence presence. Empire building, in short.

But seemingly minor factors diverted Kindleberger from becoming a more overt servant of the external empire the American state built after World War I.1 He attended the relatively less prestigious Kent School (motto: “an elite school, not a school for elites”), the Quaker-founded University of Pennsylvania (WASPs at core are Episcopalian or Presbyterian), and had the bad taste to associate with people who may or may not have been actual communists while he worked for the US government. The first two combined with his innate ability to secure him positions in, among other government agencies, the OSS, putting Kindleberger on what looked like a predictable, and to him desirable, track into the core imperial apparatus. But the latter blocked his security clearance at a key moment in 1951, pushing him off that track and instead into academic employment. If the 1950s Red Scares hadn’t intervened, Kindleberger might have transitioned smoothly from his work on the Marshall Plan back to one of his former positions at the State Department, Treasury or Federal Reserve rather than ending up as a professor in the Economics department of MIT.

### Kindleberger as economic historian

This off kilter transition moored Kindleberger in a liminal space. The MIT department was hardly the periphery of the imperial apparatus, given its disproportionate role in training economists for the US and other central banks, but actual policy levers were out of reach for Kindleberger. At the time, MIT economics faculty were influenced by MIT’s own engineering orientation and the US government’s efforts to quash any social science that spoke of class conflict, instead promoting methodologically individualistic approaches like rational choice. Economics took off in an unempirical and impractical direction: highly abstract mathematical models in which money and finance played no part. MIT’s own Paul Samuelson helped repackage Keynes’ explicit call for full employment through aggressive government fiscal support and direction of investment into a tamer call for monetary policy. Ironically, the MIT department perceived Samuelson as a leftist because he championed even this mild form of Keynesian economic management.2 Meanwhile, on the other coast, the US Air Force was helping Douglas Aircraft to stand up the public policy think tank later called the RAND Corporation. RAND supported the early rational and public choice economists—for example, Kenneth Arrow and James Buchanan—whose work argued that a group of individuals could never rationally generate the values needed for an efficient planned economy.

By contrast, Kindleberger’s direct involvement in policymaking left him intellectually pragmatic. Mehrling describes him as at heart an intelligence analyst aggregating facts from the world and filtering them through his own practical experiences with, among other things, employment in the pre-World War II Bank for International Settlements (BIS), the Federal Reserve Board, and the State Department bureau overseeing economic and currency reforms in Germany. Critically, he helped design the extremely pragmatic and production-oriented Marshall Plan, which melded European economic revival with anti-communist politics, while his work at the BIS exposed him to the destabilizing effects of short term international capital flows.

Kindleberger thus sat close enough to the center of power to want to, and occasionally be able to, influence US foreign economic policy. He nonetheless remained an outsider methodologically and at a distance from the actual policy reins. As Jonathan Kirshner’s back-cover blurb accurately puts it, Kindleberger was a sideman in the academic economics jazz band, capable of drawing his own crowd only in smaller venues like the niche academic IPE market. There he figured mostly among those abjuring approaches using formal economic models and even then not until after he officially retired from MIT.

What tunes did he play in counterpoint to the economics frontmen? Here, Mehrling deftly uses Kindleberger’s writing to spotlight the dance between economic theory and actual US international monetary policy from roughly the 1950s to the 1980s. Put simply, two issues mattered, at least overtly in Mehrling’s account. Was money, in the form of credit creation, an independent force on its own or simply a veil over the “real economy”? And, in a world comprised of nominally independent countries, each with their own currency, whose currency would be used to settle accounts? Behind these stood a third issue, most clearly expressed in Kindleberger’s study of the causes of the Great Depression: who would rescue the system in the event of a crisis? That is, whose money sat at the top of the global currency pyramid, giving them power over global credit creation by virtue of being able to bail out the global financial system?

The formal mathematical models of the economy developed at MIT and elsewhere after the 1950s—Real Business Cycle (RBC) models and the Dynamic Stochastic General Equilibrium (DSGE) models derived from them—ignored money. Among the huge simplifying assumptions made to get tractability in these models are—don’t laugh—perfectly competitive markets, perfect information for market participants, and, in most cases, a “representative agent”—that is, a single infinitely lived household representing all consumers.3 Critically, these models also assumed the neutrality of money. Changes in the money supply would not affect any of the real variables in the economy, like productive capital, employment, or growth rates. While later new Keynesian versions assumed sticky prices, this simply delayed adjustment to the underlying real equilibrium state.

Both Kindleberger and even more so Mehrling, whose own work centers on potential imbalances of credits and debits across interlinked corporate balance sheets, find such assumptions untenable. Kindleberger explicitly anchored his arguments in real people facing practical financial problems rather than in RBC’s abstract rational actors.4 He saw the fundamental economic problems of the day as the outcome of structural disequilibria whose existence RBC models explicitly denied.5 Kindleberger’s practical policy experience dealt precisely with the problems created by mismatches between money going in and money coming out for actors and countries involved in international trade. How could a country with a balance of payments deficit—too many imports compared to its exports in value terms—obtain enough financing to tide it over until exports increased (or imports decreased)? How could countries cope with short-term, speculative inflows and outflows by international speculators?

Global credit creation, and the destruction of credit during crises, thus came to the fore. Kindleberger argued that normal business activity cannot occur without credit creation, because most firms must buy inputs and pay workers before they themselves get paid by customers.6 When banks extend credit, they simultaneously create matching sets of assets and liabilities on the bank’s and borrower’s balance sheet. For the bank, the lending creates an asset in the form of the borrower’s debt to the bank, but the deposit the bank creates to fund that loan creates a liability for the bank. For the borrower, the deposit at the bank is the asset matching the liability of its debt. And, critically, credit creation creates money out of thin air, rather than relying on some prior saving.

The core of Kindleberger’s work, particularly his best known work on causes of the Great Depression, considers how this global debt landscape can lead to crises, a theme he explored at length in Manias, Panics and Crashes. There, he argued that the absence of a powerful central actor meant that lesser actors facing the payments mismatches and unserviceable debts that had accumulated by 1929 could find no savior, producing a global crisis. Before World War I, the Bank of England and Britain’s massive overseas assets backstopped the global financial system. After World War I, as Kindleberger famously put it, Britain couldn’t and America wouldn’t provide system stability.7 Following World War II, America became much more willing to act as the system stabilizer, or as later IPE scholars put it, a hegemon. The 1944 Bretton Woods Conference essentially established the US dollar as the key currency for the post-war global monetary system. Other currencies were indexed against the dollar while the dollar was indexed against what Keynes called the “barbarous relic” of gold. 8 In principle this solved the problem of stabilizing exchange rates so payments could be made more easily, and, if needed, in gold. In practice it created one immediate and one future problem. Kindleberger’s work largely addressed the immediate problem and anticipated the issues around the future problem.

The immediate problem was the tension Robert Triffin identified between global liquidity needs and foreign actors’ confidence that they could indeed redeem dollars in gold. Expansion of world trade required that more and more dollar-denominated trade credit be available in global markets. But if the supply of dollars in overseas financial markets exceeded the volume of gold held by the US Federal Reserve, could anyone trust that dollars were actually redeemable in the event of a crisis? Moreover, unless world trade grew in sync with US growth, money supply growth would be out of sync with one or the other. In reality, global trade grew considerably faster than the US economy, and banks increasingly evaded regulatory controls to fund that growth, contributing to global inflation in the 1960s and exacerbating the overhang of dollars relative to gold. Rightly or wrongly, some accused the United States of abusing its exorbitant privilege—the ability to fund its current account deficits in its own currency and seemingly without any penalty—and thus exporting inflation to trade surplus countries that had to accept dollars of diminishing value.

What to do? Triffin proposed using an artificial currency built on a basket of the major currencies, what we now know as the Special Drawing Rights (SDRs) held by the International Monetary Fund, to resolve the liquidity problem. Kindleberger, by contrast, saw that this was in essence a political problem of coordination among the central banks. Regular banks netted out transactions daily, funding shortages with overnight loans from other banks or, in extremis, the central bank. In the absence of a formal global central bank, Kindleberger proposed that central banks agree to fund each other’s deficits by holding excess dollars (or whatever) rather than forcing daily settlement. In effect, he proposed the swap lines that now anchor responses to global financial crises. In the event, SDRs came too-little-too-late to be effective and the early version of swap lines failed to stabilize the value of the dollar against gold.

Kindleberger was sanguine about the overhang of dollars. He saw the US financial system as essentially operating like a bank for the world, taking in short term deposits, recycling those deposits as long-term lending, and, on the strength of its economy, accepting the risks that ensued from this maturity mismatch. What mattered, as he argued after Nixon freed the dollar from gold, was that there be some leadership, and that the leader accept the costs of being the lender, broker, and commodity buyer of last resort in order to prop up the value of assets in a crisis. The International Political Economy subfield translated this insight into Hegemonic Stability Theory.

### Hegemony, debt, and empire

Mehrling’s own claim to fame comes from going one level deeper than Kindleberger and elaborating the interlocking balance sheets that make up the global financial system and determine its stability. In his framework, assets are sustained by debtors’ payments and thus are vulnerable to failure to pay. The central bank plays a central role in dealing with the systemic crises that arise from a collapse of collateral value when debtors cannot pay. In short, the same problems getting payments to line up not just day to day but, like those that Kindleberger handled while at the BIS, globally, with different currencies, and over extended time periods. Mehrling, following Hyman Minsky, precisely reverses RBC’s assumptions: capitalism is a financial system first and foremost, and the financial dog wags the real economy tail. This “money view” uniquely suits him to parse Kindleberger’s arguments about disequilibria and central banking. Mehrling explicitly and Kindleberger implicitly share the same perspective that credit (and thus debt) creates money, not the other way around.

Mehrling thus picks up on the importance Kindleberger assigns to banks in money creation. He complements this with the Minskian insight that bank credit creation is inherently pro-cyclical, feeding on itself until it generates unsustainable levels of debt. Each new extension of credit puts more money and thus more aggregate demand into the economy. More aggregate demand validates prior extensions of credit and the collateral that backs that credit, because those debtors now have money to make interest and principal payments. Yet this process is self-destructive. Each validation of prior borrowing encourages not only more borrowing but riskier borrowing, so adventurous borrowers willing to pay a higher price for an asset eventually crowd out prudent borrowers. Those adventurous borrowers ultimately need to realize capital gains via sales to “greater fools” in order to repay their debts. But as Minsky argued, and as 2008 showed, we do eventually run out of greater fools. When that happens, either the banking system crashes, as in 1929–1931, or the central bank steps in to rescue the banking system, as in 2008.

Mehrling also builds on Kindleberger’s observations that the stability of the global financial system depended on a buyer of last resort for both impaired assets and any commodity overhang. Indeed, his career has been built on the idea that the Federal Reserve Bank is now not only the lender of last resort for banks, but also the dealer of last resort for the entire US securities market and much of the global financial market. Kindleberger, largely living in simpler times, came to much the same conclusion about the global financial system. That system has the same problems around payment mismatch and excessive credit creation as do domestic financial systems but with the added problem of multiple currencies. Here, Minsky’s dictum that anyone can create money, but the problem is getting other people to accept it, matters.9 Debts owed in foreign currency must be serviced and validated with that foreign currency, and your own central bank may not be able to help you by simply extending emergency credit in your own currency.

But perhaps because Mehrling himself sees private credit creation and private money as a slightly more powerful force than state money, his treatment of Kindleberger’s work leaves the nature of power in the world economy largely unexplored. Kindleberger clearly sought language and organizational formats that drew a veil over the real hierarchy present in his preferred solutions to monetary instability. 10 He was, Mehrling notes, ultimately a believer in the efficiency of markets who tempered that belief by observing that those markets needed some degree of political interference for stability.

His proposal for expanding the Federal Reserve Bank’s Open Market Committee was a case in point. Kindleberger argued that the FOMC ought to accept representation from the central banks of the nine other major free market economies. Thus, the Group of 10 would have representation on what would in effect be the world’s central bank, setting the world’s interest rate, backstopping currencies under speculative attack, and intervening during a financial crisis. Yet this was not the kind of global clearing house cum central bank that Keynes proposed at Bretton Woods. It was clearly still the central bank of a single nation—one where, as the 2008 global financial crisis and the 2020 Covid-19 crisis showed, the Federal Reserve and the dollar sit at the top of the global financial system. In 2008 the Federal Reserve bailed out the other major financial systems via their central banks. The bailouts used nominally symmetrical swap lines, but US banks did not receive help from foreign central banks, revealing the essential asymmetry of power. By 2020 the swap lines were firmly institutionalized, and peak drawings during Covid-19 ran at about three-fourths of the 2008–2009 level.

That said, as Mehrling also notes, Kindleberger still ended up at quite some distance from mainstream economists for whom any political interference threatened to disturb rather than stabilize markets, even if he did not see financial markets as expressions of political power around the question of how to create and allocate credit. But credit markets are both manifestations and expressions of that power, as another of IPE’s founders, Susan Strange, argued. This power has structural, tactical, and practical aspects.

It takes no large step to observe that inviting representatives from subordinate central banks is like the extension of partial citizenship from the Roman Republic to its Latini neighbors.11  Empire is rarely a purely command and control relationship. In the nineteenth-century British empire, London extended considerable domestic autonomy to the richer, European settled colonies that became Australia, Canada and New Zealand. But sterling backed the monetary systems of those colonies, the Bank of England effectively determined interest rates for them, and their debts were sterling-denominated.

Equally, today two-thirds of global credit is dollar denominated, and almost all of that is extended by non-US banks. Foreign banks’ enormous overhang of dollar-denominated assets and liabilities on their balance sheet ties them to the Federal Reserve as surely as the old colonial banking systems were tied to the Bank of England. Banks must turn to the Fed for help if those assets are impaired, as the 2008 crisis showed.

Tactically, dollar centrality means that most global transactions flow through a dollar-denominated financial plumbing in which the New York Fed controls the critical shut-off valves. The US state’s power to impose financial sanctions flows from control over the plumbing. Efforts to build alternative pipelines have had only minimal success.

Finally, the British and American metropolitan cores drew enormous volumes of unrequited physical resources from their respective formal and informal empires. The United States accounts for half of cumulative global current account deficits from 1992 to 2020—mostly oil, autos, electronics, and clothing. The equivalent British figure is more difficult to calculate, but Britain imported roughly half of its food consumption and the bulk of the cotton and wool feeding its enormous textiles industry. Neither could do this if they had to pay for those imports in something other than their own currency.

But even if you don’t want to go as far as describing the global economy and its financial architecture as an empire centered on the US state and a small number of firms, that economy and its financial system is far from neutral. As Yakov Feygin and Dominik Leusder have argued, and as Matthew Klein and Michael Pettis put it in their recent book, supplying the key currency imposes costs, but not in any equitable way. Rather, workers in the US traded sector, which means mostly manufacturing, suffer losses as their jobs migrate overseas, while workers in export surplus countries receive a much smaller share of what they produce than they otherwise would. The US financial sector and foreign export firms are the beneficiaries of the nominal $11.6 trillion in current account deficits the US economy accumulated from 1992 to 2020. A slice of the US population enjoys the real resource transfer implied by the current account deficit, but its corresponding liabilities fall on US workers and taxpayers. Export surplus economies stand on the other side of that deficit. Foreign firms get to hold dollar-denominated assets—paper claims, not real resources—generated by the US financial system, but only because their employees’ consumption is limited, enabling their export surpluses. Here, the contours of empire become visible. Kindleberger and Mehrling might stop after noting the payment risks and imbalances inherent in a global economy where non-US banks generate 90 percent of dollar-denominated cross-border lending and where more than half of global trade is invoiced in dollars. But the transfer of real resources to the center, and the adhesion produced by having one’s nest egg denominated in the center’s currency suggest a profound asymmetry in power. For those reasons, the book might better have been titled Money as Empire. 2. ## The Sanctions Age Comments Off on The Sanctions Age #### Backfire: How Sanctions Reshape the World Against US InterestsBy Agathe DemaraisColumbia University Press, 2022 Charles De Gaulle declared in 1961, “A great state which does not possess [nuclear weapons]… does not command its own destiny.” France became the world’s fourth nuclear power in 1960 following the Gerboise Bleue nuclear test. Yet the command of France’s destiny continued to elude French policymakers—the great power anxieties that gave rise to Gaullism persist in France today. After all, the proliferation of nuclear weapons did not diminish America’s superpower status, which found new military, economic, and cultural articulations. De Gaulle was worried about France being a junior partner to the United States in the bipolar order of the twentieth century. France entered the twenty-first century as a junior partner in a unipolar world. American power has continued to vex French leaders, and in recent years it has been America’s economic might that has caused the most consternation. In a 2019 speech, French finance minister Bruno Le Maire suggested that a bloc that does not control its currency cannot command its own destiny. The weakness of the euro had been exposed by the power of American sanctions. Le Maire was troubled by “the example of American sanctions against Iran,” which had been imposed by the Trump administration in the previous year following the unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA). Most studies of the power of US sanctions naturally focus on their effects in the targeted countries. Trump’s sanctions, imposed as part of a “maximum pressure” policy, cut Iran’s few links to the global financial system, making it difficult to conduct foreign trade, even in humanitarian goods. Of Iran’s major energy customers, only China proved willing to sustain crude oil imports in the face of the US measures. The Iranian rial weakened dramatically as the central bank lost access to its reserves at the same moment that export revenues plummeted, wreaking havoc in the foreign exchange market. The loss of oil revenues also created an acute fiscal crisis, to which the government responded with expansionary monetary policy, adding to the inflationary pressures. Just as it had in 2012, Iran suffered a sanctions-induced macroeconomic shock. The resulting high inflation has dramatically eroded the living standards of ordinary Iranians. But Le Maire was not particularly concerned with the fate of the Iranian economy. He was worried about the way that sanctions—much like nuclear weapons—allowed the United States to treat France as a junior partner. In turn, he was angry about the collateral damage to European multinationals, which for decades had been thwarted in the large and lucrative Iranian market. The dollar’s dominance in global banking and trade allowed the United States to “exercise leverage on European companies” through its sanctions, Le Maire explained. Those companies were suffering because of “American decisions that [the French] don’t always share.” One long suffering European company is the French energy giant Total. In 1996, the US congress passed the D’Amato-Kennedy bill—the Iran and Libya Sanctions Act—as part of a growing set of nuclear sanctions. The sanctions were extraterritorial in nature and sought to prevent investment by non-US firms in Iranian and Libyan energy sectors. Total had recently invested in the second and third phases of Iran’s massive South Pars gas field, swooping in after domestic politics prevented American oil giant Conoco-Philips—Iran’s preferred investor—from entering the project. European authorities balked at the idea that American legislation could command the destinies of European firms. After two years of intense lobbying and a threat to refer the issue to the WTO, the Clinton administration struck a compromise with Europe. Total ramped-up operations in Iran and remained an investor until 2010, when the company withdrew from the country in compliance with EU sanctions imposed over Iran’s nuclear program. Six years later, following implementation of the JCPOA, Total was the first major oil company to sign an agreement to re-enter the Iranian market, reaching a$4.8 billion deal to continue development of the South Pars gas field. But the triumphant return was short-lived. Once again, political developments in Washington came to determine Total’s fate.

The election of Donald Trump in 2016 put European businesses active in Iran on notice. Trump had vowed to tear-up the Iran nuclear deal. Total tried to change his mind. The company opened a lobbying office in Washington tasked with protecting their investment in Iran. The company’s CEO, Patrick Pouyanne, made a personal appeal to Trump at a dinner in Davos, asking Trump to consider giving the reformists in Iran more time to “help them to go towards more democracy.” Pouyanne’s argument was a sophisticated one, and evidently the wrong one given his audience. Trump was unswayed and pulled out of the JCPOA in May 2018 despite Iran’s full compliance with its commitments under the deal. Total exited Iran again in August of that year. In 2019, US sanctions would force the French company out of Venezuela. This year, sanctions have dogged Total’s operations in Russia.

This history makes Total “the textbook example of how secondary sanctions may derail the business plans of non-American companies,” according to former French treasury official Agathe Demarais in her new book, Backfire: How Sanctions Reshape the World Against US Interests

In Backfire, Demarais examines how the growing use of economic sanctions is dramatically reshaping the international order. In her view, “few if any foreign policy tools have as big an impact as sanctions,” which have “not only come to play a major role in the lives of millions of people and in companies around the world” but have also reshaped “relations between countries, and in turn global geopolitics.”

### Side effects

To be more precise, it is American sanctions that have had this impact. Demarais focuses on the incredible power that the United States has gained by developing its sanctions regime, leveraging the global dominance of the dollar over the past two decades to devise over seven sanctions programs targeting upwards of 9,000 entities. Through its sanctions, especially the financial ones, the United States wages economic war and commands the destinies of many states. In this sense, sanctions are a weapon.

Demarais is no spectator. She first grappled with sanctions policy during a posting as a French treasury official in Moscow between 2010–2014, where she worked on Russia sanctions imposed after the annexation of Crimea, and in Beirut between 2014–2017, where her portfolio included the numerous sanctions programs targeting Middle Eastern countries.

The book’s particular perspective can be distinguished from works by former US officials, such as Juan Zarate’s Treasury’s War and Richard Nephew’s The Art of Sanctions. American sanctions practitioners—while aware that sanctions do often backfire—tend to write about sanctions with a certain detachment. For one, they rarely have experience “in the field” and the unintended consequences are, if anything, an affirmation of the unique power of the economic weapon they helped develop.  For her part, Demarais, while assuring the reader she is “not for or against sanctions,” aims to provide a “clear picture” about their effects. She presents two main arguments for why overuse of sanctions by American policymakers is backfiring, hurting US interests.

First, Demarais describes how the unilateral and extraterritorial use of sanctions has strained transatlantic relations going back several decades. She recounts the Siberian pipeline “debacle” of the 1980s, the tussle over extraterritorial sanctions against Cuba, Iran, and Libya in the 1990s, the fight over the Nord Stream 2 pipeline in 2017, and the fallout from Trump’s withdrawal from the Iran nuclear deal in 2018, which she considers “the straw that broke the camel’s back” for European officials worried about the extraterritorial power of US sanctions. In June 2018, the foreign ministers and finance ministers of France, Germany, and the United Kingdom took the unusual step of writing a joint letter to their American counterparts, demanding measures that would ensure “the extraterritorial effects of US secondary sanctions will not be enforced on EU entities and individuals,” enabling European firms to maintain business with Iran. The Americans rejected the plea.

Second, Demarais explores how the US overuse of sanctions has contributed to efforts by targeted countries to not just find ways to circumvent sanctions, but also to find ways to permanently reduce the impact of US financial coercion. In January 2019, European governments established a state-owned trade intermediary called INSTEX that was intended to enable European and Iranian companies to trade without needing to make cross border transactions, nullifying at least part of the impact of US sanctions on Europe-Iran trade. While INSTEX never constituted a serious challenge to US financial primacy, Demarais suggests that China’s development of CIPS, a financial messaging and clearing system intended to compete with SWIFT, may lead to the formation of a “fragmented global financial system” in which “some channels are controlled by the United States, while others escape Washington’s scrutiny.” Around 1,200 financial institutions in one hundred countries are currently connected through CIPS, around one-tenth of the number connected through SWIFT. But the adoption of parallel financial channels is growing, as predicted by Demarais. Last month, Russia and Iran announced they were connecting their banking systems as the two countries seek to create a united front against Western sanctions. Russian and Iranian banks will be able to send payment instructions using Russia’s own SWIFT alternative, called SPFS.

### The Russia sanctions

After three years of research and writing, Demarais narrates, she was putting the “finishing touches” on her manuscript when Russia invaded Ukraine. Sanctions have been the cornerstone of the Western response to Russia’s invasion. US and European financial sanctions have frozen about half of Russia’s foreign exchange reserves and excluded Russian banks from networks like SWIFT. Export controls have strained Russia’s industrial supply chains, making it more difficult for Russia to import key technologies such as semiconductors. The oil price cap instituted towards the end of last year is beginning to take a bite out of Russia’s oil revenues, adding fiscal pressure on the government. Given the overall chilling effect of the Western sanctions, over 1,000 Western businesses have withdrawn from the Russian market. Notably, these measures have been carefully coordinated by American and European policymakers, relieving some of the transatlantic strains that had motivated Le Marie and others to call for greater European economic sovereignty during the Trump administration. The US has not applied secondary sanctions on Russia, counting instead on the EU’s own sanctions to curtail the activities of European companies.

The swiftness with which Western governments isolated Russia’s economy has given a new impetus for the likes of China and Russia to find ways to reduce their vulnerability to Western economic weapons, leaving Demarais even more bearish about the future of unilateral sanctions. In a recent Foreign Affairs essay, she cites intensified Chinese and Russian efforts to cease conducting trade in dollars, including through the adoption of digital currencies. These efforts began years ago—by 2020 “China settled more than half of its trade with Russia in a currency other than the US dollar, making the majority of these commercial exchanges immune to US sanctions.” But the goal of creating sanctions-proof financial channels has gained greater importance following the Russian invasion of Ukraine. Considering the new geopolitical stakes, Demarais believes the trend is permanent, suggesting that “within a decade, US unilateral sanctions may have little bite.”

Whether Russia and China can develop a viable defense against the weaponized dollar remains unclear—there are plenty of reasons to doubt that the two countries can achieve the technologies and institutions necessary to operate a fully parallel financial and trade system. But the prospect of a more concerted challenge to US dollar hegemony is not the only geopolitical consequence of the Russian invasion of Ukraine. Europe’s push for greater economic sovereignty has fallen by the wayside. The unified Western response to Russia gives the impression that the US and Europe have moved past the disagreements that make-up a large part of Demarais’s book. But even as the transatlantic allies apply sanctions on Russia in concert, the inequities that underlie Europe’s economic subservience to the United States persist.

Last October, French President Emmanuel Macron accused the United States of “double standards” as American energy companies rake in huge profits by exporting LNG at record prices to an energy starved Europe. Macron’s comments point to an overlooked fact—Europe always bears a higher cost than the United States when it supports sanctions programs. A 2020 paper published by the Kiel Institute found that “European countries bear a much higher cost of sanctions than the US, relative to their respective GDP values.” For example, with losses equivalent to 0.2 percent of its GDP, sanctions were eighteen times more costly for Germany than for the US at the time of the report. While Europe may have smaller defense budgets than the United States, it is paying for Western security in other ways. Of course, these contributions count for little in Washington, which continues to treat Europe as a junior partner.

Moreover, Western sanctions can create acute economic pressures for countries in the global South, particularly by contributing to elevated commodities prices. Considering these pressures, broad sanctions programs can even backfire by deepening economic dependence on the countries being targeted by the West—in this case, Russia. Patrick Pouyanne of Total warned a French parliamentary committee that “the vision which we have of this conflict in the Western camp is by no means shared by the vast majority of the rest of the world.” Reflecting on conversations in the Middle East and South Asia, Pouyanne noted that his interlocutors were “very surprised by our attitude when we unilaterally imposed sanctions and only afterwards went to the United Nations to check if that was ok.” Pouyanne’s warning seems to be that if China and Russia are to spearhead an Eastern bloc, the West should not take it for granted that the horrible spectacle of Russia’s invasion will lead countries in the rest of the world to side with it. No doubt Pouyanne has been tracking the tremendous volume of Russian oil still being consumed by countries like India.

### A new multilateralism?

In 2018, the European Commission published a strategy document titled “Towards a Stronger International Role of the Euro.” At the time, one of the intentions behind creating a stronger euro was to defend European companies exposed to “currency risks and political risks, such as international sanctions that directly affect dollar denominated transactions.” But as Russia continues to wage war in Ukraine, as Iran continues its nuclear intransigence, and as rhetoric from China turns more bellicose, Europe has been forced to weaponize interdependence. Europe is leveraging the prominence of the euro in global trade, the importance of the European banking sector, and the significance of foreign direct investment by European multinational companies to create its own tools of economic coercion.

European Union High Representative Josep Borrell recently asserted that Europe is facing “the consequences of a process that has been lasting for years” in which Europeans “decoupled the sources of [their] prosperity from the sources of [their] security.” Speaking to his ambassadors, Borrell bluntly insisted that Europeans “need to shoulder more responsibilities” to address “mounting security challenges.” He called on Europe to end its dependence on trade with Russia and China, two countries that have underwritten European prosperity, as well as its reliance on the United States, which has guaranteed European security.

Implicit in Borrell’s diagnosis is the idea that while European power was once advanced by deepening trade and investment ties, to back control over its security, a credible European sanctions power is needed. Two decades of mutual economic gains were not enough to stop Putin from starting a war in Europe. But Borrell believes that the economic war Europe has launched in response will deter other states from such rash action in the future. To put it another way, Borrell is ready to unify European economic and security policy even if doing so requires decoupling fully from Russia and partially from China.

The coordinated effort to impose sanctions on Russia demonstrates a “reinvention of US diplomacy” rather than something that reflects European agency. Demarais writes that the current moment “highlights that after decades of going it alone, America needs allies to implement sanctions too.” But her prediction of a restored “multilateralism” may be misplaced. Today, the European effort to assert economic sovereignty is in service of a sanctions alliance with the US. It does not establish an independent pole of influence.

At the dawn of the nuclear age, De Gaulle worried that “two super-states would alone have the weapons capable of annihilating every other country.” He wondered how “under these conditions… could Europe unite, Latin America emerge, Africa follow its own path, China find its place, and the United Nations become an effective reality?” His question remains startlingly relevant as European far right parties use the inflationary costs of the Russia sanctions to sow discord, as countries in Latin America and Africa worry about the end of the brief multipolar dream, as China prepares for long-term confrontation with the United States, and as the United Nations is paralyzed.

De Gaulle’s attempted solution was a simple one. To maintain influence in the atomic age, France needed to become a nuclear power. Failing would mean remaining dependent on the United States for security. This in turn would curtail French sovereignty. As Maurice Vaisse has argued, for De Gaulle, acquiring a nuclear capability “was more a question of protecting oneself from one’s allies than of arming oneself against one’s enemies.”

Six decades on from the first French nuclear tests, it is sanctions—not nuclear weapons—that are reordering the world. European officials are taking a similar approach at the advent of the sanctions age as they did at the dawn of the nuclear age. Ardent defenders of sanctions claim that the weaponization of the euro will advance European diplomacy and economic sovereignty. But by seeking to establish their own sanctions powers, European officials are consenting to the proliferation of economic weapons and participating in an arms race in which the US has an unassailable lead. Meanwhile, countries like China, Russia, and Iran are hoping to neutralize the threat posed by the West’s economic weapons by establishing parallel financial systems. But so long as the dollar remains a weapon in the global economy, those efforts are likely to fail. With allies subservient and adversaries strangled, to the extent that sanctions are reordering the world, it is according to American interests and in the service of American power, even if the efforts at times appear to backfire.

3. ## Cold Controls

#### Knowledge Regulation and National Security in Postwar AmericaBy Mario Daniels and John KrigeUniversity of Chicago Press, 2022

In an effort to stymie “indigenous” chip development in China, the US Bureau of Industry and Security (BIS) introduced new controls on semiconductor technology exported to the People’s Republic of China (PRC) last October. Targeting high-performance and advanced memory chips, manufacturing, and “know-how,” the new regulations block Chinese firms’ access to core knowledge and products needed to produce supercomputers and advanced weapons systems. The United States manufactures roughly 10 percent of the global supply of integrated circuits; in turn, the controls lean on an expandedforeign direct product” (FDP) rule, which gives the Department of Commerce the authority to regulate “direct products” of US-origin technology. Supplementing these measures, the BIS added over thirty Chinese entities to its “unverified list.”

The controls are the latest in a series of actions taken by the US government against Chinese technology firms. In September, the BIS imposed special licenses on Nvidia’s shipments of Graphic Processing Units (GPUs) to the PRC. A month prior, accelerated by Covid-related supply shocks, Congress ratified the CHIPS Act, which aims to rebuild domestic capacity in semiconductor production and restructure global supply chains for integrated circuits. These developments came on the heels of the Trump administration’s 2019 “assault” on Huawei.

These regulations have been praised for turning back the clock on fifty years of “bad” industrial policy. Secretary of Commerce Gina Raimondo called the CHIPS Act “a once-in-a-generation opportunity to secure our national security and revitalize American manufacturing and… innovation and research and development.” But gains of protected high-technology trade, which might boost US power in the long term, come with more immediate commercial, diplomatic, and military risks. Not only do these controls strain US semiconductor firms looking to the Chinese market—as well as the Taiwan Semiconductor Manufacturing Company Limited (TSMC), which manufactures the majority of the world’s semiconductors—they also escalate tensions with the PRC over Taiwan.

Mario Daniels and John Krige’s new book Knowledge Regulation and National Security in Postwar America (2022) contextualizes Commerce’s recent actions. The first complete history of dual-use export controls, the book maps the evolution of these regulations throughout the twentieth century. During the high Cold War, US trade in scientific and technological knowledge was oriented towards securing strategic lead-times over the Soviet Union and increasing the nation’s techno-industrial base— this was what the authors call a “national security” control regime. With increasing global competition in semiconductors during the 1980s, market shares in high-tech products were prioritized in the hopes of circling private-sector gains back into innovation—a regime of “economic security.” The book, thus, offers an invaluable insight into an arcane and understudied topic. At the same time, however, Krige and Daniels’ conceptualization of these security regimes relies on too simple a distinction between military and economic concerns. In reality, the history of export controls has navigated these two modes of reasoning, often at one and the same time.

### An era of national security

The US’s first peacetime export controls were ratified under the Export Control Act of 1949. This legislation gave the Department of Commerce’s Office of International Trade, a predecessor of the BIS, jurisdiction over the export of critical commodities and technical knowledge. Later that year, Congress established the Coordinating Committee for Multilateral Export Controls (COCOM) for Western nations, which synchronized a US-led blockade. States like Germany historically held deeper trading relationships with Eastern Europe than the United States. This meant that if the export controls were going to work, the US needed West-Central Europe on board.

For Daniels and Krige, this unprecedented imposition of export regulation can only be understood in the context of the Cold War and the ideological concerns that emerged from it. In their words, this “new approach to trade…[signaled] the redirection of the American ideological compass toward national security.” National security, as an ideology, located state power and military preeminence in government-led techno-scientific development. Moreover, it encouraged federal investment, largely from the Defense Department, in strategically significant technologies that, down the line, commercialized as they diffused. “This new way of thinking,” as Daniels and Krige explain, “established a close link between security, economy, and ceaseless technological innovation.”

Despite this unifying impulse to protect the techno-industrial base, the authors show that the interpretation of controls varied in the 1940s and 50s. In the immediate aftermath of the war, US policymakers were concerned to enact export controls while retaining support from private industry, academia, and the broader public; the aim was to effectively restrict high-technology trade without turning the US into a “garrison state.” To do so, they undertook a series of experiments, which ranged from soliciting voluntary data controls in the earlier years, to hardliners like Senators Kenneth S. Wherry (R-NE) and James O. Eastland (D-MI) calling to amend the Espionage Act to include radar. Such discussions, however, became circumscribed after 1949 by the very bureaucratization of the regulations.

The Export Control Act of 1949 then wasn’t the first time these controls, or other trade restrictions, were used in a retaliatory fashion. But, as Daniels and Krige argue, it was evidence that the ambitions of the Cold War national security state—key among them, protecting US supremacy against a rival hegemonic foe—had come to overshadow other commercial, technological, and scientific concerns. It meant keeping high-technology out of the Soviet Union at all costs, even if this meant sacrificing the principle of free trade. This was seen in the Export Control Act of 1951, which, ratified in the fog of the Korean War, provided for “the control by the United States and cooperating foreign nations of exports to any nation or combination of nations threatening the security of the United States, including the Union of Soviet Socialist Republics and all countries under its domination, and for other purposes.”

### The break down of “national security”

According to Daniels and Krige, the changing global distribution of power in the 1970s and 80s worked to dislodge export controls from these earlier concerns of “national security.” Two developments prompted this paradigm shift: a resurgence in Soviet military build-up and commercial rivalry with Japan.

On the heels of détente—which eased export controls—a growing anxiety surfaced in the mid-1970s that the Soviet Union was using warming relations as a cover for military build-up, nuclear and otherwise. In response, calls for even stricter controls cropped up in certain policy circles, corners of Congress, and critically within the Defense Department. Out of these tensions emerged the 1976 “Bucy Report,” to which Daniels and Krige dedicate an entire chapter. As the authors argue, the Bucy Report ushered in a new approach to regulating technology trade. Commissioned by the Office of the Director of Defense Research and Engineering and headed by Texas Instruments executive Fred Bucy, the Report directed attention away from end-use and safeguards to the potential military applications of dual-use technologies. In turn, it called for more stringent control of technology transfers while minimizing the importance of reverse engineering.

At the same time, a new geostrategic rival emerged—from within the Western alliance. Unlike rivalry with the USSR, competition with Japan was driven by ostensibly economic—not military—concerns. This unprecedented challenge required novel policies for maintaining commercial supremacy within America’s open trade bloc and a new way of thinking about the very source and limits of US power. The authors write: “Japan’s aggressive inroads into the semiconductor and related industries exposed the fragility of the American high-tech industry… [and it] raised questions about whether the country could lead the free world if it persisted with a laissez-faire approach to its core techno-industrial base.”

Out of this regulatory reshuffling emerged the paradigm of “economic security.” This new paradigm foregrounded global market shares in dual-use high-technology products like memory chips. It also came with a new kind of industrial policy: profits generated from dominance in consumer markets could be channeled back into R&D, with the US defense establishment benefiting from industry’s technological and commercial prowess. Once an innovator, the military had primarily become a consumer of high-tech goods.

When discussing the protective turn in US-Japanese high-tech trade, Daniels and Krige emphasize the Exon-Florio Amendment (1988), which allowed the Committee on Foreign Investment in the United States (CFIUS) to review, and thus block, select inward foreign direct investment. Despite its theoretical neutrality—any non-national investment could be singled out—the Reagan administration in practice targeted Japanese firms. A more apt example of this “recalibration” might be the US-Japan semiconductor accord of 1986. Japan held the largest market share for DRAM chips in 1986. This aggressive treaty, however, gave US semiconductor producers a minimum 10 percent of the Japanese domestic market in integrated circuits.

### “Economic security” reigns

In addition to thwarting the Japanese memory chip industry, the authors argue this new doctrine of economic security was responsible for the expansion of high-tech trade with the PRC. While most accounts associate the Nixon administration with warming US-Chinese relations, Daniels and Krige date the shift to Carter, who, in response to the Soviet invasion of Afghanistan in 1979, partnered with the Chinese to arm the Mujahideen.

Reagan deepened this relationship. Leveraging the PRC’s “four modernizations” under Deng Xiaoping, he drew on China’s historical antagonism with the USSR to dangle an increase in US high-tech trade with the PRC in exchange for halting the proliferation of Chinese missiles in the Middle East. As the authors underscore, in 1983, Commerce reclassed the PRC into “Group V,” the most liberal control category, which included Western Europe, Japan, Australia, and New Zealand. Looking at export licensing—meaning, applications submitted to Commerce by American firms seeking to trade in controlled goods—the value of approved licenses from the US to China jumped from under $375 million in 1980 to a surprising$5.5 billion by 1985. In 1986, 80 percent of the value of US licenses to China were attributable to high-tech trade.

The first Bush administration continued to link export controls to non-proliferation and proceeded to strengthen trade ties with the PRC, prioritizing American high-tech firms in the wake of the Tiananmen massacre. Bill Clinton likewise loosened export controls on US dual-tech destined for China—even as partisan backlash crystalized in the 1999 “Cox Report.” The Clinton administration, moreover, replaced the Cold War-era multilateral control agreement, COCOM, with the Wassenaar Arrangement, which greatly reduced restrictions. Wassenaar, still in effect, is a voluntary multilateral agreement for conventional arms and dual-use tech. The treaty provides little by way of control, however. Instead, it aims to promote “transparency” regarding shipments of military-significant goods to non-members, requiring signing members to report such shipments to the group biannually.

Daniels and Krige connect increased high-tech trade with China to Clinton’s enthusiasm for the 1990s Revolution in Military Affairs (RMA)—the apotheosis of “economic security” thinking. Although the RMA ostensibly promoted technologically imbued “systems of systems,” chips were at its center. First put into practice during Operation Desert Storm, the doctrine came into its own during the Clinton administration when it was believed that “securing technological leadership and market domination in research intensive industries like semiconductors, microelectronic circuits, software engineering, high-performance computing, and machine intelligence… would generate profits in global markets that could be ploughed back into R&D.”

### Export controls, knowledge regimes, and geopolitics

Knowledge Regulation, thus, demonstrates how US officials wielded export controls to meet the changing strategic demands of the second half of the twentieth century. But in structuring the book around successive geostrategic paradigms—“national security” and “economic security,” respectively—Daniels and Krige, at critical moments, either risk oversimplifying the policymaking behind these regulations or miss the larger macroeconomic and geostrategic picture in which these security regimes sit.

The legislative history leading up to the Export Control Act of 1949’s ratification is representative of this risk. By 1951, nuclear competition and outright war had transformed the Export Control Act into an economic weapon intended to halt the Communist world’s access to critical scientific and technical knowledge as well as military-grade industrial goods. Crucially, it was only months after the 1949 Act’s ratification, in August of that year, that Soviet engineers oversaw their first successful test of an atomic bomb, code-named “First Lightning.” In 1949, however, a commitment to taming inflation and stabilizing the monetary situation in Western Europe was also doing political work.

For example, Congressional records depict the 1949 bill as part of a Democratic program for managing exports due to short supply, foreign policy, and national security—largely in that order. Working in concert with the Office of Price Administration (OPA), Truman viewed export controls as a tool for taming domestic inflation. If Commerce oversaw trade in commodities with large export markets such as steel and agricultural goods, domestic supplies of those commodities could be kept high, which would, in turn, help to keep prices down. This function was more important in the immediate postwar period when the Export Control Act was first extended, but it persisted in 1949. Indeed, contemporary accounts cite the legislation as part of Truman’s “Eight-Point Anti-Inflation Plan.”

In fact, the debate that threatened to kill the legislation was related to neither science, technology, nor national security, but edible “fats and oils.” A surplus of edible oil, particularly cottonseed oil, had deflated prices. Southern Democratic Congressmen like Paul Brown (D-GA) and Burnet R. Maybank (D-SC) wanted to liberalize this trade so as to send excess oils to Latin America and Western Europe. Truman, however, was working with a large Democratic majority in the House and held a ten-vote lead in the Senate. When Chairman Brent Spence (D-KY) phoned the President in the middle of the House Banking and Currency Committee with Brown’s objections, Brown fell in line. The Export Control Act would make it to a vote, and liberalized trade in edible fats and oils would have to wait.

In addition to this inflation-fighting function, the Truman administration viewed export controls as promoting monetary stability within the new Bretton Woods system. While the Marshall Plan had already been enacted, trade needed ongoing management until more dollars could be pumped into the region. As Acting Secretary of Commerce Thomas C. Blaisdell highlighted in his Congressional testimony, export controls were still needed to prevent supply shocks in Western Europe.

It is true that US government officials recognized the utility of export controls for peacetime security purposes. For example, Congressmen advocating for liberalizing trade against the tides of the 1949 Act qualified that they didn’t desire loosening trade controls for “Russia and her satellites.” Blaisdell himself, moreover, underscored that the Department was “maintaining strict control over shipments of materials and equipment having potential military significance” to this region. And, indeed, most conventional histories of export controls written by legal scholars and political scientists assert that by 1948—a year coinciding with the Soviet Union building its first successful plutonium production reactor—Cold War concerns had overtaken the bill’s supply functions. But in limiting their analysis to military considerations, under the umbrella of national security, Daniels and Krige effectively overstate the connection between the 1949 Act and escalating Cold War pressures.

### Contradictions in the postwar order

Reliance on the paradigm of economic security as distinct from national security likewise obscures crucial historical developments. The US-led postwar order justifiably could be seen as possessing a mercantilist impulse to optimize exports while retaining monetary hegemony. At the same time, it upheld a commitment to liberal internationalism. There were clear signs this system was under pressure by the 1970s.

For one, the Vietnam War had shown that bloated budgets and extensive research programs did not necessarily lead to military victories. Out of this realization, the tech infrastructure supporting American empire was reconstructed around commercially developed dual-use technologies, particularly semiconductors. As Under Secretary of Defense Research and Engineering John S. Foster, Jr. commented as early as 1968 in Congressional hearings for Defense Department appropriations: “It is increasingly clear, particularly from our experiences in Vietnam, that we have only a fragmentary understanding of the consequences of such conflicts. Military hardware and tactics—no matter how ingenious or effective—cannot provide a long-term solution to the problems we face in Vietnam.”

Moreover, this arrangement created the very conditions in which Japanese competition in dual-use tech like memory chips could flourish. In the 1950s, American officials viewed rebuilding Japan as a bulwark against Communism in the East. These same officials, however, also maintained that domestic autonomy in economic and political matters was necessary if imperial overreach and outright hostility were to be avoided. But, by the 1970s, Japan’s export-oriented growth model needed access to consumers—mostly in the US. Political scientist and historian Chalmers Johnson has shown that Japan was a major beneficiary of the open trading system that developed after World War II, and that “Japanese government leaders… repeatedly acknowledged the favorable effects for them of such institutions as the General Agreement of Tariffs and Trade, the International Monetary Fund, and… stable exchange rates—all institutions they had no role in creating.”

The Bucy Report itself emerged out of this moment of upset. After Vietnam, the Defense Department was hamstrung. The agency’s budgets were slashed. Moreover, the department never possessed real jurisdiction over the circulation of things like integrated circuits. Bucy, thus, sought to reconfigure the export administration to give Defense more authority not just over US-Soviet tech transfers but overseeing the global reach of technologies like semiconductors, increasingly conceived of as “military-critical.” Thus, it was not just economic rivalry with Japan, but a changing perception of geopolitical strategy and military threat that underpinned the rise of a new export control regime.

### An era of cheap imports

Daniels and Krige’s discussion of US-PRC integration under Clinton similarly relies on a too clear separation of national and economic security. After the Soviet Union collapsed and bipolarity gave way to unipolarity, US militarism by no means ceased; if anything, it became more impulsive. Whether via humanitarianism, a new commitment to protecting other states’ sovereignty, a geopolitics of oil, or a surge in neoconservatism and Christian messianism, US military intervention persisted throughout this period. Liberalizing export controls complemented this adventurism by detaching high-tech exports from discrete military action. Put differently, the Clinton administration sought to foster a privately funded, high-technology base with military-crossover, absent of distinct geostrategic goals.

Moreover, the economic story told by Daniels and Krige doesn’t quite hold on its own terms. US high tech trade with China didn’t begin through the cycling of profits made in its consumer markets back into R&D. Rather, American high-tech firms began to build global supply chains during the 1970s, primarily motivated by the search for cheap labor. The book bases its analysis on the consumption of high-tech goods, neglecting to analyze transformations in production. In reality, tech transfers weren’t just about shipping finished products overseas but also offshoring the production of US tech—something Bucy realized. The goal was cheaper manufacturing costs, primarily via reducing the price of labor. These reduced costs were thought to encourage private stewardship over the US techno-industrial base, as domestic design combined with foreign manufacturing was thought to provide a wellspring for ample, cheap dual-use tech imported back to the United States. Although places like South Korea held the bulk of assembly work in the 1970s and ‘80s, China became the major center for tech assembly by the early 2000s. For example, US-designed chips manufactured at TSMC were shipped to China to be assembled into consumer electronics—i.e., in things like iPhones—then sent to the US.

Economic integration with China was also driven by the global position of the dollar, which the authors similarly overlook. Reagan “discovered” the global economy when Japan started buying up US Treasuries following Volcker’s infamous rate hikes; these purchases tamed inflation and allowed the US to run a larger deficit. China overtook Japan in financing the US deficit after it joined the WTO in 2001. Treasuries supported the PRC’s growth model in that they helped the state balance its payments, while keeping the dollar strong. Lax export controls then facilitated the steady supply of assembly tech products from China to the US, creating a complementarity between this monetary regime and Clinton-era industrial policy.

### What’s new?

In the 1940s, export controls emerged to curb domestic inflation, stabilize the position of the dollar in Europe, and facilitate a budding Western blockade. As tangible bipolar nuclear rivalry took hold in the 1950s, these controls aimed at the twin goals of maintaining nuclear lead-time and frustrating the industrial power of the Soviet Union. The 1970s and ‘80s brought further modifications to export regulations as the postwar order unraveled. US officials refitted export controls, seeking to weaken the Japanese position in memory chips as well as leveraging Chinese industrialization against a resurgent Soviet threat. This rearrangement precipitated a remaking of US industrial policy around commercially developed dual-use tech, supported by increased investment in the Asia Pacific. After the Soviet Union collapsed in 1992, US-PRC integration only intensified. At the heart of this relationship was a tradeoff between hegemony (monetary and military) and manufacturing capacity. This tradeoff was supported by, but not reducible to, an industrial policy of economic security and undergirds the current conditions in which we, in the United States, now live.

The history that Daniels and Krige plot in Knowledge Regulation may provoke new questions as to our current era of export controls. In light of the latest regulations, has the US entered a new era of export controls and, if so, what are its features? Some have argued that Commerce’s latest actions may be intended to encourage new industrial policy—at whatever geopolitical cost. Alternatively, these heightened controls could be deliberately oriented towards escalating tensions between the US and the PRC.

Deeply engaging with such questions requires abandoning hard distinctions between economic and military motives, as well as hard lines between the commercial and strategic significance of dual-use tech. As Daniels and Krige effectively show us, export controls are flexible regulatory tools that can be put to many uses, whether they be macroeconomic, commercial, or geopolitical.

4. ## Transatlantic Ties

#### The Political Economy of the Special RelationshipBy Jeremy Green Princeton University Press, 2020

Bretton Woods is often associated with les Trente Glorieuses, the triumph of a certain kind of social democratic governance system, and American hegemony in Western Europe. The postwar system of monetary governance represented a form of “regulated” international capitalism subordinate to the needs of nation states. The termination of this system, then, is often framed in US-centric terms: the Nixon Administration chose to shed the burden of providing stability for the rest of the world, perhaps as a necessary response to US overspending on the Vietnam War and the Great Society Programs.1 In this telling, the failure of Bretton Woods was almost a failure of will.

To understand the system’s collapse, we must also consider the role of financial networks undergirding it. In his book The Political Economy of the Special Relationship, Jeremy Green argues that Bretton Woods echoed “the domestic Keynesian mediation between the polarized alternatives of laissez faire and state planning,” by creating a system which was designed to ensure a combination of international free trade, national balance of payments, and the provision of a welfare state to hold down unemployment. Echoing John Ruggie, he calls this “embedded liberalism.”

Green’s key intervention is to draw attention to the links between the City-Bank-Treasury nexus2 which governs capitalism in the United Kingdom and its American equivalent, the Fed-Treasury-Wall Street complex. This link, he claims, ensured that the US would always have to be in dialogue with its allies, especially the UK. A “transatlantic feedback loop between financial institutions and regulatory authorities in London and New York” transmitted globalizing and financializing pressures in both jurisdictions. For private institutions, this generated both a search for new areas of financial innovation, but also a desire to defend those that did exist from legislative oversight. For public institutions, it strengthened pro-market lobbying to promote pro-market reforms. Green argues that, far from a period of unchallenged US hegemony, Bretton Woods and its aftermath represented a period of “very interactive development” between the UK and the US, where they came to form “a distinctive Anglo-American developmental space that refashioned the global economic order, disrupting the Keynesian compromise in both states and spurring financial liberalization.”

Green begins his narrative on the eve of the First World War and ends with the aftermath of the 2007–08 financial crisis. Using a wide range of sources, including the archives of the Bank of England, Green argues that Bretton Woods was almost immediately destabilized by the existence of the eurodollar: US dollars held in accounts outside of the United States and therefore not subject to American regulations. These “jurisdictional ambiguities” resulted in an influx of offshore American banks into London in the 1960s which “destabilized the prevailing regulatory order” and also “generated feedback pressures on the US New Deal regulatory regime” as American banks sought greater permissiveness from their own regulators.

This growing unregulated money market would have vital implications not only for the failure of Bretton Woods, but for the turn to neoliberalism in the 1980s and onwards. The period, for Green, is not simply one of American hegemony, but of American primacy in constant negotiation with allies—most importantly the United Kingdom.

### The postwar order

In 1914, the United Kingdom was the financial center of the world, financing almost two-thirds of global trade—predominantly settled in sterling—through its discount market. The balance of payments was handled through the export of a number of capital goods, primarily ships, steel and coal.3 The First World War and its aftermath would systematically wreck all these advantages. The need to unpeg sterling from gold in 1914 meant that neutral importers and exporters in Asia and the Americas decided to conduct business in dollars, which remained pegged. Companies and financiers were therefore required to turn to New York banks to purchase international imports. The shift from coal to oil as the major global fuel in the 1910s and ‘20s similarly ended British dominance in energy. In 1925, the decision to return the pound to gold at its pre-war level, by then an enormous overvaluation, critically damaged the important shipping and steel export industries. Vast expenditure in two world wars4 further fundamentally altered Britain’s balance of payments, turning it from the world’s largest creditor to one of the United States’ many debtors.

Despite this greatly diminished status, sterling in 1945 was still an important reserve currency, and the advanced infrastructure of the City of London ensured that British finance would continue to be internationally important. The initial American attitude after the war, however, was by no means accommodating to the UK or other western European countries. In 1945–47, the US attempted to force convertibility on European currencies, setting off an inflationary spiral that saw all European countries face capital flight to the safety of New York. The UK resorted to tight exchange controls and a devaluation, while both Italy and France toyed with adopting floating exchange rates. Marshall Aid in 1948 represented a dramatic reversal in US policy, in part offsetting European capital flight across the Atlantic.5

As Green explains it, these vacillating American policies were partly a result of a disagreement between US Treasury officials and the New York banking community. Wall Street financiers such as Randolph Burgess of the National City Bank and Thomas Lamont of J.P. Morgan urged financial cooperation with the British, including the extension of cheap dollar-denominated loans, while the Treasury under Henry Morgenthau preferred more hardball tactics. This conflict mirrored disagreements over the emerging Bretton Woods system. The New York banking lobby regarded their compatriots in London as vital colleagues in the fight against what they saw as excessive regulation, while the Treasury was focused on achieving international stability, with the United States as the lynchpin.

Not only was Wall Street successful in encouraging a policy shift through Marshall Aid, but its financiers also managed to convince the federal government to tone down commitments to cooperative capital controls, which had appeared in the original Bretton Woods architecture. Still, Green notes that most parties were generally satisfied with the negotiations, suggesting a shared commitment to avoid the “unilateral and beggar-thy-neighbor policies of the 1930s” through the creation of fixed exchange rates, and temper the excesses of the gold standard era by creating an institution—the International Monetary Fund—which could shield nations from the most extreme pressures of speculators and deflationary balance of payment issues.

### The rise of the eurodollar

“Embedded liberalism was not, though, built on firm foundations,” states Green. Almost as soon as the Bretton Woods institutions were created, the eurodollar would emerge to undermine them. The first eurodollars appeared in the mid-1950s, before Bretton Woods had even come fully online,6 when the Soviet Union, concerned about the prospect of American sanctions, moved some of their dollar deposits out of American banks and into a branch of the Midland Bank in London. Seeking access to greater financing than the weakened sterling could provide, British banks began using dollar deposits to finance their lending activities.

Over the course of the 1960s, US banks opened branches in London to take advantage of the City’s offshore environment. As Green explains, this move was perceived at least in part as a quid pro quo for American banks continuing to abide by New Deal-era regulations, particularly Regulation Q, which limited the amount of interest they could charge American-based borrowers. As early as 1960, Treasury Secretary C. Douglas Dillon told Congress that the eurodollar market could ensure that foreigners kept hold of dollar deposits, taking pressure off America’s gold reserves. Green also quotes an unnamed partner at Chase Manhattan, asserting that without eurodollar financing, the entirety of Wall Street would have suffered a liquidity crisis in the mid-1960s.

By the late 1960s, most American borrowing on the eurodollar market took the form of long-term (three years or more) bonds or debentures. This was notionally to finance capital spending in Europe, given the imposition of capital controls by the Johnson Administration. But there was little doubt that these facilities could fund American operations. In 1968, for example, the American conglomerate Ling-Temco-Vought borrowed 15 million on the eurodollar market to acquire Wilson Sporting Goods, another American company. The facility was provided by a syndicate of British banks and the London branches of American banks. At the time, newspaper reports described this kind of arrangement as “increasingly popular” among the American banking community.7 These transactions, however, raised an essential question for the American political economy: how could American regulators manage the balance of payments and achieve price stability when a focal point of dollar trading was outside the United States? The United Kingdom, on the other hand, had to deal with the implications of being home to the world’s major offshore market, though the secrecy of the trading meant that its influence only surfaced over time. Green argues that, in practice, the main effect was enriching Britain’s finance sector and granting financiers a strong lobbying position in domestic politics. This may explain why proposals for part-nationalization of the lending sector floundered in the United Kingdom, even as they found limited success in other parts of Europe. Certainly, there was no British equivalent of French dirigisme In Green’s telling, the cultivation and protection of the eurodollar market was the center of the “special relationship” between the UK and the US, inaugurating an unprecedented wave of coordinated regulatory and monetary moves. He points to recurrent moments of cooperation: the bilateral work between the Bank of England and the Fed to establish the London Gold Pool in 1960, which stabilized the price of gold after a run; Fed Chair Bill Martin being consulted in 1964 in the run up to the devaluation of the pound; and the role of the Bank of England in negotiating the first Basel Concordat, which set out principles for sharing supervisory responsibility for banks’ foreign branches. Green describes Bretton Woods as a compromise between the extremes of total laissez-faire and full state planning (between Edwardian Britain and Soviet Russia, if you will). It did this by pegging international currencies to the dollar, which was in turn pegged to gold, and allowing the introduction of capital controls in order to prevent destabilizing runs. But Green alleges that, in practice, the existence of the City-Bank-Treasury nexus and the Fed-Treasury-Wall Street complex created political pressure in London and Washington to nurture the finance industries, eventually contributing to the collapse of the system. Free from government regulation, the eurodollar may be the closest we have seen to Hayek’s imagined notion of purely private money. By creating the institutional environment for vast offshore financial and capital flows, the eurodollar market allowed lenders and borrowers to access credit outside of government influence. This hurt attempts by central banks to adjust credit supplies and ensured that they could not shape market interest rates. The significance of the eurodollar’s impact is further demonstrated by the short time Bretton Woods was actually in operation—far from three glorious decades, the system was fully online for less than a decade and a half. Between the Nixon Shock and 1980, the number of eurodollars in circulation increased more than tenfold, and then nearly doubled again in the following decade. Much of this trading took place in London, but it was conducted by the overseas branches of American banks, a signal of the increasingly standardized banking practices on both sides of the Atlantic. Innovations such as the introduction of rollover credits8 began in London and were soon transmitted to New York. After the 1986 “Big Bang” of financial deregulation in London, large American investment banks swallowed smaller British merchant banks. With both British and American governments removing capital controls at the same time, London and New York then came into even more direct competition for business, which, in turn, intensified the pressure for competitive liberalization between the two jurisdictions. In addition to this “race to the bottom,” Green argues that the era also saw a coordinated attempt to maximize international liberalization, which he demonstrates through convergence of Fed and Bank of England interest rates throughout the 1980s. In the 1990s, there was an even more dramatic convergent evolution, with both the Federal Funds Effective Rate and the Bank of England Base Rate settling into a minor fluctuation between 5.3 percent and 7.5 percent between 1995 and the end of the century. ### The failure of monetarism The Anglo-American financial relationship—and the centrality of the eurodollar to its dominance—persisted well past the fall of Bretton Woods. Green points to the underlying role of eurodollars in shaping the relationship between Ronald Reagan and Margaret Thatcher. The eurodollar was key to both figures’ visions of liberalized, globalized finance, but it ultimately doomed orthodox monetarism in both jurisdictions. With the eurodollar in play, central banks could not fight inflation by placing severe limits on the money supply. Thatcher and Reagan both failed to meet their monetary targets and had quietly abandoned the ideology by 1983. Put simply, the Reagan Administration could not adequately restrict the supply of dollars because so many of them were held offshore, out of the US’s regulatory reach, while the Thatcher government’s attempts to restrict the supply of sterling resulted in businesses and money managers increasingly turning to the eurodollar to meet their financing needs. With so many dollars being held in London, it would have been impossible to achieve control of the monetary supply without an even more draconian tightening of domestic supply in both countries. But, as Green notes, monetarism “was always defined more by its political implications than any semblance of intellectual coherence.” In both the US and the UK, Reaganite and Thatcherite policies—high interest rates, an aggressive stance towards labor relations, and expansion of the defense establishment—broke the back of organized labor, and turned the economy towards finance and away from industry. For Thatcher, an atmosphere of patriotism and economic growth—fueled by the victory over the Argentine junta in 1982 and the discovery of North Sea oil and gas fields—served as political cover for her deregulatory and privatization agenda. But the decision to keep the pound strong to help the finance industry devastated British export industries, which were priced out of international markets. In the United States, the strong dollar attracted vast amounts of international capital, teaching the Republicans the important lesson that, in the words of Dick Cheney, “deficits don’t matter.” International capital meant that the Reagan Administration’s regressive tax cuts and ballooning defense expenditure could be implemented without concerns regarding the money supply or the budget deficit, at least until after Reagan (with his characteristic good luck) had left office. This house of cards came falling down in 2007–08. Green attributes the financial crisis to the global buildup of payment imbalances leading to a savings glut. Successive US balance of payments deficits caused a net outflow of dollars, swelling the supply of eurodollars. Foreign banks and the foreign branches of American banks were only too keen to compete to recycle these vast funds because they were free of reserve requirements and deposit insurance assessments. In search of yield, the finance industry came upon the subprime mortgage sector. Unconventional monetary policies adopted by the Fed in the aftermath—quantitative easing and interest rates held close to zero percent—were copied worldwide. Vast bailouts for a range of financial institutions, the Fed’s extension of dollar swap lines to select central banks, and domestic austerity programs formed a new political consensus. National economies were left chronically under-stimulated while finance rapidly recovered. ### Unregulated monies In Green’s narrative, the eurodollar and unregulated financial transactions were central to the failure of Bretton Woods, the neoliberal turn, and the 2008 financial crisis. Unregulated is not the same as uncontrolled: the dollar guaranteed by the Fed is controlled by governors appointed by elected politicians, the unregulated money of the eurodollar was controlled by the financiers of Wall Street and the City. In today’s unregulated system, new modes of financial engineering direct vast quantities of funds to new financial products bought and sold by the same class of people. This has imposed very real, deleterious consequences on the rest of the economy. The strength of the dollar has fed an ever-growing American trade deficit and tilted the economy towards various rent-extracting industries rather than productivity growth. In the United Kingdom, the rise of finance has led money to flow into the City while leaving the rest of the country behind. In the failure of Bretton Woods, Green sees a de facto conspiracy of Anglo-American bankers, who embark on what he calls “financial lobbying,” aided and abetted by the Bank of England and the Fed. The turbulent period was also marked by deeper flaws. Almost immediately after the full conversion of currencies had been achieved, Bretton Woods proved unable to cope with the existence of the eurodollar. The 1960s saw a series of patch-up jobs to deal with the worldwide dollar glut before Nixon put the system out of its misery in 1971. While Anglo-American financiers did undermine Bretton Woods through the use of offshore exchanges, why did a system of global monetary management fail to consider that a country’s fiat currency might be held outside its borders? At the original conference, Harry Dexter White shot down Keynes’s plans for an international clearing union, which would have managed national balances of payments through automatic interest rate changes. The system that did result more closely resembled Dexter White’s initial aims, creating a global order with dollar dominance. White was clear throughout negotiations that the dollar must be central to any postwar international monetary system, receiving the privileges of becoming the international currency. The objective was not to create a stable economic world safe for national-level social democracies, it was to cement American financial hegemony. This was broadly successful in the long term. The dollar is now the lynchpin of international markets, and the Fed, through the extension of swap lines, is now arguably the world’s central bank. Green alerts us not only to the core challenges of Bretton Woods, but also the postwar social democratic order surrounding it. The system could not manage the globalized nature of modern capitalism—controlling the eurodollar was never its purpose to begin with. With questions around global macroeconomic management again in flux, and unregulated financial markets continuing to pose challenges to global schemes, it would be wise to consider where the last attempt at progressive global regulation went wrong. 5. ## Politics and Expertise Leave a Comment #### Thinking Like An EconomistBy Elizabeth Popp BermanPrinceton University Press, 2022 #### Public CitizensBy Paul SabinWW Norton, 2021 Explanations for the rise of neoliberal policymaking in the United States commonly take one of two forms: a political history or an intellectual history. The first focuses on the overlapping crises of the 1970s and the rebalancing political coalitions competing to manage them. The stagflationary oil crisis, rising corporate dominance of Germany and Japan, declining legitimacy after Vietnam, Watergate, and the Iranian hostage crisis confronted an increasingly divided American liberal coalition and a more unified conservative one. The result was a collective political shift to the right, the alienation of many working class people from politics, and the unleashing of a virulent politics of grievance that political elites were unable to manage. But neoliberalism as it is usually understood, is not just a political coalition, but also a political philosophy. Thus the other narrative: the rise of a self-consciously “neoliberal” intellectual tradition. The first thinkers to identify themselves as “neoliberal” were a group of right-wing European intellectuals who sought to re-articulate the value of classical liberalism against a corporatist social democratic hegemony.1 Common to most of these thinkers was a vision of markets as spaces of freedom via consumer sovereignty, a form of freedom that is threatened or distorted whenever collectivities outside of the corporate boardroom interfere with the competitive process. According to this view, the goal of governance ought to be to expand the scope of consumer sovereignty and to prevent so-called interest groups from capturing any part of the governance process. If one conceives of neoliberalism through this way of thinking about governance, then one can follow “neoliberal thought collectives” from the rightward margins of the New Deal order to the center of the Reagan Revolution, tracking the twisted inroads in between. The crises and realignments of the 1970s created ample opportunity for neoliberal ideas and their promoters to make their way into government. And, as neoliberal arguments began to win out in domain after domain, policy makers across the board adopted them. Such accounts of neoliberalism emphasize rise of the economic right and the left’s triangulating response: conservatives gradually build up strength and strategy until crises create the opportunities to muscle aside New Deal and Great Society liberals (and, in other countries, socialists), who developed their own variations on neoliberalism in response. But scattered throughout the literature is a different framing, which recognizes the emergence of neoliberalism from within the New Deal and Great Society coalition. There is plenty of analysis out there to help us trace how, for instance, New Deal housing and transportation policies created the car-dependent, single-family-dwelling, racially segregated suburbs that formed the social bases for early conservative revolts in the Republican party (in California and the Southwest, e.g.) and later professional-managerial class splits from the rest of the working class in the Democratic party (in New England, e.g.). Labor histories examine the way union leadership’s compromises with management and commitment to rooting out radicalism undermined its very source of their power in the long term. At the level of intellectual history, two recent books help us appreciate how theories of governance associated with the neoliberal turn originated in part within the midcentury liberal coalition, becoming part of the Democratic party’s approach to policy analysis well before Reagan’s rise, or even Carter’s turn to the right. One such account is Elizabeth Popp Berman’s Thinking Like an Economist, which tells the story of the growing influence of the “economic style” within the Democratic party starting in the Kennedy Administration. Another is Paul Sabin’s Public Citizens, an account of how the liberal lawyers of the “public interest movement” critiqued the administrative state, market regulation, and “interest group” politics that would become key parts of the Democratic party’s version of neoliberalism. Popp Berman and Sabin make convincing cases that much of what we now know as the neoliberal style of policy thinking was developed by elite-trained members of the New Deal coalition to rationalize and even sometimes to democratize liberal governance. They fill in an important piece of the narrative on the rise of what we now know as the neoliberal style of governance. ### Building the beachheads Following the “thought collective” approach, Popp Berman traces two different networks of economists as they intermingled and gained influence over the course of the 1960s and 1970s. One network laid the groundwork for monetized cost-benefit analysis; the other built the foundation for the idealized models of markets that guided antitrust reforms and the deregulation of infrastructural industries. The first arrived through the military. Economists began to build the intellectual apparatus for modern cost-benefit analysis at the RAND Corporation, which was originally founded and funded by the Air Force to continue the weapons and operations research begun during World War II. Economists were part of a team developing ways to rationalize weapons development and deployment. Everybody at RAND thought that some sort of mathematized cost-effectiveness analysis was needed, but it was economists who pointed out that one could arrive at a general notion of “efficiency” by placing a monetary value on all possible options. Soon, RAND became an epicenter of postwar quantitative social sciences, home to many of the most influential postwar rational choice theorists (Thomas Schelling, Kenneth Arrow, Paul Samuelson, Herbert Simon, Theodore Schultz, etc. etc.). Robert McNamara, who had himself been a cost-effectiveness analyst for the Air Force in World War II and applied similar techniques in the Executive suite at Ford Motor Company, generalized “weapons systems analysis” to “systems analysis” and brought the approach with him to the Department of Defense. Cost-effectiveness analysis became an important part of several aspects of military strategy, but it was the “Planning-Programming-Budgeting System” (developed to guide the more bureaucratic aspects of the DOD) that had the most lasting institutional and intellectual influence. In 1965, President Johnson ordered its use for cross-executive-branch planning, requiring agencies to devote staff time to defining objectives and developing ways of measuring progress toward them. Though President Nixon shut PPBS down in 1971 due to widespread resistance to its implementation, Popp Berman argues that the program created a “beachhead” for monetized cost-benefit analysis. It did so by introducing the question of cost-effectiveness and goal definition for the first time at many agencies, and creating specific subdivisions—often called Offices of Policy Planning—dedicated to asking such questions. PPBS also created a demand for a specific type of policy analysis, which reshaped how many bureaucrats and policy evaluators were trained—a shift from “public administration” to “public policy.” Many of its promoters continued to have profound influence on the framing of policy questions. Charles Schultze—President Johnson’s Budget director who migrated to Brookings and eventually to Chair Jimmy Carter’s Council of Economic Advisors—referred to liberal economists of this sort as “partisan efficiency advocates,” perfectly encapsulating the perceived neutrality of cost-effectiveness as way of cutting through values-talk in a world of connivers and moralists. In the meantime, another group of liberal economists journeyed to Washington. This looser network of “Harvard School” industrial organization scholars focused not on administration, but on competition. They theorized markets and the way regulation shapes competitive dynamics. Unlike cost-benefit analysts, I/O economists did not introduce economic analysis to a new terrain. Instead, they introduced a new form of economic analysis built on neoclassical rather than institutionalist foundations, and oriented toward “efficiency” rather than the balancing of multiple interests. In doing so, they cleared space for the more recognizably neoliberal Chicago School of I/O, which more strongly emphasized markets’ ability to “self correct.” The Harvard School approach to antitrust and regulated industries emerged around the same time as weapon systems theory, but it was not until the 1960s that Harvard Schoolers began to have an impact on policy. In 1965, Johnson appointed Donald Turner as the first economist to head the Antitrust Division at the Department of Justice, and many economists followed. Economists gained a stronger foothold at the Federal Trade Commission in 1970 after Ralph Nader’s denunciations led Nixon to reorganize the agency, creating an Office of Policy Planning and strengthening the Bureau of Economics, among other efforts. Soon, I/O economists—mostly trained at Harvard and Yale—were marching into these institutions. They brought with them the perspective that economic regulation should aim primarily or exclusively at allocative efficiency and give up on ostensibly noneconomic aims such as decentralizing political power or preserving rural communities. Their impact remained limited at first—despite near unanimous support for deregulating transportation industries as early as 1960, for example, they made no headway for years—but they gradually built the conceptual foundations for what we now think of as “economic” approaches to antitrust and regulated industries. ### The economic style By tracing these two distinct inroads for economic analysis, Popp Berman highlights the contingency of a distinctive and unitary “economic style.” Systems analysis was focused on effective decision-making and efficiency in public administration—it did not have anything in particular to say about how to regulate markets or whether social spaces should be set up as markets in the first place. Harvard School I/O economists, on the other hand, were not concerned with the practicalities of the administrative state—let alone the military. The two approaches need not have come together. But as Popp Berman highlights, there was also a strong complementarity between the two approaches. For one thing, they shared a common intellectual foundation focused on designing “efficient” systems which attempt to maximize the value of a system or choice, and define value in monetary terms. For another, they provided complementary justifications for an approach to policy that seeks to make the real world more like idealized markets. Want to make public administration cost effective? Want to make sure a given area of social life results in allocatively efficient outcomes? Promote market competition and provide the minimum subsidy necessary to ensure that all are included in the market. This way of thinking was broadened throughout the 1970s, often with the support of research funds from government agencies—the Urban Institute, MDRC, and Mathematica developed in this environment. The economic style became a distinctive approach to governance, contrasted by frameworks that focused on rights, justice, harmony with nature, and the empowerment of marginalized groups. In healthcare, liberal economists were supportive of universal coverage but skeptical that a public system would be the most cost-effective way to provide it: better to promote “cost sharing” and “competition” through an insurance market, set up a limber regulatory agency to ensure basic consumer protection norms are followed, and means test subsidies to the demand side. In environmental policy, liberal economists were supportive of reducing pollution but skeptical of command-and-control regulation that would determine how much would be acceptable where: better to create a cap on total pollution, create a fixed amount of tradable rights to pollute, and then let the market set the efficient level for each facility. In education, liberal economists were supportive of increasing access but skeptical of expanding public schools: better to subsidize students through grants and, in higher education, debt. She also shows how, despite their emphasis on policy and not politics, liberal economists utilized their “neutral” perspective to manage conflicts between constituencies. An early example is when economists within the Johnson Administration opposed the Economic Opportunity Act’s requirement that public benefit recipients have “maximum feasible participation” in designing the programs. They opposed it for neutral (though not entirely disinterested) reasons: it directly conflicted with centralized evaluation of welfare programs experts through the lens of cost effectiveness. (Berman notes that, to the director of evaluation at the Office of Economic Opportunity, “education was a production function.”) But this opposition became useful to Johnson when several collectives of welfare recipients used federal funding to organize actions that challenged city governments and urban political machines. When mayors in these cities—often Democrats in white-dominated political machines governing large Black populations—began complaining to Johnson, it was convenient to roll back maximum feasible participation using the disinterested economists’ objections. A later example is more frequently associated with the transition to neoliberalism and will get us closer to understanding it: deregulation of regulated industries. This was an issue on which neoliberal and liberal economists agreed (if not on all the details). And, crucially, it was an issue that was given a populist bent by the Naderite public interest and consumerist movement. As Berman puts it, consumerists “thought that regulation [of the sort that then prevailed] mostly served the interests of incumbents at the expense of consumers, although they approached the topic with a focus on power and equity, rather than market efficiency.” To get a full sense of this deregulatory shift, we need to bring the public interest community that Sabin chronicles into the story. ### The rise of the citizen-consumer Sabin argues that the overarching concern of the public interest movement was to empower a professional set of “citizen-consumers” to disrupt corporatist forms of governance in which the “public interest” was undermined by the corrupt relationship between big businesses, unions, and regulators. Whether focused on environmental preservation, consumer protection or workplace safety, this vision was grounded in a critique of prevailing regulatory approaches but not of regulation as such. What was needed, from the critics’ perspective, was a reexamination of the substantive goals of regulation—incorporating concerns about environmental degradation and the corrupting influence of business on democratic culture, for example—and ongoing pressure on administrators to do their jobs rather than giving in to industry capture. What was needed was a lobby for the “public interest.” Although the public interest movement thought of itself as an insurgency from outside “the system,” it was, in many ways, a product of it. It was predominantly populated by white men from the upper middle class trained as elite lawyers. Nader himself was educated at Harvard Law and recruited much of his staff—many of whom would go on to form their own organizations—from Harvard or Yale. At one point in the 1970s, one third of the graduating class of Harvard Law applied to work for Nader. The preoccupations and methods of the movement were, in many ways, reflective of the legal liberalism that prevailed at elite law schools at midcentury. The idea of a “public interest” to be protected by public-minded experts came out of Progressive and New Deal conceptualizations of the purpose of regulation—the “public interest movement” simply doubted that the public interest would be served if the experts were only in government. This basic critique of regulatory capture and institutional sclerosis was first articulated by former New Dealers like James Landis, Louis Jaffe, and William O. Douglas as well as influential left-leaning law professors like Charles Reich. (Lest we flatten, we should keep in mind that other former New Dealers went in different directions.) The prioritization of working “within the system,” especially through impact litigation, is partially rooted in the liberal lionization of the success of the legal arm of the Civil Rights Movement and the Warren Court’s reimagining of the Constitution. But, like liberal economists at the same time, the public interest movement sought to distance itself from the coalition politics of midcentury liberalism. Drawing from the New Left, they sought to create space for “participatory democracy” that could undermine “structured power.” Doing so required “people who knew how to play the Washington game” to lead, rather than “black tenant farmers in Mississippi.” Consequently, they built issue-specific organizations with small staffs of elite-trained lawyers. Sabin argues that the Ford Foundation, at that time led by former national security advisor McGeorge Bundy, played a crucial role in developing the model by having his elite network advise the young upstarts, among other efforts. Less influential than the funders were the members, whose participation was mostly restricted to mailing in money and serving as a list of potential named plaintiffs in strategically placed jurisdictions. And since participation was limited to funding lobbying and litigation, member bases tended to be upper middle class and white. They were more likely to donate when they worried about the capacity of government to protect the public interest (in Republican administrations) than when they trusted those in power (in Democratic ones). The more public interest organizations that were created, the more they competed over this narrow base of funders. In its heyday, the public interest movement was often at loggerheads with the liberal economists Popp Berman chronicles. It was perhaps the most important promoter of the “command-and-control” vision of the administrative state that economists have so often decried. The wave of environmental laws in the early 1970s is a prime example. These laws explicitly—and notoriously—prevented the new Environmental Protection Agency from balancing environmental benefits against monetary costs to business.2 They mandated pollution level setting which provided “an ample margin of safety to protect the public health” rather than one which used marginal reasoning to calculate an “optimal” level. They created “technology-forcing” rules that required the adoption of anti-pollution measures, rather than leaving it to the market. Alongside the emphasis on strict regulation deadlines and citizens’ right to sue agencies and prevent stalling, public interest movement standards were designed to prevent capture and to rebalance societal priorities, not to internalize the externalities of pollution given current preference functions and technological capacities. Indeed, economists loudly objected to these rules. At the time, they were roundly ignored. The public interest movement’s position on market competition was more ambivalent. Many arms of the movement were critical of the corrupting influence of the profit motive, and the impacts of unchecked development on local communities and the environment. Their belief in citizen activism and (in some circumstances) union democracy caused panic among many businessmen—Ralph Nader was notoriously spied on by agents of Ford, and he was the central antagonist in Lewis Powell’s notorious memo to business leaders on the need to create a more unified political strategy. However, “the public interest” was often conflated with the interests of the consumer, often without attention to the inequalities between consumers. Though the consumers who populate consumerists’ imaginative world are different than those of the neoclassical economist—they are so-called citizen-consumers, capable of protecting their interests through collective action and government intervention rather than market choice—this distinction made little difference when some consumer interests (in something like low prices, say) were pitted against others (like higher revenues and wages). Additionally, market competition presented an attractive remedy to capture and corruption, promising to break up the perceived cartel of big business and big government. Because they were not tied to any particular economic theory, these notions remained open to interpretation through a neoclassical lens. ### Explaining deregulation The convergence of Popp Berman’s economic style and Sabin’s citizen-consumer opened the path to deregulation. The importance of this union is clearly demonstrated in the history of the transportation industry. Starting with the Interstate Commerce Commission in 1887, the prevailing approach to transport regulation involved a specialized federal agency responsible for restricting entry and price competition, and fostering stability and geographical equity through rate regulation. Although the agencies involved were nominally independent, in practice they closely communicated and coordinated with the companies under their purview. This approach to regulation tended to keep prices well above marginal or even average total cost—indeed, in the airline industry, carriers often competed on luxury, driving costs and prices up rather than down. For the consumerist wing of the public interest movement, the problem with this model was that the collusion between big business and complacent regulators hurt consumers: high prices, limited service, and a disinterest in consumer satisfaction. For I/O economists, the problem was that regulated industries were inefficient because they did not harness the power of market competition to lower prices and improve service. Firms were using the regulatory process to rent seek at the expense of consumers. These justifications could have led to differing policy orientations. It is not too hard to imagine consumerists favoring a more command-and-control approach that mandated lower pricing margins and looser standards for entry. They might have favored giving consumer representatives formal representation in the agency (as with the Consumer Advisory Board in the National Recovery Administration of the 1930s and the Consumer Protection Agency they were contemporaneously advocating for) or a private right of action to challenge decisions about prices or new entrants. But by the 1970s the economists had spent over a decade elaborating a solution. Brookings alone had published dozens of reports from its designated research project on deregulation. What Berman calls the “economic style” was growing in influence more generally, such that consumer power and freedom were increasingly conflated with neoclassical notions of consumer sovereignty. (The emergence of commercial speech doctrine from public interest impact litigation strategies to break up professional cartels is another resounding example of this convergence.) In this context, the two interpretations merged into one: corporatist forms of regulation were said to result in rent-seeking through regulatory capture, representing a conspiracy against consumers that inefficiently reduced consumer surplus and increased deadweight loss. By the Ford administration, the two constituencies had converged on this issue. And they were joined by neoliberals—more specifically Chicago School I/O economists, who had their own, more radical, theories of agency capture and inefficacy. Their joint cause gained momentum when a group of liberal and neoliberal economists advised President Ford that transportation deregulation would help reduce inflation (even though they privately admitted it would not). Ford was on board, and he was joined by staunch consumer advocate Ted Kennedy. Carter, who actively courted Nader’s approval throughout his term, prioritized deregulation across transportation industries and beyond. By the time Reagan took office, airlines, trucking, cargo shipping, and railroads were either deregulated or very nearly so. In his own account of this period, the journalist Binyamin Appelbaum reports that, as predicted, prices dropped across the board, especially in highly trafficked areas. Without mandated cross-subsidy, companies disinvested in rural and other low-population regions. In some industries, reliability and safety increased. Meanwhile wages and conditions for workers deteriorated. And increased competition for profit led to greater concentration of control, often combined with an offloading of responsibility through creative use of corporate forms—outsourcing, contracting, franchising, and so on. Executive compensation and stock prices soared. Soon enough deregulation spread to telecommunications, finance, and utilities. A similar pattern followed: lower overall prices with increased inequality. In some industries, volatility and fraud increased dramatically, as eventually demonstrated by the California blackouts and the escalating series of financial crises that culminated in the 2007 meltdown. Meanwhile, the economic style more generally had begun to get an easier and easier hearing in the Democratic party. Competing discourses of rights and justice gradually lost relevance; the interests they expressed came to be seen as so many preferences of interest groups—to be efficiently balanced through technocratic application of optimization functions. The public interest movement, with diminishing returns to fundraising and diminishing standing among policy elites, would have to get in line with all the other “special interests.” Indeed, according to Popp Berman, the economic style became the Weltanschauung of Democratic party elites from the Carter Administration on. And Republicans took advantage as they took power. Berman points out that Reagan used economic analysis when it served his political agenda of “regulatory relief”—to require cost-benefit analysis for Executive Agencies, to promote the consumer welfare standard in antitrust, to rein in consumer protection at the FTC—but ignored it (and even cut off funding to policy research) where it went against his political agenda in domains like healthcare funding, environmental regulation, and social welfare policy. Thus began a rightward ratchet effect through which liberals internalized the economic style as a neutral limit to their own political ambitions, while conservatives opportunistically used the economic style as a neutral justification for their agenda where it served them, and ignored it where it did not. ### Rethinking the economic style There is no question that something that we might call the “economic style” is characteristic of contemporary policy discourse, and Popp Berman makes a convincing case that this style gained sway through the Democratic party well before the more radical form that arrived with the Reagan Revolution (or the Carter Administration). She vividly illustrates how even the translation of avowedly social democratic goals into the argot of social welfare functions and self-equilibrating markets can create blindspots while clearing conceptual space for the rightward ratchet that has been called neoliberalism. But Popp Berman’s account has an important flaw: it risks overlooking the political and methodological struggles within economics that made this style and its purported neutrality possible. Attending to these struggles highlights that the influence of liberal economists cannot be entirely separated from the influence of neoliberals—the battle simply took place earlier. Economic advisors to the Roosevelt and Wilson administrations were trained in a discipline which was pluralistic and predominantly concerned with how public institutions should ensure that increasingly consolidated corporate power was held responsible to the public interest.3 Its economic style (usually just referred to as “political economy”) was much more heavily historicist, institutionalist and, eventually, Keynesian. Many influential economists in this era were skeptical of overly mathematized and deductive models—and, indeed, some of them used “neoclassical” as a term of derision for those who fetishized perfectly competitive markets rather than theorizing conflicting interests and the role of collectivities in shaping outcomes. These were the economists who staffed the early Federal Trade Commission, the Office of Price Administration, the Agricultural Adjustment Administration, the National Recovery Agency, and so on. Many institutionalist thinkers were marginalized or forced to disguise their views in the politically repressive environment of the 1950s and others found themselves isolated as policy shifted more to stimulating demand rather than reforming institutions. Meanwhile, the highly mathematized neoclassical methods that neglected questions of power were much more likely to attract Cold War research funding (at RAND, for example). At the same time, the more radical implications—both political and methodological—of these frameworks were smoothed over to fit within an overall “neoclassical synthesis.” As neoclassical thinkers gained control over departments, they often prevented Institutionalists, Keynesians, and Marxists from gaining a hearing in the mainstream of the discipline in the United States (though it took decades for pluralism to truly disappear). These alternative methods became “heterodox,” and developed their research programs at less prestigious and less well-funded departments. In developing the neoclassical framework and pushing against these alternative approaches, liberals and neoliberals acted as friendly rivals. The sense of a shared “economic style” was created by suppressing forms of economic analysis built on foundations other than efficiency, rationality-as-preference-maximization, markets as variations on a perfectly competitive theme, and the like (“human capital” for labor markets,4 “information economics” for consumer markets,5 “public choice theory” for political institutions). Thus, even though this economic style may have first been successfully applied to policy by liberal economists operating within the Democratic Party, we should not treat their influence as independent of the neoliberals. Added to the dominance of economics within the Democratic Party is a struggle over the meaning of economics itself. ### Reflecting on self defeat Armed with Sabin and Popp Berman’s accounts, we can begin to piece together a more detailed picture of how New Deal and Great Society liberalism set up the conditions for its own defeat. The economic style and the public interest movement were both manifestations of postwar optimism about human reason, expertise, and the possibility of finding neutral ways to serve the public interest. They built on Progressive and New Deal efforts to rationalize governance, which themselves were premised on a notion of a public interest that balanced the collective needs of different constituencies. Very few of those involved in making these internal critiques of the liberalism that came before predicted that they were clearing the way for a defeat of the liberal coalition. Most operated on the presumption that conservatism (not to mention socialism or communism) had been resoundingly defeated—that the New Deal regime would perpetuate itself. Yet, through their disdain for coalition and confrontational politics, they failed to appreciate how their own positions depended on the mobilizations, interest groups, and deal cutting that made the midcentury liberal coalition possible. In the case of the public interest movement, their antagonistic strategy to push sympathetic liberals in their direction was increasingly undermined as liberals left Congress. In the case of economists, they became more influential just as the coalition was hollowing out. When the coalitions shifted, so did the impact of their work. What lessons do these historical reinterpretations hold? Popp Berman provides a good starting point in identifying the specificity of the economic style and encouraging progressives and leftists to recover and develop other registers for policy analysis. Since economists tend to present their style as universal, parochializing it forces open the conversation about how to think about economic institutions and the values that shape them. Still, to identify the limits of an “economic style” risks treating the methodological questions within economics as settled, leaving only the question of how humble those who use those methodologies should be. And we do not just need to better situate economic analysis within an overall policy analysis; we need to rethink what economic analysis consists of. Doing so involves learning from the heterodox traditions that have not had sufficient attention or support to develop detailed policy programs. What would this look like? Popp Berman notes that “in making efficiency (in various forms) its core value, the economic style often treats efficiency as self-evidently good, rather than itself a choice that sometimes competes with other values, like equality or democracy.” But rather than balancing efficiency against other values, scholars of law and economy have argued we should abandon it altogether. The basic economic concept (and the one that applies most frequently in I/O) is Pareto optimality—a state of the world in which nobody could be made better off without at least one other person objecting. But, aside from being regressive and based on absurd assumptions about human decision-making, this concept rarely has purchase in the real world. Kaldor-Hicks welfare maximization, which seeks to avoid the limitations of Pareto efficiency through adopting the policy mix with highest total willingness to pay, ultimately experiences the same problem: it is biased in favor of the desires of the wealthy, requires unrealistic assumptions, and frequently leads to parodic results in practice (as when, say, bureaucrats need to measure the commercial value of biosphere collapse). In antitrust in particular, the analysis becomes even more tangled. “Allocative efficiency” is supposed to be traded off against “productive efficiency,” but, ex hypothesi, an allocatively efficient outcome is one in which all resources are already being used optimally—that is to say, productive efficiency is an element of allocative efficiency in the standard model. As Sanjukta Paul has made clear, in order to square the circle, the concepts must be modified, such that allocative efficiency means, in essence, low consumer prices and productive efficiency means consolidation that facilitates low prices. So the purported trade off is actually between something like the low prices that supposedly come with concentrated control and the reduction in competition that results from consolidation—“efficiency” does not enter into it. We can agree with Popp Berman that antitrust policy should not just focus on consumer prices (or on output restrictions that are supposed to mechanically cause increases therein), but we can disagree that this means “trading off” against allocative efficiency. Within the set of values we consider, we might include a more modest and intuitively appealing notion of efficiency, meaning economizing on some dimension (time, energy, money), a version that would make sense to trade off against other values—e.g. economizing on production time vs. creating humane working conditions. This line of analysis leaves open the question of how to balance those values–but if we think that balancing values is part of the task of politics rather than purely a matter of calculation, that is a feature rather and not a bug. Indeed, any post-neoliberal style of policy analysis worthy of a broadly social democratic coalition must also reexamine the relationship between experts and the messier side of politics. The attempts at disinterest and neutrality—of rising above “interest groups”—from economic stylists was far from neutral: it helped ratchet policy discourse to the right. Its real valence was to focus power in the hands of technocrats, who then pressed a form of policy analysis with regressive tendencies. The public interest movement had a better sense of politics. It highlighted the insufficiency of creating agencies or programs designed to serve the public interest and the need for insurgent expertise to prevent agency sclerosis and capture and to workshop new ideas for reforms. It also provides a model of policy analysis that does not present itself as disinterested or value-neutral and that takes seriously the need to create programs that reproduce political conditions of accountability and deliberation rather than just targeting static distributional/allocative outcomes. Yet, as Sabin tells it, the public interest movement is also its own cautionary tale of attempting to rise above coalitions. It institutionalized insurgent expertise not in base-building organizations working together with similar organizations as part of a broader power-building project, but in specialized nonprofits hemmed in by funders. This is a model of change that works best when confronting officials and politicians who are sympathetic, when it can mobilize unorganized people by scandalizing them, and when it is not going up against a better funded and similarly organized opposition—conditions that obtained in the 1960s and early 1970s, but not the present. The foundation-funded insider-advocacy model is even less effective in front of a reactionary judiciary or competing for the attention of the small fraction of Democratic congresspeople who do not just take their agenda from lobbyists and consultants. Nevertheless, it remains the main way that left-leaning legal and subject-matter experts advocate for their causes. These are, accordingly, mostly rearguard actions. Meanwhile conservative organizations that built themselves on the public interest model are thriving. A form of expertise worthy of a left-liberal coalition that could move us past neoliberalism must be one that does not hold itself apart from base-building organizations or from political calculation. It must be one that breaks down subject-area silos that press for narrow specialized reforms and instead aims to find ways to build power and agendas that combine multiple issues into a mutually agreeable vision. Of course, there is always a risk that incorporating strategic and political considerations will degrade expertise into hackery. But part of the lesson of these books is that even purportedly disinterested policy advice can function as hackery in a given context. Being able to critically assess the complicated political valences of one’s analysis—and acknowledge one’s epistemic limits—is a superior way to manage this tension than pretending at disinterestedness. 6. ## The Last Days of Sound Finance Comments Off on The Last Days of Sound Finance #### Engine of Inequality: The Fed and the Future of Wealth in AmericaBy Karen PetrouWiley, 2021 When the Federal Reserve turned to unconventional monetary policy in 2008, many feared that we would soon see a return to the wage-price spiral of the 1970s. The combination of deficit spending and monetary ease raised the old specter of debt monetization, in which the Treasury sells its debt directly to the central bank instead of the bond market, thereby freeing itself from interest obligations and market discipline. (Pejoratively, this is referred to as “printing money.”) But while quantitative easing (QE) did involve the mass purchase of Treasury bonds by the Federal Reserve, the Fed was buying these bonds from private financial institutions, not from the Treasury itself. Instead of opening a direct line from the central bank to the Treasury (a public—and, in theory, democratic—entity) , the Fed’s “money printing” operation detoured around the Treasury to create new reserves on the books of primary-dealer banks. This was, at best, an indirect form of debt monetization. But inflation hawks nevertheless turned to the well-worn scripts of the 1970s to make sense of what was happening. By driving down interest rates on future government borrowing, they warned, QE would encourage wanton social spending and release workers from the discipline of the market. Wages would inevitably be driven upwards at the expense of profits.1 They need not have worried. Beginning with the Troubled Asset Relief Program or TARP, which bailed out private financial institutions while leaving indebted households underwater, post-crisis fiscal stimulus has prevented a collapse in consumption but done little to offset the astounding concentration of wealth and income at the top.2 For all these reasons and more, the Fed’s decade-long (and counting) experiment with the money printer has failed to resurrect the wage-push consumer-price inflation of the early 1970s.3 When advocates of economic expansion proclaim that “this is not a return of the 1970s,” it is meant to be reassuring. But should it be? Arguably, the late 1960s and early 1970s represented the most effective challenge to wealth concentration in the long twentieth century and the closest the United States has ever come to fiscal revolution.4 By contrast, unconventional monetary policy, even when it has lowered unemployment, has only intensified inequality. Instead of wage inflation, we got asset-price inflation and, following the worldwide supply shocks of the coronavirus pandemic, stand-alone consumer price inflation. Not downward but vertiginous upward redistribution. Economic historians have commonly argued that pandemics, wars, and other exogenous shocks tend to empower labor and compress income disparities.5 This prognosis was not borne out during the coronavirus crisis, when central banks around the world reprised their large-scale asset purchases and predictably drove asset prices to new heights. Between the first quarter of 2020 and the second quarter of 2021, the top 1 percent of US income earners averaged net-wealth gains of3.5 million per person, compared to \$5,300 among the bottom 50 percent.6 The picture is even more disturbing when we consider that one in five Americans is a lifetime renter. With the end of coronavirus moratoriums, the rapid inflation of property prices has left millions of households (disproportionately minority and female-led) faced with escalating rents and eviction.7 Just when catastrophic weather events are becoming a fact of life, basic shelter has turned into a luxury good.

The last three chairs of the US Federal Reserve have been loath to acknowledge any link between unconventional monetary policy and soaring inequality. Other central bank officials have been surprisingly forthcoming. In 2012, an anonymous report in the Bank of England’s quarterly bulletin admitted that rising asset prices had overwhelmingly benefited the top 5 percent of households due to their disproportionate share of financial assets such as stocks and bonds in their wealth portfolios.8 Although more evasive on the question of their own responsibility, both the Bank’s former Governor Mark Carney and former Chief Economist Andrew Haldane have recognized the role played by QE in exacerbating extreme wealth concentration.9 Others—including in-house economists at the Federal Reserve and Bank for International Settlements—have added their voice to the chorus, while in the meantime a handful of academic economists have undertaken the slow work of demonstrating the causal connections between ultra-low interest rates, central bank asset purchases, and the swollen asset portfolios of the wealthiest households.10

### Asset-price strategy

Taken as a whole, this literature is damning in its assessment of institutional failure on the part of central banks and fiscal authorities. Yet for the most part, it lacks the panoramic scope that would propel it forcefully onto the public agenda. Karen Petrou’s Engine of Inequality is the first monograph to systematically investigate the distributive impact of the Federal Reserve’s unconventional monetary policy and to do so with the explicit aim of advancing alternatives. Although closely engaged with a dauntingly technical literature, the book is eminently accessible to a wider reading public. This makes for an enormously important contribution to the debate on wealth concentration and its institutional drivers.

Petrou aptly describes the Fed’s large-scale asset purchases and ultra-low interest rates as a kind of “trickle down” monetary policy. In theory, lowering the price of money is intended to encourage banks to step up their lending to households and businesses, whose higher risk profile would otherwise have deprived them of access to credit. In turn, this new lending would enable an expansion of personal consumption and business investment, both of which would generate new employment across the economy. Things did not turn out as planned, however. Instead of channeling liquidity downwards, banks have proven highly reluctant to lend to low- and moderate-income households. Credit flows to the business and corporate sector have privileged financial investments like share buybacks and private equity deals, whose main purpose is to bid up stock prices. If this is “supply side” policy, it is only in the sense that it has expanded the supply of credit in the service of asset price appreciation. There has been very little increase in the kind of long-range capital investment that would favor high-wage employment or empower workers. While the downward trickle failed to materialize, high-end portfolios have continued to appreciate. As a loose supply of credit bids up the price of financial assets, the benefits flow to those who hold relatively more of their wealth in the form of stocks, private equity, and the like.

Where some see unintended consequences, Petrou reminds us that raising asset prices was the Fed’s explicit goal. Four years into QE, Ben Bernanke still counted on “declining yields and rising asset prices” to “ease overall financial conditions and stimulate economic activity” across the board.11 Petrou rightly traces this doctrine back to former Federal Reserve chairman Alan Greenspan, who from the mid-1990s to 2006 presided over a historic boom in asset prices. The foundation of the boom was the so-called “Greenspan put,” an implicit guarantee that the Federal Reserve would protect asset markets from downside risk, thereby assuring wealth holders that their portfolios would appreciate. Though he shared the central banker’s traditional hostility to wage inflation, Greenspan saw asset-price inflation as benign.14 Greenspan sat back and let “worker insecurity” do the rest. Labor figured in his political calculus only to the extent that workers might also become asset owners. If everyone could own (or aspire to own) a home, workers would be less inclined to fight back against stagnant wages.

This democratic twist on the asset-price strategy—always problematic—is no longer on the table. Homeownership rates fell by more than 5 percent following the subprime crisis of 2007 and house prices are now out of reach for middle-income earners in many major cities. As Petrou demonstrates, low-cost bank credit has become even less accessible to so-called “subprime” households, despite the trillions of QE intended to stimulate such lending. Even with historically low interest rates, the income- and asset-poor have become ever more dependent on credit cards and extortionate payday loans.

### A limited toolbox?

Petrou is illuminating on the distributional impacts of unconventional monetary policy. Her proposals for exiting the impasse, however, are less convincing. She argues that we need to act hard and fast to halt the momentum of asset-price inflation, insisting that the only tool we can count on is monetary policy. If the Fed created this mess in the first place, then only the Fed can get us out of here. Thus, she sees the unloading of the Federal Reserve’s bloated balance sheet along with a steady rise in interest rates as the best medicine for the job. By contrast, she flatly dismisses fiscal solutions including a wealth tax, an increase in federal spending on education and social welfare, or a federal infrastructure program. For Petrou, all such interventions are futile given the longueurs of the budgetary process and the inertia of the existing system of government transfers.

Given the crushing disappointment of Biden’s first year in office, it is easy to see why pragmatically minded reformers might want to abandon the fiscal toolbox altogether. We live in a time where even the most conservative Keynesian maneuvers look wildly utopian. So, realists retreat to the technical fixes of central bank monetary policy as the easiest way out. Petrou’s failure to envisage a more ambitious public-spending agenda is motivated by more than pragmatism, however. At one point, she rejects any “overtly redistributive proposal” for equalizing wealth on the grounds that it “would hurt what’s left of the US middle class.” Elsewhere, she resurrects the classic “crowding out” thesis, once beloved by fiscal conservatives. In a curious inversion of the formula that once saw government deficit spending as crowding out private investment, Petrou contends that “increased federal deficits [have] destroyed public wealth” (emphasis added). Supposedly, “the more the deficit grows, the less net wealth US taxpayers collectively own and thus the less there is not only to go around, but also to devote to progressive policies.”  The logic is unclear, even incoherent: why can’t deficit-financed public investment increase public “wealth”? Moreover, accounting principles mean that a government deficit must correspond to a surplus on some private balance sheet—the opposite of the negative-sum conflict imagined here. Petrou seems unaware or unconcerned that recent experience (ten years of post-financial crisis deficit spending, followed by lavish if temporary public spending during the coronavirus crisis) has powerfully refuted old orthodoxies.

If Petrou’s implied point is that elite reactions to deficit-spending will vary depending on how (and for whom) money is being spent, she is right. Budget constraints reflect the struggle for power, not the implacable force of supposed economic laws. But Petrou seems genuinely, even quaintly, devoted to financial conventions that few others are following. Like Bill Clinton, who cast the New Democrats as Eisenhower Republicans fighting the excesses of Reagan Republicans, Petrou is a center-leftist stubbornly attached to yesterday’s conservatism. Having outlined QE’s outrageous transgressions of the rules of sound finance and its contributions to inequality, she shows little appetite for breaking those same rules on behalf of redistribution. She rejects not only Modern Monetary Theory (MMT), which sanctions permanent debt monetization, but even “helicopter money,” the more limited form of emergency central bank money creation advocated by Milton Friedman and (at one point) Ben Bernanke.

This leaves Petrou with a slim set of monetary and regulatory options to choose from. Ultimately, she looks to monetary tightening and fiscal restraint to rein in asset prices and replenish the savings accounts of a rapidly receding “middle class.” Yet she does not explain how low- and middle-income households—already “struggling to manage day-to-day consumption”—can simultaneously maintain their living standards, increase their savings rate, lose access to consumer credit, and face higher interest charges on existing debt. The fact is that monetary policy alone is impotent to address the gross inequities of our time unless the fiscal levers of spending and taxation are also put into play. As Gerald Epstein and Juan Montecino remark, the paradox of our current conjuncture is that “both loose and tight monetary policy are likely to be disequalizing.”15 Given this dilemma, a lack of “utopian” vision turns out to be a practical liability. Absent a more imaginative fiscal politics, Petrou can only offer up a progressive version of sound finance.

### Abandoning “shared growth”

Petrou’s call for tighter monetary policy has now been answered by Jerome Powell’s Federal Reserve, which in July 2022 hiked interest rates by three quarters of a point, the highest percentage in decades, for the second month in a row. This policy turn represents a fatal misreading of the economic landscape. The current run up in consumer prices is driven by the supply-chain bottlenecks of the coronavirus pandemic, the Russian invasion of Ukraine, and profit-push price hikes on the part of business—not a return to the wage-price spiral of the 1970s.16 A rise in interest rates will do nothing to resolve these supply-chain issues and will certainly not help low-income workers, the unemployed, or the chronically indebted.

The Fed’s conviction that low-wage workers must be punished for over-exuberant demand is grotesque. But it is internally coherent. Powell acknowledges that the point of tight money is to reduce business investment and “temper growth.” This economic slowdown will ensure that supposed “wage pressures move back down,” rectifying the “real imbalance in wage negotiating” which Powell now sees as a dangerous consequence of easy money. Contrast this with Petrou, who claims that tighter money will increase investment and employment: “The lower these [rates] go, the less companies spend on investment, the harder it is for lower-skilled workers to find jobs.” She acknowledges that investment is led by demand (“The less the nation spends for overall consumption of goods and services, the less need for businesses to invest in new plants and infrastructure to meet demand”) but believes that somehow tighter money will mean more demand. These tortured constructs reflect a stubborn refusal to accept what Powell freely admits: monetary policy simply cannot reverse hyper-wealth concentration nor revive what Petrou calls “shared growth.”

It is worth remembering the actual historical contours of “shared growth.” The last time we saw any significant compression of wealth and income inequality was in the postwar era, when federal and state governments poured money into public construction projects and lavishly subsidized the “private” manufacturing sector. Vigorous growth rates meant that wages could rise without threatening the profit share of national income. This is how the limited Keynesianism of the New Deal state was supposed to work. The period after 1965 saw a significant expansion of social and redistributive public spending relative to defense outlays and an upsurge in labor militancy across the private and public sector. When wages kept rising, even as industrial profits came under threat from foreign competition and rising oil prices, industrial employers and financial asset holders alike quickly lost interest in maintaining the Keynesian peace. No longer a respected partner, unionized labor had revealed itself as an enemy of the free-enterprise system and, via “wage-push inflation,” the prime cause of the nation’s economic ills.

Wage-push inflation could just as well have been dubbed profit-push inflation, since the rise in consumer prices reflected an ongoing struggle between workers and business owners rather than the outright victory of labor unions. Yet the fact that the distribution of income could shift, even momentarily, in favor of workers was enough to dissolve any commitment on the part of business to shared growth. (In 1974, a young Alan Greenspan told a group of social-service bureaucrats that Wall Street stockbrokers were harder hit “percentage wise” by inflation than the poor—an undiplomatic statement that revealed what it really meant to “whip” inflation).17

### Monetary policy and the fiscal state

The long counter-revolution of the last half-century—which has seen central banks relentlessly attack the slightest sign of wage growth while doing all in their power to promote the inflation of asset prices—would not have surprised Michał Kalecki. In a famous 1943 essay, the Polish economist predicted that sustained efforts by government to subsidize public services, welfare, and wages would at some point release workers from the fear of unemployment and therefore generate a powerful backlash coalition of industrialists and rentiers.18 More than merely diagnosing the dilemmas of full employment, Kalecki’s prescient essay also suggests that the path to revolution might pass through and beyond the fiscal state. When social spending and redistribution is pushed too far, industrialists and wealth holders unite in opposition. But what would it mean to deliberately push Keynesianism beyond these limits—as well as beyond the familial, racial, national, and class-based limits within which the welfare state has historically been confined? Put differently, is it even possible to entertain the prospect of communism today without some sense of how to collectivize the process of money and debt creation?

Contemporary Marxists have neglected these possibilities. Too often, they invoke a strangely philological understanding of revolution, one attuned to an era before the fiscal state and modern central bank, in which workers merely had to take over the means of production while militants seized the executive powers of the state.19 But any radical challenge to capitalism today would also need to seize the means of money creation, collective spending, and taxation. When Marxist economists dismiss MMT as a Keynesian half-measure, they are stating the obvious. There is real value in MMT’s claim that fiscal and monetary actions should be judged by their real-world effects rather than their distance from supposed economic laws. But in other respects, it remains committed to the Keynesian project of dialectical mediation, with all its built-in buffers—the distinction between productive and unproductive labor, the confinement of social democracy within national borders, and the fear of excessive wage growth.20 That this is a limited project goes without saying. The whole point of Keynesianism is to moderate the relationship between labor and capital, so that central bank money creation and the state’s power to tax and spend never lead to the full-blown socialization of finance. It is easy to see why Petrou—a social liberal with distinctly unambitious fiscal politics—would shun MMT’s promise to dissolve financial constraints. But for Marxists, time spent rehearsing old critiques of reformism is time away from more urgent tasks. Until we develop our own politics of collective finance, the left will face an unsatisfying choice between celebrating QE or defaulting to a hawkishness that is ultimately hard to distinguish from sound-money nostalgia.21

So far, the most creative proposals have come from activist groups like Strike Debt! or the more advocacy-focused New Economics Foundation and Positive Money. Each of these have drawn on the full range of monetary and fiscal alternatives to advocate for a more redistributive economic policy. Although hardly exceptional by the historical standards of Keynesian (or even monetarist) thinking, their demands—for a more expansive social-spending agenda, mass debt forgiveness, or a “Quantitative Easing for the People”—hold far more promise than the return to sound finance promoted by centrists like Petrou as well as the occasional Marxist.

If skeptics are right about one thing,  it is that such experiments will never be implemented at scale without a fight. Macroeconomic policy is not, and should not, be an exclusively technocratic or parliamentary affair. The fiscal state is just as capable as the factory floor of inciting transformative conflicts. The decade-long upsurge in public-sector militancy is one instance of a labor struggle that directly touches the levers of public finance, and therefore represents a crucial site of fiscal intervention.22 Public-sector unionism is sometimes dismissed as peripheral to the real work of anti-capitalist struggle on the grounds that the fulcrum of capitalist power relations lies in the profit-making private sector. This anachronistic assumption misreads the last century of economic organization, which saw “private sector” surplus-value production massively underwritten by the state, whether through direct subventions, tax expenditures or government contracts, and thereby misses the hidden affinities between public- and private-sector unionism. It also overlooks the genuine fear that public-sector workers are capable of inspiring among political elites, as when Fed chair Arthur Burns described the 1970 postal wildcat strike as “an insurrection against the Government.”23

The relative importance of public-sector unions in today’s labor movement should not be lamented. As a movement that includes large numbers of women and minority workers, public-sector organizing has the potential to transcend the gender- and race-based trade-offs of earlier worker insurgencies. The sector’s visible dependence on government support—historically seen as a vulnerability—also offers unique opportunities. Public-sector movements are forced to dredge up problems which are usually submerged: the relationship between labor income, asset prices, and government spending; the distributional stakes of taxation and credit creation; the contradictory imperatives of reproducing an increasingly unequal society. That public-sector challenges can become sources of strength is demonstrated by initiatives such as the Bargaining for the Common Good Network, which builds coalitions between striking public-sector workers and their “clients” (students, parents, patients, commuters, etc.) while also coordinating campaigns that join the dots between government budgeting and everyday austerity. To get a sense of how far reaching such campaigns can be, the United Teachers Los Angeles (UTLA) has fought to lift the commercial property-tax limit on school funding; turn school-owned vacant land into affordable housing; and contain the power of the private equity funds which exploit renters (through their real-estate portfolios) as well as teachers (through state tax policies that privilege capital gains at the expense of funding for schools).24 This is a model for unionists public and private. More than that, it represents one way in which the reins of fiscal and monetary power might be seized from below.

7. ## Developmental Realism

#### The Neomercantilists: A Global Intellectual HistoryBy Eric HelleinerCornell University Press, 2021

In the wake of Donald Trump’s surprise victory in the 2016 US presidential election, defenders of the postwar liberal international order panicked over the return of their bête noire: neomercantilism. Signs of nationalist protectionism meant the revival of neomercantilism, a surge in trade wars, and the loss of the cooperation and openness that underpins globalization.

In light of the resurgent emphasis on the importance of energy independence, greater fixed investment, and reviving domestic production, now is a critical time to acquire a better understanding of this misunderstood and oversimplified philosophy. As defined by political scientist Eric Helleiner in his engrossing new book The Neomercantilists: A Global Intellectual History, neomercantilism was, before 1939, “a belief in the need for strategic trade protectionism and other forms of government economic activism to promote state wealth and power in the post-Smithian age.” Helleiner’s book is essential for grasping earlier theories of state-led development that diverged from classical liberalism, as well as their relevance in an era where pandemic-induced supply chain disruptions and Russia’s war in Ukraine have further eroded confidence in globalization.

One of Helleiner’s central theses is that neomercantilism had a truly global span, with endogenous roots outside of Western Europe and North America. Friedrich List—the nineteenth-century German economist whom scholars of international political economy regard as the most consequential theorist of neomercantilism—is therefore not singularly representative of the school of thought. Placing List within a broader ferment of political and economic discourse about industrial growth, Helleiner provides an expansive framework to account for the diversity of neomercantilist thought and its contributors, while still underscoring that List was instrumental to its transnational spread. In particular, List was influential in propounding the hazards of raw export dependency; the “self-reinforcing” reciprocity between industrial progress and expanding agricultural markets; and the intellectual, scientific, and civilizational advances that industrialization would facilitate and multiply.

At the same time, Helleiner emphasizes that List’s contributions to neomercantilism were quite discriminating, both in regard to the legitimate applications of tariff protection and to who and what regions of the world may employ and benefit from it. In a period where Great Britain was aggressively promoting free trade, List cited its own history of mercantile development to endorse infant industry protection for an extremely narrow range of European countries that he believed already possessed the resources conducive to modernization. “The tropics,” he wrote dismissively, did not have this recourse, and would benefit instead from European colonization.

Several neomercantilist thinkers disagreed with List’s strict parameters for legitimate protectionism and his chauvinistic notions about which countries could develop a diversified economy. The American economist Henry C. Carey, List’s closest intellectual rival, was among them. Originally a laissez-faire liberal, Carey became a chief theorist of the Republican developmental paradigm that catalyzed US industrialization from the Civil War through the early twentieth century. Helleiner explains that Carey justified tariffs on a number of grounds that went beyond shielding infant industries from international competition. Building on List and Alexander Hamilton, Carey argued that a tariff system, in addition to strengthening sovereignty, would launch technological progress and the development of a “home market” that fulfilled the reciprocal needs of industry and agriculture as well as producers and consumers. The economic relationships embedded in the home market’s multiple nodes would thus foster social and cultural progress through the spread of education. In turn, the encouragement of individual technical and creative faculties could serve commonly held, national goals. Carey believed the home market could indefinitely harmonize differences across sector, class, and region. While the ensuing inequalities of the Gilded Age, the struggles of the US labor movement, and agrarian populism disproved Carey’s more wildly optimistic forecasts, his associational ideals arguably resonated in the cities and towns where a burgeoning tariff complex appeared to undergird rapid economic growth and the emergence of an educated middle-class.

One of the more distinctive yet limited elements of Carey’s thought is what Helleiner calls “social neomercantilism.” Carey, Helleiner writes, “put a much stronger emphasis on the domestic distributional and social costs of free trade than List did.” The consequences included declining wages, increased manipulation and monopolization of markets by international traders, social upheaval and emigration, and prostitution. In further contrast to List, “Carey was critical more generally of how free trade was leading to ‘barbarism’ in all countries of the world because it eroded the kinds of strong social association that existed in more healthy, diversified economies.” In fact, Carey was a critic of imperialism and disparaged its so-called civilizing mission, believing that colonization and free trade together drained the capacities of other societies to progress. Combined with his relatively enlightened view of the benefits of gender equality, Carey’s philosophy of human advancement was in some ways socially progressive, but it was still refracted through his nationalism and theory—shared by many other neomercantilists—that societies evolve through stages of progress, from the primitive to the technologically and culturally advanced.

Despite his concern for the social costs of international free trade, Carey did not advance the concept of a welfare state. Among neomercantilists, this task would be taken up by statist conservatives such as the German economist Gustav Schmoller, but also leaders who had decidedly stronger commitments to combine development with economic democracy. For example, Bolivia’s president from 1848 to 1855, Manuel Isidoro Belzu, rallied artisan producers and workers to a more egalitarian and leftwing developmental project that would inspire similar populist coalitions in the region. Though briefly mentioned, Uruguay’s early-twentieth-century president, José Batlle y Ordóñez, is one of Helleiner’s best examples of a neomercantilist who elaborated upon the social dimension of state-led development. Batlle’s notions of cross-class compromise and state activism laid the foundation for South America’s closest relative to the Nordic social democratic idea of a “people’s home,” as evidenced by the legacy that the center-left Frente Amplio coalition invoked when it implemented new anti-poverty measures in the wake of the early-2000s Southern Cone economic crisis.

In these and other intriguing case studies, Helleiner shows that neomercantilism could be highly exploitative and autocratic, harnessed for liberation movements, or provide a basis to pursue social reform. No neomercantilists were exactly alike, but beyond tariffs many supported manufacturing subsidies, state-supported infrastructure, state-owned investment banks, controls on foreign capital, technology transfers, and state firms in key extractive industries—beyond East Asia Helleiner highlights comparably expansive interpretations of neomercantilism in Egypt, Mexico, and Poland. In examining these arguments and proposals, Helleiner corrects the tendency, based on some thinkers’ gravitation to Social Darwinist views of international competition, to reduce neomercantilism to raw power politics. On the contrary, it was innovative and frequently combined harsh realism about developmental challenges with more utopian visions. Even as they harbored contradictory notions of mutually-respected sovereignty and regional spheres of interest, thinkers such as Fukuzawa Yukichi, a major intellectual of Meiji Japan, and the Chinese statesman Sun Yat-sen believed neomercantilist strategies could provide an alternate route to universal cosmopolitanism or at least yield a more stable and peaceful world system, superseding the core-periphery dynamics of European imperialism—a vision not so dissimilar from Carey’s particular form of liberal nationalism.

Helleiner thus demonstrates that neomercantilist thought, despite its core objectives of statecraft and international power, is complex and can ramify in different political directions. In addition, the appropriate level and form of state authority over industry and markets varies considerably. From Carey to imperial Russia to the mid-nineteenth-century and early-twentieth-century Latin American statesmen who articulated a developmental framework closer in spirit to social democracy, neomercantilitist ideas have served a range of political projects. Outcomes depend upon the broader political philosophy of neomercantilism’s proponents and the position of their state—or subnational, colonized, or otherwise non-sovereign people—within a capitalistic global order. This dynamic explains the wide-ranging appeal of neomercantilism during the epoch of imperialism, forced economic “openings,” and astonishing capital accumulation in the industrializing core regions of Western Europe and the United States.

Yet nearly all of Helleiner’s thinkers share a common thread beyond a basic faith in protectionist measures. In striving to build national wealth, they understood a fundamental relationship between the power of the state to grant privileges to domestic capital and the prospect of obtaining greater economic and military leverage in international affairs. Strategic tariffs were typically the first, but not the only, mechanism aimed toward the end of economic sovereignty. Neomercantilist policy thus contained many sociopolitical implications for the types of developmental coalitions that would be required of its execution; even its most egalitarian advocates tended to believe the productive forces of national progress would transcend class tensions if properly utilized, and that these capacities would shield society from the ostensible existential threat of predation in the emerging international state system. And for those theorists who contended with the extractive practices of colonial rule and state racism, such as the pan-Africanist Marcus Garvey and advocates of India’s Swadeshi movement, voluntarist efforts to cultivate autonomous manufacturing capacities were a practical means toward freedom and national liberation. As Helleiner suggests in his conclusion, the legacies of neomercantilism are further reflected in the range of developmental states that pursued import substitution industrialization but also the establishment of multilateral financial institutions with programs oriented to the objectives of late industrializers.

Helleiner’s several references to social neomercantilism also provide a bridge to contemplate the tensions, possibilities, and limitations that protectionist capitalism presented to establishmentarian reformers as well as more visionary American liberals in the middle third of the twentieth century. It seems at once an obvious and understated fact that neomercantilist practices were an integral component of the construction of welfare capitalism, even if that was not the intention or was at best an ancillary concern of neomercantilism’s most influential advocates.  By stimulating the tax revenue, technological progress, labor productivity, and interregional economic integration that modernized national economies, these practices typically intensified class conflict and yielded a viable remedy in the modern welfare state. Especially when accompanied by political liberalism and an openness to regulated trade, neomercantilist development created new conditions in which labor, capital, and the state were forced to negotiate social peace and the rights of citizenship.

The book thus offers us an opportunity to assess the historiography of economic development of individual polities through the lens of something like developmental realism. This means examining more closely the political agents of industrialization and their decisions in relation to various antagonistic and cooperative forces, the conditions which cultivate and privilege a manufacturing core, and the societal and class pressures that emerge from within and without nodes of rapid growth. In the field of American political development, this approach may enrich our understanding of how regionally-accented developmental coalitions forged by one political party fragment, and become reconstituted under another—the most significant transition being that from Republican to Democratic hegemony in the epoch spanning the Progressive Era and New Deal.

In this uncertain moment for the terms of globalization, neomercantilism appears to only threaten more instability and conflict, yet its most innovative thinkers show there is a progressive side to its legacy. A careful amalgam and greening of certain historically neomercantilist ideas, such as industrial policy, with democratic finance, global debt relief, and related proposals for the green energy transition could foster new developmental coalitions with transnational aims to combat the climate crisis. Neomercantilists had an acute understanding of state capacity and infrastructural reach—conditions which are paramount to mitigating the kinds of domestic political problems that are inhibiting international cooperation towards sustainable development. The emergence of developmental coalitions that can foster a more durable basis for such cooperation would affirm the vision of the more humane and egalitarian neomercantilists documented in Helleiner’s book.

8. ## General Theories

#### Raising Keynes: A Twenty-First-Century General Theoryby Stephen MarglinHarvard University Press, 2021

In 2022, the audience for books about John Maynard Keynes is probably as large as it has ever been. With two global economic crises followed by widespread use of government interventions, debates recently relegated to history books and academic journals have acquired new urgency. The curious reader can pick from a wealth of recent books. Geoff Mann’s In the Long Run We Are All Dead: Keynesianism, Political Economy, and Revolution (2017) and heterodox economist James Crotty’s Keynes Against Capitalism: His Economic Case for Liberal Socialism (2019) offer perspectives from critical political economy, while Zach Carter’s The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes (2020) presents a detailed biography. But until now, there has been nothing quite like Stephen Marglin’s Raising Keynes, which subtly promises no less than A Twenty-first Century General Theory. The text runs to more than 896 pages, weighs four pounds in hardcover, and, as Marglin acknowledges, is not an easy read. But the result is truly original.

Marglin is uniquely positioned to carry forward the trajectory of the Keynesian tradition. Like Keynes, Marglin’s early career saw him transform from the star pupil of the reigning economic theories of his training—neoclassical economics—into a sort of a radical economist of his own category after receiving tenure. And, like Keynes, Marglin argues that it was his observation of the world around him that forced him to shed his allegiance to neoclassical theories and their claim to represent how the world works.

Marglin is emphatic that he is not a historian of economic thought. But he does see his work as a kind of historic rescue mission. In his view, generations of so-called Keynesians have blinded themselves and their students to the “central vision” of the General Theory: “Namely, that a capitalist economy is not self-regulating” in either the short or the long run. Not content to demolish the mainstream neoclassical synthesis, Marglin charges into the wreckage to offer his own novel formalization of Keynesian theory, reconstructed by means of mathematical tools that its originator lacked. Finally, he tests his theory against the historical record, especially the Great Depression and the post-2008 recession. It is this triple undertaking—blending history of economic thought, formal economic theory, and economic history—that sets Marglin’s book apart on the shelf of recent books on Keynes.

Why have economists understood Keynes so poorly? According to Marglin, the confusion centers on two mistakes. First, mainstream Keynesians have interpreted Keynes as “a sophisticated theorist of sand in the wheels,” for whom “the problems of capitalism are rigidities, frictions, and imperfections” (most famously: “sticky” wages and prices, which do not adjust downward as the textbook says they should). But Keynes’s original critique was more radical. Even a perfectly competitive market economy for Keynes contained no force guaranteeing full employment equilibrium.

The second mistake is that aggregate demand—the total amount of spending on goods or services in an economy, and the motor of Keynesian analysis—matters only in the short run. In the long run, rigidities and frictions will be eliminated, all prices and quantities will achieve balance, and the “classical” economics that Keynes attacked would regain its validity. This was the heart of the neoclassical synthesis: short-run imperfections and long-run equilibrium.

### Formalizing Keynes

Marglin is highly critical of the macroeconomic modeling that has reigned since the 1970s, including “New Keynesian” models. He interrogates the microfoundations of mainstream macro, including profit and utility maximization, the rationality of individuals, or the propensity of firms to ignore sunk costs of physical capital and exit industries when their management knows that it’s curtains. Throughout the text, Marglin critiques Dynamic Stochastic General Equilibrium (DSGE) models, the methodological tool used widely in articles published in the highest-tier journals. DSGE models explain the effect of changes in the economy—a market friction here, an exogenous shock there—with a series of assumptions regarding the behavior of individuals and institutions. However, when one begins from alternate premises—the economy is largely out of equilibrium, actors and institutions respond ably to multiple phenomena, and class position, historical contingency, and power make experiences varied—the core logic of DSGE dissolves.

Nevertheless, Marglin argues that one reason for the distortion of Keynes’s legacy was the absence of elaborate models articulating the General Theory. Given the mathematical transformation of economics following Keynes’s death in 1946, the lack of formal models proved to be an Achilles heel in the discipline. When Keynes’s followers (from Franco Modigliani to Axel Leijonhufvud) took up the task of formalizing his work, they put short-run rigidities at the center of their models. These models, in turn, proved vulnerable to antagonists such as Milton Friedman, who identified flaws in Keynesian theory that a more adequate formalization would have resolved. In Marglin’s assessment, the so-called failure of Keynesian economics in the 1970s tells us less about Keynes than it does about “the distortions of the General Theory perpetrated by friends as well as enemies.”

Marglin presents his own models. Key to their significance is a critique of comparative statics. At the macroeconomic level, many factors can influence variables in ways that are difficult to isolate or understand in their totality. Present debates about the causes of inflation are a good example. Are wages to blame? Or is it the shortage of inputs? And which inputs? Which effects dominate, and which are induced by other features of reality? Static models are snapshots of economic relationships at a given time. A standard comparative static model like the model of supply and demand examines the simple relationship between price and the quantity of output purchased or produced. Other factors—income, societal norms, production costs, and anything else that might influence overall demand or supply—are exogenous. Comparative static models simplify the myriad factors at play, and isolate the potential effect of one variable to influence another.

By design, such static models allow for ambiguity. Will an increase in income counteract an increase in labor costs that may lead firms to decrease output at all possible price levels? If increased borrowing by firms expanding output has the potential to induce an increase in the interest rate, will it do so? And would this hypothetical increase in the interest rate nullify the effect of increased demand for credit? In Keynes’s rendering, the ISLM (investment-savings and liquidity preference-money supply) framework—which shows how practices in product markets and production may generate parallel changes in financial systems and vice versa—makes no claims about how one equilibrium turns into another. It consistently reminds the reader of the myriad possibilities that can occur when actors and institutions are uncertain about the future. Marglin rightly notes the ambiguity of the central comparative static models that mid-century Keynesian economists derived from Keynes’s work, and reveals the pernicious consequences of assuming an ultimate path toward equilibrium.

Because of their ambiguity, comparative statics are a poor tool for drawing definitive conclusions about how changes in one economic sphere will play out in the real world, where people and their institutions live, work, and make decisions. The appeal of a comparative static model is its tractability, but this simplicity may bias conclusions away from important factors. Comparative static models typically embed assumptions about behavior which may be impossible to visualize, or inaccurately describe particular relationships. More advanced economic models, which account for multiple variables influencing outcomes, may be impossible to map in a two-dimensional space. Formulas that rely on growth rates of other variables introduce yet more complexity to a model that would represent the possible implications of different factors for an economic outcome. While the comparative static model can give enough information for understanding the potential effect of one variable on outcomes compared to another, anyone trying to predict which factors are most pertinent or dominant in determining particular outcomes will come up short with a comparative static model. Conversely, a perfectly dynamic and realistic model with arrows and multiple dimensions risks the Borgesian problem of a representation that is infinitely long and complex in its attempt to capture all potential realities and outcomes.

### Class and power in the General Theory

The dynamics of an economy are driven by its participants, but not all participants are created equal. In his work, Keynes gave due consideration to the varieties of economic experience, and he did not avoid the language of class in explaining this complexity and uncertainty. Appropriately, Marglin devotes much of his exegesis to unpacking the range of class experiences in the realms of consumption, investment, relative preference for cash, and financial instruments, while acknowledging that actors and institutions respond to multiple stimuli, prioritizing different ends at different times for equally rational reasons.

Class figures in the discussion of differential consumer response to uncertainty (via savings), the propensity of investors to purchase financial assets or hold cash, and the enigma of investment demand by firms. Marglin identifies a particular blind spot in (non-fundamentalist) Keynesian economics arising from many professional economists’ assumptions that consumers will behave like the economists. Because of this assumption, these thinkers opened themselves up to attack whenever the broader economy failed to behave the way that they might have expected, such as during the bout of stagflation in the 1970s.

### Thinking in the long run

The reconstruction of Keynes on offer here hinges on Marglin’s discussion of the long run. As Keynes engaged neoclassicals on their own turf, Marglin holds that any alternative macroeconomic interpretation of the world ought to engage long-run growth models. In order to tell a story of long-run growth, Marglin therefore seeks to formalize the role that employment, wages, and prices have in determining and resulting from economic growth. He advocates a theory which articulates how investment, prices, and wages are determined, and how aggregate demand may alter growth trajectories. To this end, he borrows insights from Roy Harrod, Evsey Domar, and Robert Solow—all of whom attempted to explain long-run growth through their attention to the supply side of economies—and incorporates Joan Robinson’s work on aggregate demand.

Marglin’s full model of long-run growth draws from Robinson’s insight that unpaid work, family businesses, and informal employment function as an escape valve for those without employment in industrial capitalist enterprises. Any “general theory” must account for the continued persistence of these forms of work alongside the growth of formal employment. These contributions are enormously relevant for debates about the relative exploitativeness of large or small firms, the widespread withdrawal from the labor force of people with care obligations in the absence of reliable child and elder care in the ongoing waves of the pandemic, and the persistent reticence by major powers to increase immigration quotas.

Labor forces, Marglin argues, should be seen as endogenous. If we open our analysis to the global economy, there may be an unlimited potential supply of labor. Alternatively, if we narrow our focus to domestic constraints of racism, sexism, and xenophobia, we can appreciate how social norms limit the potential for growth (of the labor supply and of the economy). In some ways, this flips the reserve army theory on its head. While larger labor forces may increase the aggregate number of unemployed, and depress bargaining potential within the employed portion, employing more workers and paying them more may increase social welfare even as aggregate profits rise. The argument thus allows for new conclusions about aggregate growth in the long run, and the book feels like an exciting springboard for future research in this direction.

Marglin’s treatment of investment likewise accounts for diverse forms of investment expenditure—at times, capitalists will invest in ways to lower the costs of production (capital deepening), and at times they will invest in order to increase their productive capacity (capital widening). These differing modes of investment respond to different pressures. In times of decline or stagnation, capitalists failing to sell or produce to their full capacity will try to make their production costs go further, which may be linked with downturns in employment and real wages. By contrast, in periods of expansion, capitalists may respond to incentives to increase their production capacity, in ways that will increase employment opportunities and relative wages in the longer-run. These tensions are notable in our current moment of high growth limited by supply factors originating at home and abroad; Marglin allows for ambiguity in recognizing that different supply shocks may have disparate effects on investment decisions, employment and wages, and growth overall. The complexity of Marglin’s modeling will be challenging for the uninitiated; however, his descriptions of how the real world presents a diverse array of challenges for workers, capitalists, and the unemployed allow for expansive application of his arguments in work that others may pursue.

On the topic of long-run investment, Marglin breaks with past work, notably a 1990 paper co-authored with Amit Bhaduri. In that work, Marglin and Bhaduri contended that the effects of rising wages on employment were ambiguous. While they agreed with the wage-led growth view that rising wages might encourage more expenditure, which in turn might encourage more production and therefore employment, their model demonstrated how rising profits could potentially yield more employment (the profit-led view), allowing for social, political, and class contingencies. In their telling, it was conceivable that measures to raise wages in ways that depressed profits might encourage cost-cutting investment, with ultimately negative implications for employment overall. This observation meant that economists, particularly left-leaning Post-Keynesian ones, ought to establish how sensitive investment was to profits before arguing definitively that higher wages should always lead to more growth. But over time, Marglin has grown skeptical of the likelihood that profit-led growth will prevail. Distinguishing capitalists’ tendency to cut costs via  investment from the tendency to increase capacity demonstrates the pitfalls of leaving development to the private sector.

The distance from that earlier work seems to rest on a reappraisal of the relative propensity of capitalists to engage in capital deepening. In Marglin’s words, he and Bhaduri, “lumped all investment together, implicitly assuming that investment takes place solely to expand capacity,” when, in fact, capitalists might also invest in order to “cut costs by substituting capital for labor, energy, or other inputs—capital deepening for short.” In light of historical data on investment, employment, and wage rates, Marglin concludes that in the US since the 1970s, whether investment is capital widening or deepening depends on whether the economy is growing or shrinking. If capitalists decline—for whatever reason—to increase capacity, despite the prospects for more growth and higher wages that could follow, more active participation by governments in directing economic development may be necessary.

### A political economy

Across 900 pages, Marglin challenges economists to account for what they have tended to ignore: social class, fundamental uncertainty, management decisions about investment expenditure and pricing policy, and the responses of workers and consumers (often the same people) to changing prices. Once these dynamics are reintroduced, outcomes deemed impossible by friction-minded Keynesians reemerge into the realm of feasibility. Time and again, Marglin tests his models of the long run against US economic data from the twentieth century. And time and again, Marglin’s formalizations of Keynes’s informal comparative static models into beautiful schematics of spaces and probabilities and dynamics seem to accurately predict the outcomes that have transpired—in the Great Depression, over the 1970s, and in the period before and after the 2008 Global Financial Crisis.

Alongside his formal models, Marglin weaves in political economy of a particular form. He shows how political factors inflected the uptake of Keynesian ideas, for good and for ill, arguing that the success of Keynesian economic theories relied on Keynes’s larger political project, and the canniness with which he promoted them in the UK and the US. In this way, Marglin’s text fits with the recent work of both Crotty and Carter, who noted how Keynes modified his own vision once he was welcomed back into the policy-making arena during WWII.  Later, Keynes’s work was discredited by political opponents of demand management and the welfare state, not just by professional economists. The eclipse of Keynesian practices after the 1970s was part of a political project, not just the progress of science.

It’s this recognition of how political environments shape the reception of economic ideas which drives Marglin into formal modeling—if the mainstream has rejected Keynesian ideas on the assumption that they are unproven or unrigorous, Marglin will make sure that these excuses no longer serve. By the same token, he hopes that anti-Keynesian policy prescriptions will be less beguiling after he has challenged their formal rigor.

Politics is also key to another distinctive element of Marglin’s exposition, namely the insistence on formalizing Keynes without rigidities and imperfections. One could imagine a fellow heterodox economist objecting that real-world capitalism is characterized by administered prices and other forms of frictional market power. Why should a macroeconomic model assume, against all evidence, that perfect competition actually exists? But if Marglin embraces the perfect market in theory, it is only in order to defeat market utopianism in politics. If “the problems of capitalism are rigidities, frictions, and imperfections,” then capitalism could be fixed by getting rid of imperfections, such as unions and minimum wages. But if even a perfect market does not guarantee stability and growth, then we can lay to rest the idea that capitalism “can be cured by remaking the economy in the image of textbook accounts of perfect competition.”

Compared to Crotty’s Keynes Against Capitalism or Carter’s Price of Peace, Raising Keynes is a technical book. But no less than Crotty or Carter (or, for that matter, Keynes) Marglin brings a moral vision to his writing. The last chapter of the book ends with a rumination on the class violence of austerity, whose human costs include “an entire generation of Greeks, Italians, and Spaniards… sacrificed on the altar of fiscal rectitude.” The epilogue nods to the social movements that have emerged in the last decade. Climate change also haunts the later pages. “My own conclusion,” writes Marglin, “is that the moral imperative is for the rich nations of the world to slow down growth if not bring it to a complete stop.” If this were to happen, deficit spending would be more important than ever, to maintain full employment without high levels of new investment. “We must hope,” Marglin concludes, “that functional finance is an idea whose time has come.”

Most obviously useful as an accompaniment to Keynes’s General Theory, Raising Keynes is as much history as textbook, rich in narrative and the empirical changes in demand, production, and policy over time. If, as Marglin writes, his goal is to plant seeds of inquiry in the heads of scholars, policy-makers, and activists, its publication is more timely than ever. Fundamentalist Keynesians and Post-Keynesians have been doing this for a while now; so too have empirically and model minded heterodox and radical macroeconomists. Marglin’s book is an invitation for more to come aboard. Economists, policy-makers, and journalists should accept the invitation.

9. ## Transition Theory

A Brief History of Commercial Capitalism
by Jairus Banaji
Haymarket Books, 2020

Capitalism is either eternal or it isn’t. There are people who defend the first view, or something close to it—the 2014 multivolume Cambridge History of Capitalism opens in Babylonia, circa 1000 BCE—but it is much more plausible that capitalism, like most other social phenomena, has its origins in specific historical developments. The trouble is that, once you’ve got everyone to agree that capitalism has a history, you have to define what capitalism is and then explain when, where, why, and how it emerged.

Of course, no one thinks you can date the transition the way you can specify when a battle took place or a patent was filed. But even after abandoning false precision, those who’ve grappled with the problem of defining and explaining capitalism’s emergence have been unable to agree even on which centuries and continents were involved. These questions are likely no closer to resolution today than they were when European radicals started using the word “capitalism” two hundred years ago.

For many, the whole question of origins is a pseudo-problem—you can write economic history without modes of production. But those who have dreamed of transcending capitalism find it harder to let go of the thorn. If the object can’t be defined, can it be dismantled? If there was no starting point, can there be an end? Marxist scholars have been central to the origins debate, but Marx himself said enough different things on the topic to inspire contending schools, each speaking in his name.

The so-called transition debate is often broken down into approaches that focus on the growth of trade and approaches that focus on the transformation of social relations of production. In the 1950s iteration, the Cambridge economist and Communist Party Historians Group member Maurice Dobb squared off against Paul Sweezy, who earned an economics PhD at Harvard before launching the independent socialist journal Monthly Review. Dobb outlined three common ways of understanding capitalism: as a rational-entrepreneurial mindset, as production for a distant market, and as a class relation between capitalists and wage-laborers. He found the first two “insufficiently restrictive,” since acquisitive investment and long-distance trade have clearly been present in societies since antiquity. Such ancient phenomena can neither explain nor serve as a definition for capitalism as a distinct economic system. For Dobb, the correct definition was found in class relations, which pointed toward a history of conflict between lords and peasants, rather than distant trade. Sweezy countered that late medieval commerce was a powerful disintegrating force capable of breaking apart feudalism and ushering in capitalism, including through the growth of towns.1 A generation later, the “Brenner debate” of the late-1970s took on the same question, with Robert Brenner defending the centrality of agrarian class structure to the transition against two sets of opponents: historians who emphasized a demographic explanation for the crisis of feudalism, and world-systems theorists who saw the creation of a continent-spanning world economy after 1492 as the fundamental transition to modern capitalist development.2

Jairus Banaji believes that Dobb and Brenner’s views have so far dominated the argument. Their critique of the conflation of commerce and capitalism has been so effective, in fact, that the phenomenon of merchant’s or commercial capital has been neglected in the literature. In his latest book, A Brief History of Commercial Capitalism, Banaji seeks to set things right. In a compact 138 pages, Banaji traverses the centuries from 829 to 1930 and ranges from Indochina to New Orleans, citing works in seven or eight languages. The book is not the overview that the title may suggest: it proceeds with some consideration to chronology but is mostly thematic and historically free-ranging, with events and characters appearing in sequential vignettes rather than a continuous narrative of development.

Banaji’s core intervention is that the venerable distinction separating production from exchange is badly posed. Historically, merchants have profited not just by arbitrage but also by dominating direct producers and thereby organizing production. Commercial capitalism, then, is not just a new name for an old thing (long-distance trade) but a specific formation in which “a wide range of industries worked for merchant’s capital.” Once this has been recognized, Banaji suggests, we can tell the history of capitalism on a broader canvas than the English pastoral painted by Dobb and Brenner. Another important part of the argument is that the dominance of merchants lasted beyond the early modern period, and even after the industrial revolution. It was only around the end of the nineteenth century, in Banaji’s view, that one can speak of “the subordination of commercial to industrial capital.”

Production and exchange cannot be cleanly separated because merchants have often dominated and organized production. In fifteenth century Florentine wool mills, in the prerevolutionary French silk industry, and in the cotton fields of the late-nineteenth-century, direct producers found themselves working under the same people who sold their products to markets around the world. At times, merchant capitalists gathered workers under one roof, but more common was some version of the putting-out system, in which merchants would advance raw materials (and sometimes payment) to families for household production. The Grande Fabrique of eighteenth-century Lyons was not, as one might translate the words today, a big factory, but rather a network of hundreds of merchants and thousands of homeworkers. These were capitalist class relations, but ones in which workers might be dominated not by the wage-system but by relationships of debt, credit, and the merchants’ monopoly over raw materials. The class relationship also included contracted managers, standing between merchant and the worker, who directly supervised the labor process.

The putting-out system is not a new discovery, but it has sometimes been treated as a “transitional form… incompatible with the overall development of capitalist production,” as Harry Braverman wrote in his classic Labor and Monopoly Capital. Against this, Banaji insists that merchant manufacturing was persistent and dynamic, worthy of a place at the center of the history of capitalism rather than just a preface to smokestack industry. Textiles were soon produced in factories, but “oriental” carpets were manufactured by cottage industry well into the twentieth century. Agricultural production, too, was commonly organized in this fashion, from the first Caribbean plantations to the various commodity booms of the mid-to-late nineteenth century. Banaji quotes a description by Samuel Smith, a contemporary English merchant, of the chain of relations governing the cotton boom in Western India in the 1860s. What Smith called “the machinery of the cotton trade” consisted of four levels between the cotton-grower and the customer: village-level dealers, regional dealers, the “wealthy native merchants of Bombay,” and finally the “shippers to England.” Credit was advanced from the top down, creating debt relationships tying the lower levels to the upper.

The more common story figures merchants giving way to industrialists. Banaji does not completely reject this idea, but he locates the transition at the end of the nineteenth century rather than the first industrial revolution. Banaji places the death of the commercial capitalist era sometime between 1880 and 1914, when “trade began seriously to be driven by industry.” The crucial developments were new forms of heavy industry (oil, steel, chemicals), the formation of industrial cartels and other concentrations, and the division of the non-European world through the New Imperialism. This was not just “an entirely new form of capitalism” but “a completely new world.” The new players were nation-states and their empires, not the independent merchants and diasporic communities that gave commercial capitalism its cosmopolitanism. (Banaji is aware of the danger of romanticizing this earlier state of affairs, writing that cosmopolitanism and racism often proved compatible, but the warmth in his descriptions of various trading communities is unmistakable.)

In some ways, A Brief History of Commercial Capitalism is an appropriate counterpart to the late Ellen Meiksins Wood’s The Origin of Capitalism. That book, similarly brief, offered a powerful and stylish exposition of the Brennerite argument that capitalism was born in the English countryside. In just under 200 pages, Wood rejects vast historiographical literatures for the sin of conflating commerce and capitalism (in later work, Wood even charged Brenner himself with having too loose a concept of capitalism). Many readers, myself included, have found Wood’s polemical style bracing and clarifying. Her insistence that the historically specific core of capitalism is market dependence (people cannot access the means of their subsistence without going through the market) has helped people think about contemporary capitalism as well as its history. Many others—sometimes the same readers who learned so much from her—have been frustrated by Wood’s single-minded focus on England and free wage labor and, relatedly, her lack of interest in race.3

The two books demonstrate two opposed ways of thinking about commerce, and Banaji’s short book is good follow-up reading for fans of Wood. Each illuminates the insights and lacunae that accompany their dueling forms of thought. Banaji offers a trade-centered international history of capitalism that, because it keeps social relations of production in focus, cannot be easily dispatched by Wood’s critique of the commercialization model. He draws on a far wider body of sources and points the way toward reintegrating these into a comprehensive story. On the other hand, Wood’s finely-honed specificity means that she provides an answer to the basic question about the origins of capitalism—and the political importance of a definition—in a straightforward way that Banaji ultimately does not.

In an incisive review of Banaji’s earlier book Theory as History, the sociologist Henry Bernstein questioned Banaji’s “deafening silence on Brenner’s work; the lack of any indication of where industrial capitalism (and its origin) fits in his framework.” Bernstein, an Africanist whose 1977 “Notes on Capital and Peasantry” Banaji credits as one of his core inspirations, can hardly be accused of special pleading on behalf of English exceptionalism. The questions he raised about Theory as History are not fully answered in Banaji’s new book either. Slyly (and perhaps diplomatically), Brenner is only cited in connection with his study Merchants and Revolution, which Banaji finds to be partly consistent with his own framework. The transformation of agriculture, prerequisite for moving masses of workers off the land and into factories without running out of food, does not feature in the book. The industrial revolution appears, so far as I can tell, once, in an aside that “the industrial towns in the north of England acted as magnets for commercial firms from all over the world.” Steam power does not appear except in the form of trans-oceanic steam-ships; coal is mentioned as something traded but not as a source of energy. The point that we should not let a stylized image of Manchester stand in for all of capitalism is well taken and, at this point, accepted. But the dark satanic mills still must find a place, and a relatively important one, in any history of capitalism.

Related to the question of industrial revolution is the question of productivity growth. Part of what makes capitalism distinctive is its record of sustained economic growth, driven by continuous increases in labor productivity. Historical estimates of per capita world output are crude, but no one can deny the major discontinuity signaled when the graph shoots up around 1800. For Marx and other observers, this was the heart of the system’s dynamism and its crises, as well as the enabling condition for one day escaping economic necessity altogether. When thinkers like Harry Braverman dismissed the putting-out system as a “transitional form,” they argued that the lack of industrial concentration obstructed the centralized control and infinitesimal division of the labor process that was the key to increasing productivity. Banaji shows effectively that workers manufactured things for merchants at a large scale, but there is no full answer to Braverman’s argument about that system’s limits. There are many striking and well-chosen examples of the trade in agricultural commodities expanding, but not much about whether this was the extension of production into new lands or the transformation of production. A fascinating section on “Velocities of Circulation” focuses on the specific way merchants increased profits, not by labor-saving innovations but by increasing the rate at which their capital could turn over. These included improvements to transportation (some of which, like steam ships, clearly come out of industrial capitalism) as well as more purely commercial innovations such as credit instruments allowing the more rapid advance of capital from one investment to another.

To return to the original question, when did capitalism begin? In another essay, Banaji has written that “a form of ‘war capitalism’ may well be the best way of characterizing even Rome’s expansion and domination.” We are almost at a transhistorical notion of capitalism, which may after all be correct. But a few pages later we find: “The Roman fine ware industry was organized on a capitalist basis, but it doesn’t follow that Rome’s economy was driven by capitalism in the sense in which one would normally understand this.” At stake here are theoretical questions about social forms and modes of production, which are treated at length in Banaji’s Theory as History. The Brief History is written far more accessibly, but it leaves unanswered the definition of “capitalism in the sense in which one would normally understand this.” The new book starts with Venetians in Byzantium around the year 1000. It’s clear that their story can be brought forward until it merges with something we all recognize as capitalism, but it’s not clear if they themselves are already merchant capitalists, or, more concretely, whether and how they took control of and reordered production processes. Banaji does make clear, near the end, that not all complex commercial societies are capitalist. He cites (and seems to endorse) Roy Bin Wong’s argument that the late imperial Chinese state fostered a market economy that was distinct from commercial capitalism. What made China different from Venice and Genoa in the later middle ages was that the latter had states subordinated to the merchant class. Here, in an aside on another author’s claims, in an easy to miss paragraph in the final pages, we get an actual origin story: commercial capitalism was born in the class struggles through which Italian capitalists conquered state power.

A number of voices have suggested that the contemporary world economy has seen the return of merchant capitalism. One of the first was labor historian Nelson Lichtenstein, who spent much of his life studying the archetypal smokestack industry, automobile manufacturing. As he tried to understand the world that had come after Fordism, Lichtenstein noticed striking similarities between Walmart and the powerful merchant houses of the eighteenth century. What did Walmart do if not buy cheap, ship across oceans, and resell at a profit? At such a scale, buying and selling generates immense power, including over production. Lichtenstein describes one struggling Arkansas apparel factory which was saved by a huge order from Walmart. The corporation procured bulk flannel in Taiwan, shipped it to American workers (mostly African-American women) to work up, then bought back every shirt they made. There was pressure to hold down labor costs, not least because Walmart itself continued to manufacture similar shirts in lower-wage plants abroad. Since Sam Walton “wouldn’t buy union goods,” the workers were barred from the collective bargaining rights supposedly secured by federal law. In the same Mississippi Delta where cotton brokers had once told planters what to grow, merchant capital was still organizing exploitation through the putting-out system into the 21st century.4

“We live in the period of transition from capitalism to socialism,” wrote Paul Sweezy in 1950, “and this fact lends particular interest to studies of earlier transitions from one social system to another.” In the 1970s, Immanuel Wallerstein addressed his theory to “those who are seeking to understand the world-systemic transition from capitalism to socialism in which we are living, and thereby to contribute to it.” Today, capitalism remains prone to crisis. But what systemic alternative waits in the wings? Could the world-bestriding powers of latter-day merchant capital be commandeered by democratic economic planning? This is the hope of those who imagine a “People’s Republic of Walmart” or Amazon as “Gosplan 2.0.”

Others fear regression toward the direct power relations that preceded the impersonal rule of the world market, with writers across the political spectrum warning of “neofeudalism.” In his classic contribution to the transition debate, Robert Brenner sharply contrasted feudalism—with its limited productivity and strictly “political” methods of extraction—from capitalism, with its reliance on “economic compulsion” and historical takeoff into “self-sustaining growth.” But in recent analyses, Brenner speaks of “worsening economic decline met by intensifying political predation,” suggesting a world-historical boomerang back to lordly domination. Whatever comes next will not be a simple return, if only because of the radical transformations to which capital and the environment will subject each other in the coming century.5 As we wonder what comes next, we are all transition theorists now.

1. The basic texts are Maurice Dobb, Studies in the Development Of Capitalism (1946) and The Transition from Feudalism to Capitalism, edited by Rodney Hilton (1976), which collects responses to Dobb including Sweezy’s.
2. Brenner’s challenges to demographic arguments are collected, with replies, in The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-industrial Europe, edited by Trevor Astin and C.H.E. Philpin (1985). For the debate with world-systems theorists, see Brenner, “The Origins of Capitalist Development: A Critique of Neo-Smithian Marxism” (New Left Review July-August, 1977); Giovanni Arrighi, “Capitalism and the Modern World-System: Rethinking the Nondebates of the 1970’s” (Review: Fernand Braudel Center, 1998).
3. Even Adolph Reed, who has called anti-racism “a neoliberal alternative to the left,” objected to Wood’s insistence that “capitalism is conceivable without racial divisions.” See: Adolph Reed, Jr., “Unraveling the Relation of Race and Class in American Politics,” Political Power and Social Theory 15 (2002): 265- 274; Ellen Meiksins Wood, “Class, Race and Capitalism,” Political Power and Social Theory 15 (2002): 275-284; Reed, “Rejoinder,” Political Power and Social Theory 15 (2002).
4. Nelson Lichtenstein, “The Return of Merchant Capitalism,” International Labor and Working Class History (2012).
5. Jason W. Moore, whose work recasts world systems theory as environmental history, is strikingly absent from Banaji’s bibliography.
10. ## Geoeconomics and the Balance of Payments: A Reading List

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Below is a rough reading list assembled by the panelists in the August 13, 2020 discussion on “Geoeconomics and the Balance of Payments.”

A recording of the discussion—moderated by Adam Tooze and featuring Mona Ali, Daniela Gabor, Izabella Kaminska, Matt Klein, JW Mason, Michael Pettis, Brad Setser, Jon Sindreu, Colby Smith, and Nathan Tankus—can be found here.