Since 2021, inflation has featured as among the most salient issues in American public discourse, with voters actively awaiting pronouncements from the Federal Reserve. Inflation mattered in the 2022 midterm elections, and it looms large over the 2024 presidential election. In historical terms, however, there is room for further politicization. While the much awaited soft landing promises to keep the show on the road, for the most part, it does little to alter the defining traits of the current economy. For critics, these problems are hardwired into the current system and are almost impossible to overcome as long as policy-making takes place within the parameters of the current monetary system—moving interest rates up or down. What is needed instead is a new monetary system: democratic choices about what serves as money, who can create it, and what its value is tied to.
To politicize monetary policy is a controversial demand today; to politicize the design of the monetary system can sound positively outlandish. Jakob Feinig’s Moral Economies of Money gives us an excellent place to start. Feinig’s historical account demonstrates that monetary-system design was once “at the center of political life” in North America. He begins his narrative in the Colonial era, when voters and their representatives, from town halls to state legislatures, arrived at different answers to the fundamental question: what should serve as our money? They used wampum, or notes tied to land or tobacco, or created new money to pay for a specific public project. They dealt with the subsequent questions thrown up by the need to manage a dynamic economy, as when notes were increasingly backed by low-quality tobacco—a struggle that involved a warehouse being set ablaze. Where state legislatures created money to pay for public projects, they “made the functioning of paper money visible [because] under one roof, lawmakers performed the functions of today’s central bank, the Treasury, fiscal policy makers, and the Bureau of Engraving and Printing.”
These were not, Feinig argues, missteps on the way to the present monetary system, but meaningful outcomes of a context-dependent struggle over equality and economic development. Regular voters understood that different forms of money empowered different parts of the population, making it easier to engage in some forms of economic activity than in others. Poets and traveling lecturers spread knowledge about the design of the monetary system far and wide. Such grassroots mobilization interacted with elite politics: proposals for forms of money that were more equitable had a better chance of success if an up-and-coming part of the commercial elite considered them beneficial for their bottom line. Feinig shows that contestation over money was a crucial element of some of the most important political questions. The climactic struggle between the settlers and the Crown, for example, might easily have taken place under the motto: no monetary-system design without representation.
But in the early nineteenth century, a very different understanding of money gained prominence. Advocates of settler equality argued that any monetary system requiring ongoing governance was wont to become dominated by a privileged few who would “thrive at everyone else’s expense.” Feinig traces this sea change to a clause in the US Constitution that withdrew the states’ right to create money. State legislatures—previously the primary fora for democratic debate and decision-making about monetary design—lost an important function. Instead, they granted private citizens the right to set up commercial banks. Those banks issued money not to invest in projects that had been democratically deemed to advance equality and economic development, but that promised the highest return.
In this setting, the Jacksonians managed to shift the conversation from how to govern money, to whether a society should even try to do so. What followed is one of the great ironies in Feinig’s account: Jacksonians kept federal deposits at so-called pet banks, which despite loyalty to the administration, proved unable to honor their promises during the panic of 1837. The episode encapsulates Feinig’s convictions: “monetary institutions there must be, institutions require decisions about their design, and decision-making is a political process”; a public discourse denying those facts only makes the many “manipulated [more] easily” by the few.
Tracing a history extending from the early colonists up to the New Deal, Moral Economies of Money covers a lot of ground—in just 148 pages plus notes and a bibliography that includes much of the recent flourishing in the history of money. To synthesize this extensive material, Feinig develops two key concepts: “knowledges and practices that enabled people to shape money creation” are referred to as “moral economies of money,” and activities that stood in the way of such processes he calls “monetary silencing.”
The choice of the word “moral” puts Feinig in the position of having to protest against the impression that he embraces the values of the historical actors: “most moral economies of money sought to secure a white men’s ideal of living as ‘independent’ small producers, which they attempted to realize at other people’s expense and at other people’s peril.” The “us” in debates over what should serve as “our” money excluded women, slaves, and Native Americans. When white men decided what public projects to finance through money creation, they settled not only on bridges and lighthouses but also on military action against Native Americans. In one of the book’s strongest passages, Feinig explains the perverse dynamic at the heart of the wampum-based monetary system: “Disabling Native ways of sustaining life and imposing debts meant incorporating indigenous groups into the settler economy and monetary system even as Natives produced tokens that settler authorities had assigned legal tender status.”
The distinction between “moral economies of money” and “monetary silencing” might create the impression that monetary silencers did not consider money a moral problem, but this was not the case. Even silencers often made normative claims. Not only the state legislators of the Colonial era (whom Feinig considers moral economists of money) but also the Jacksonians (moral silencers, in his terminology) fought for their respective ideas of just money. “Monetary silencers” were not silent about all things monetary, only about “the possibility of [its] democratic governance.” Indeed, Feinig approvingly cites a historian’s judgment that the Jacksonian politics of money was an early instance of mass politics.
Future research building on Feinig’s important book might thus helpfully distinguish three dimensions of the politics of monetary-system design—silence, ethics, and democratic governance. Do actors talk about the monetary system? If they do, do they endow it with normative content? And lastly, do they see money as an ongoing governance project?
Such an explanatory framework is urgently needed to make sense of our current predicament: an unprecedented period of almost a century in which money creation has not been a topic of sustained democratic debate. That is a marked departure from the earlier pattern that organizes Feinig’s book, in which such democratic debate occurred and disappeared with much more regularity. Future research on the exceptional period in which we find ourselves will fruitfully engage with Feinig’s hypothesis that its foundations were laid between 1913 and 1935. The first cause is what we might call the “fudgibility” of the monetary system: elites’ ability to change the monetary system in ad-hoc ways that are not fully grasped by the public despite their tremendous consequences. In this respect, World War I was a watershed moment. Feinig writes: “Since the colonial era, wartime currencies had forced money users to grapple with tax receivability and legal tender laws and taught them that legislatures and treasuries make money.” World War I was “the first major conflict during which money users did not encounter a new currency.” The monetary system changed, but that change was difficult to parse.
Since then, the institutional set-up that allows for monetary fudging has only become more entrenched. It revolves around the Fed, a large supply of sovereign debt, and a small number of banks that can move money around at scale, either indirectly through their influence on smaller banks or directly through their giant balance sheets. In the financial crisis of 1974, the Fed repurposed old crisis-fighting tools to backstop new forms of money. Lev Menand and Josh Younger have shown that the Fed interpreted its statutory authority creatively to turn government bond dealers into money issuers. We know from a new paper by Will Bateman that in moments when even this was not enough, the Fed engaged in direct monetary financing of the Treasury. Daniela Gabor has described similar changes in recent years as a monetary “revolution without revolutionaries.”
As the second cause of the unusually long democratic silence around money, Feinig identifies the rhetoric used by Franklin D. Roosevelt (FDR), which later became taken for granted. Feinig is a close reader of FDR’s speeches, which “grafted moral rhetoric and banking regulation onto an institution [i.e., money] that remained unspecified and seemed to be always and already there.” At the same time, FDR did engage in monetary redesign. He “pressure[d] central bankers […] to buy more government bonds than they otherwise would have by threatening to issue greenbacks.” But “there was never a moment of truth about fiat money, and FDR presented each step in a way that distanced his policy choices from moral economies of money.” Similarly, Roosevelt made gold policies that gave him room to maneuver while he spoke in a way that reinforced the link between gold and money. His “denial of the federal government’s unique monetary agency” while exercising it is indeed, as Feinig puts it, “paradoxical”—and it had a long-lasting effect, the book suggests, in that it effectively helped block democratic debate around money creation for decades.
This is not only because FDR avoided the discussion of moral economies of money. What was just as important, Feinig suggests, is that he created moral economies around financial institutions that are adjacent to but now were understood by the public as categorically different from money—particularly fiscal policy and social insurance. Most importantly, FDR designed social security in such a way that citizens perceived themselves to be building up a capital stock that they would later be drawing down.
Feinig’s narrative ends with the New Deal, but invites future research in archives like the papers of Henry Reuss, chairman of the House Banking Committee from 1975 to 1981. In the fall of 1979, Reuss received a letter from a citizen living in Chokoloskee, Florida, that encapsulated the understanding, so carefully nurtured by FDR, of pensions as separate from money creation:
Sir:
You ought to be ashamed of yourself!
Your criticism of the Federal Reserve in raising the discount rate to bring inflation under control […] means that you don’t know that a […] 13% increase in the money supply vs. about a 2% production increase results in double digit inflation […]
P.S. If you do answer, please advise how you expect to take care of those of us on a fixed income in a rapidly inflating economy. I trust it isn’t welfare. We did work and we foolishly saved so people like you could tax it away by inflation.1
To this day, such an understanding of the economy—moralizing social security and the budget while obfuscating money creation—has served to block more egalitarian policies. What will happen if deficits in the Social Security trust funds and the federal budget continue to grow? Some proponents of a new democratic politics of monetary-system design hope that the growing internal contradictions can be used as a lever to pry the orthodox understanding of money open. Modern-day politicians, Feinig suggests, could do what FDR did not:
[he] could have […] pointed out that what counted were the real resources available to those who would use Social Security payments to purchase goods and services in the future. He could have connected the new institution with existing moral economies of money, turning people into participants in a monetary governance project, not individual contributors who seemed to depend on hoarding cash in a government account.
This new democratic politics of monetary-system design could take a relatively traditional institutional form, with the American Association of Retired Persons the modern-day equivalent of the nineteenth-century Farmers’ Alliance.
But it is just as conceivable that a new democratic politics of monetary-system design will take a different institutional form, and one that does not follow pre-existing social cleavages. Feinig’s history suggests that assembling the monetary alliances of the past involved creativity and uncertainty: Jacksonians achieved “the conscious creation of a heterogeneous alliance,” and Colonial legislators had invited proposals on money creation “from any persons whomsoever.” Over the past fifteen years, the most publicly visible proposal for a new monetary design has been Bitcoin with its combination of moral stance, high salience, and denial of democratic governance. But over the same period, an increasing number of activists have sought to advance environmental protection, local value creation, and racial justice through a democratic governance of money. In an echo of the monetary poems of the eighteenth and nineteenth century, there are now manga spreading heterodox thinking about monetary governance.2 These grassroots efforts coincide with attempts to shift elite politics. Since 2020, three experts who seek to redesign the monetary system have been nominated or seriously considered for important positions in Washington, DC: Mehrsa Baradaran and Saule Omarova as Comptroller of the Currency, and Sarah Bloom Raskin as Federal Reserve Vice Chair for Supervision. In the financial crisis of spring 2023, such voices were heard in mainstream publications. Monetary governance, considered outlandish not long ago, may be moving toward the center of democratic debate.
In the aftermath of 2008, the pace at which capitalist states moved from bailouts and stimulus policies to fiscal belt tightening was jarring. No less striking was the shift in the intellectual framework deployed to make sense of it. While in the heady days of 2008, sales of Capital exploded and headlines like “What would Marx say?” appeared in the pages of The Economist, the restoration of the status quo ante under the umbrella of post-crisis austerity saw the revival of a different historical figure. To explain the rapid shift from bailouts to fiscal consolidation, academics and center-left intellectuals turned to Keynes.1 Indeed, much of the literature on the politics of austerity and capitalist crisis took up Keynes’s maxim that it was the intellectual influence of defunct economists and academic scribblers, the “gradual encroachment ideas,” not vested interests, that explained the dramatic about-face from stimulus to austerity. From Obama’s Simpson-Bowles Commission to the EU “sovereign debt” crisis, the resumption of austerity politics after 2008 is best understood as a case of bait and switch.2 Armed with the edicts of neoclassical theory, politicians and policymakers were able to obscure the true causes of the crisis and shift responsibility onto bloated public sectors and dependent welfare recipients. Deploying Keynes’s paradox of thrift, critics exposed the counterproductive effects of austerity measures implemented amidst an historic recession.
Given such conspicuous failures to generate growth, how can we account for the political longevity of austerity throughout the 2010s? Some analysts explained austerity’s continued power by reference to the “zombie ideas” propagated by the neoclassical canon,3 as well as the misleading equivalencies drawn between household and national budgets commonplace after 2010. Missing from these explanations, however, was adequate consideration of class and the balance of political forces after 2008.
If prevailing explanatory frameworks of post-2008 austerity relied too much on Keynes, Clara Mattei’s meticulously researched book The Capital Order sought to swing the pendulum back towards Marx. Besides elucidating the hybrid origins of austerity from interwar liberal technocracy and fascist repression, one of the primary theoretical contributions of Mattei’s recent book is its contention that the “perpetuation of austerity […] should not be reduced to a matter of irrationality or bad economic theory.” Rather, she argues, it should be understood as a “tool to maintain capitalist social relations of production.”4 Enforced through a triumvirate of fiscal, monetary, and industrial policies, austerity has both immediate distributive purposes and long-term political objectives. By slashing social spending, hiking regressive indirect taxes, and orchestrating recessions through deflationary monetary policies—thereby driving down wages—austerity channels wealth and resources away from the working classes and toward creditor classes. By promoting unemployment and market discipline, it neutralizes collective working-class power and fortifies economic control in the hands of central bankers and treasury technocrats insulated from political contestation. With the help of economists schooled in neoclassical dogma, this depoliticized capitalist economy acquires an aura of objective truth and impartial technocratic management.
While its self-stated goals are balanced budgets and price stability, austerity’s true purposes are more political, Mattei shows. She suggests that it functions to repel political threats and restore conditions favorable to capital accumulation. Its internal rationality as an economic doctrine is thus of subsidiary importance. To grasp the century-long influence of austerity in buttressing capitalist economies—a technocratic counter-revolution beginning in the interwar period whose success is arguably without parallel in the modern epoch—Mattei takes readers back to its place of origin.
Warden of austerity
Since at least the post-Napoleonic period, the British state’s commitment to fiscal prudence and “sound money” has played a foundational role in its developmental history. Zealous adherence to budgetary discipline was popularized by William Gladstone, first as Chancellor and then as prime minister in 1868. Gladstone’s budgetary reforms and stringent adherence to economic orthodoxy eventually solidified Treasury dominance within the British state. A bulwark against the rise of mass politics associated with the extension of the franchise to the male working classes, Gladstone’s rigid budgetary conventions were also part of a wider political-economic system.5 The consolidation of nineteenth-century British capitalism was shepherded in by the policy triumvirate of free trade, balanced budgets, and the gold standard, the latter of which Joseph Schumpeter aptly designated as the “badge and the guarantee of bourgeois freedom.”6 This developmental paradigm was superintended by the “City–Bank–Treasury nexus” which united key apparatuses of state and financial sectors around an orthodox consensus on economic policy.7 While commitments to austerity thus enjoyed near constitutional status in Britain toward the end of the nineteenth century, it was not until the interwar era that it was fully solidified as an economic doctrine.
It was in response to the revolutionary fervor that swept Europe after the First World War, Mattei argues, most notably in Biennio Rosso Italy and to a lesser extent during the wave of industrial militancy of 1919–20 in Britain, that austerity was hatched as a global technocratic project to restore the sanctity of capitalist property relations. The growing radicalism of wartime state collectivism and post-1917 worker militancy haunted economists, politicians, and ruling classes after the war, who met at international financial conferences in Brussels in 1920 and Genoa in 1922 to hash out austerity’s core principles. While the reconstruction of the European economy and monetary stabilization were their formal aims, as Mattei convincingly argues, its attendees were unequivocal in articulatingausterity as a mechanism to “defend capitalism from its enemies.”8 From these meetings, the modern doctrine of personal sacrifice and thrift, realized through hard work and constrained consumption, was concretized as the prevailing ideological justification for austerity.
Austerity’s champions nonetheless confronted aconundrum: how to implement such widely unpopular policies at a time of unprecedented worker militancy and widespread political discontent? The answer, Mattei suggests, was a twofold strategy, both coercive and consensual, material and ideological. An orchestrated recession, wage repression, and steep budgetary cuts could weaken the buffers of social insurance and low unemployment, often regarded as a subsidy of labor’s militancy. Central to implementing this disciplinary policy was the revival of the gold standard. Formally suspended during the war, the restoration of the gold standard in its aftermath was viewed not only as a means to reestablish monetary stabilization, but more fundamentally as a civilizational lynchpin to reinstate the liberal capitalist order of free trade, balanced budgets, and class discipline.9 By enforcing the imperatives of fiscal and monetary austerity, albeit often less through the mechanical automaticity of gold flows envisioned by its contemporaries and more through the deflationary citadels of “independent” central banks, the gold standard was, in Mattei’s telling, “knaveproof.” It was both a firewall against the incursions of mass politics into capitalist property relations and a guarantor of class discipline. Through the rigors of the gold standard, austere reforms became no longer a “matter of political dispute, but of economic necessity.”10
Austerity’s alchemists
While the gold standard and its accompanying fiscal and monetary edicts was, as Polanyi had it, the “faith of the age,” it nonetheless required ideological justification. Mattei argues that economists were central to this effort. Within interwar Britain, none were more influential than Ralph Hawtrey, who laid much of the intellectual foundations for the infamous “Treasury View” of the interwar period. From his theorization of the unrelenting tendency toward inflation in credit-based market economies, to his justification of the necessity of “independent” central banks—a proposal which Keynes notably endorsed—Hawtrey’s influence in fashioning the deflationary approach of the British state throughout the 1920s was unrivaled.
Hawtrey’s economic theories were rooted in moralistic assumptions. He believed in the inherent virtuosity of the investor class and criticized the improvident consumption habits of the working class. Ideological obfuscation gave these beliefs a scientific air. With individuals substituting for classes (e.g., “consumers” rather than “workers”), and character traits rather than class position determining one’s propensity to save, Hawtrey provided the ideological basis for the Treasury–Bank nexus to orchestrate its deflationary turn. The class orientation of these policies followed clearly from the theory: if workers and the consuming public were at fault for budgetary imprudence and inflationary threats, it followed that they must bear the brunt of personal sacrifice.
In valorizing investor wealth and attributing inflation to rising working class incomes, neoclassical theory provided the intellectual justification for policymakers to channel wealth upwards. While balanced budgets were critical, it was important who financed them. Indirect taxation was preferred over a capital levy, for instance. In this way, Mattei provides a compelling explanation for the disjuncture between the doctrine of austerity and policymakers’ frequent deviation from its core principles—a feature which persists to the present. If recessionary unemployment is necessary to break working-class militancy, balanced budgets play second fiddle. If cuts to welfare spending are needed to compel striking workers back into the labor market, tax increases take a backseat. Indeed, behind every plea for price stability and fiscal prudence is an unrelenting class project with clear distributive and political aims. In the starkly divergent political economies of interwar Britain and Italy, when worker militancy reached historic peaks, this doctrine was put into practice.
Britain and Italy
From the Cunliffe Committee to the historic increase in the Bank Rate in April of 1920, it was Britain that initiated the deflationary turn. Laying the foundation for the return to the gold standard, these policy measures were also a bludgeon to restore waning class discipline amidst the explosion of trade union membership during the war and the extension of the franchise to male working classes in 1918. Above all, they served to restore the value of creditors’ outstanding loans from inflationary threats in the aftermath of the war. These policies were disastrous, inaugurating a decade of debt deflation and mass unemployment, which, by the early 1920s, stamped out any prospects of postwar social reform.11 The brunt of the fiscal arm of austerity came from the Geddes Axe, a postwar ruling-class initiative for fiscal and social retrenchment abetted by Lloyd George. Cuts totaled some £57 million, with government expenditures slashed by a third from 1923 to 1924 and debt servicing (largely to the US) overtaking social expenditures by 1922.12 Overwhelmingly targeting social spending, these cuts would be the most far-reaching of the twentieth century, obliterating promises of health, housing, and education reform.
The return to the gold standard secured in 1925 restored the Treasury–Bank–City nexus and vanquished Britain’s brief glimmer of political radicalism. As Mattei’s book highlights, central to this conservative return were the collective efforts of Treasury bureaucrats and Bank officials. Authority over fiscal policy throughout the 1920s was more squarely within the domain of the Treasury rather than Parliament. More important still was the Bank of England. Steered by Montagu Norman, Treasury and Bank officials, as Mattei’s archival research reveals, worked closely to coordinate their objectives, with the Treasury’s interwar push for fiscal consolidation enhancing the Bank’s control over money markets.
British development during this period—an evolution towards stability, prosperity, and liberty—is typically contrasted with the political instability and economic backwardness that is said to have plagued its continental neighbors. This, it is argued, accounts in large part for the relatively low levels of fascism in the country during the interwar period, notwithstanding Oswald Mosely’s British Union.13 Mattei questions this contrast—the persistent link between liberal Britain and fascist Italy, she argues, was their mutual embrace of austerity.
Unlike the technocratic respectability of Britain, austerity in Italy was enforced by the iron fist of the fascist state. Despite these different modalities, Mattei insists that austerity united “Fascism and liberalism together in a shared, coercive pursuit.”14 She traces the role of four economists, two liberal and two fascist, in shaping Italian austerity following Mussolini’s March on Rome. Italy faced a more imminent threat of proletarian revolution than its Anglo counterpart, with half of its workforce on strike at the peak of the red wave of the ‘20s alongside frequent workplace occupations. The “pure economics” movement, a close cousin of marginal utility theory and neoclassical economics, offered a blueprint to crush working-class rebellion. Aided by the jailing and execution of communists, socialists, and labor union leaders, not least Matteotti and Gramsci, Italy’s austerity program was nonetheless technocratic. Economists from De Stefani to Pantaleoni devised a sweeping program of social-spending retrenchment and fiscal consolidation that actively drew on the British model.
Italian fascism was a boon to international capital. Early reforms included a substantial curbing of the tax burden for the wealthy and lavish bailout packages for prominent financial conglomerates. Whereas conventional historiography distinguishes Italian fascism by its early path of laissez faire and subsequent turn to corporatism, Mattei sees a continuity of austerity measures intended to quash working-class power. Following significant external pressure on the Lira, Mussolini established the monetary and exchange rate prerequisites for Italy—a dependent peripheral economy—to join the gold standard in 1927, stiffening deflationary pressures. What followed was an historic disempowerment of the Italian working class and a sharp deterioration of its living standards.
While British liberalism and Italian fascism remain distinct political formations, austerity unites both Italian and British ruling classes. As Mattei’s research illustrates, leading liberals, including in Italy, praised Mussolini’s experiment in market discipline. Those from Churchill to Montagu Norman and Andrew Mellon extolled the virtues of political order and fiscal discipline that Italian fascism wrought. With postwar debt settlements provided by the American and British states and a $100 million loan from J.P. Morgan Chase, Italy was given the golden stamp of approval to enter the international stage. Despite liberals’ best efforts to differentiate fascism’s “necessary” emergence in Italy and its absence in Britain, their shared economic policy agendas throughout the 1920s plus the sustained material support offered by the West for Italy’s fascist experiment reveal the clear links that existed.
Austerity then and now
Mattei’s analysis is an exemplary work of historical political economy that seeks to steer the conversation on capitalist crisis from Keynesianism back toward Marx. In contrast to recent accounts which have suggested that the revival of the gold standard and austerity in interwar Britain is the product of the decisions made by particular statesmen or economists, Mattei reanimates this history with the conflicts of states and of classes.15 Mattei foregrounds the ideological foundations of neoclassical economics and demonstrates its close entanglement with state power in the service of defending capitalist property relations. In this sense, The Capital Order represents an advance in recent academic literature on austerity, which can often abstract the ideational and technical features of austerity from its wider political and social foundations.
While Mattei’s workis at its best in illuminating the origins of austerity, it offers less in the way of explaining its remarkable durability all the way into the present. In her concluding chapter on austerity today, Mattei admirably breaks with the prevailing tendency to narrate twentieth-century economic history as a contest between Keynesianism and monetarism. Instead, she suggests that our present era has been defined more by a radical continuity with the interwar era. To explain this throughline, Mattei emphasizes the persistence of technocracy, which has remained the best political mechanism for enforcing austerity and shielding capitalist property relations from democratic politics.
Mattei’s emphasis on technocracy is appropriate. As the latest cycle of monetary tightening since the pandemic has demonstrated, unelected central bank technocrats remain at the helm of enforcing austerity. Indeed, recent events in British and Italian politics support Mattei’s thesis. Britain saw a stunning restoration of technocratic power following Lizz Truss’s experiment in pseudo-Thatcherism in late 2022, while in Italy, political leadership has oscillated from Draghi’s technocracy to a veritable post-fascist who affirmed her commitment to austerity.16 As Mattei reminds readers toward the end of her book, “some old habits don’t die.”17
Still, conceptualizing the political economy of austerity from the 1920s to the 2020s as an uninterrupted technocratic counter-revolution is not quite accurate. The mechanisms of legitimacy and mass politics through which austerity has been articulated have undergone significant changes since the 1920.
In the interwar era, the imposition of austerity, enforced largely through the edifice of the gold standard and its accompanying dictates of balanced budgets, faced few channels of popular oversight or scrutiny. While The Capital Order traces the explosion of militant popular opposition to this order, in many ways, this period marked the cresting of a pre-democratic age and the eclipse of an anti-capitalist left rather than a blueprint of the future. During this period, austerity often yielded open confrontations between capital and labor in ways that rendered any prospective settlement between capitalism and democracy highly dubious. In these conditions, austerity was more visibly a weapon of class rule wielded by a narrow ruling class.
But in the aftermath of the fascist interregnum, the Great Depression, and the destruction wrought by the Second World War, capitalist democracies in Europe and North America underwent a significant overhaul. With the implantation of Fordist capitalism under the auspices of postwar American hegemony, economic policy was refracted through mediating institutions of mass politics, which both obscured austerity’s class character and generated new axes of political support and opposition. Throughout the postwar period, political parties in the Western world, shorn of much of their interwar political radicalism, realigned around growth, welfare compacts, and corporatist capital-labor accords. As politicians gradually conceded social reforms associated with postwar reconstruction, the “end of ideology” superseded class struggle as democratic capitalism’s dominant ideological architecture, and political conflict became more diffuse.
This period arguably offers a more promising starting point to assess austerity’s durability in the present. In contrast to the era of the gold standard, when the popular franchise was either non-existent or only recently extended to working-class men, postwar “democratic capitalism” widened the avenues of popular politics (though by no means equally), and economic policy became more closely aligned with national populaces. In the age of mass politics in the West, austerity required a sturdier grounding. While residues of oligarchic liberalism continued to shape economic policy throughout the postwar era, not least in the role of central banks, a convincing theory of the politics of austerity today must explain how it is reproduced within the contemporary institutions of liberal democracy—however hollow and circumscribed they may now be in the aftermath of the neoliberal onslaught.
While Mattei importantly emphasizes that austerity must be understood as a mechanism of class rule rather than an irrational policy doctrine, her emphasis on the role of neoclassical economics and the persistent concentration of technocratic power over macroeconomic policy only partly explains austerity’s resilience today.
Divide and rule
One way to avoid the pitfalls of Keynesian literature is to return to one of the central theorists politicized in Mattei’s Biennio Rosso Italy: Antonio Gramsci. Written largely while he was incarcerated in fascist prison in the 1930s, Gramsci’s Quaderni offers a sophisticated framework for grappling with the material foundations of ideology in capitalist democracies. Amongst his best recognized concepts is hegemony, which described how a dominant ruling class exercises political authority based not simply on coercion and violence but on forms of “intellectual and moral leadership.”18 This form of rule represents itself as operating in the service of a general or universal interest, and it is ultimately able to secure the consent of subordinate classes and social forces by offering a variety of compromises and concessions, while nonetheless reproducing the particular interests of the dominant classes.
A rich literature has since applied central concepts from Gramsci’s work to understand contemporary capitalist societies. In the 1980s and ‘90s, Gramscian scholars in the UK looked to Gramsci to explain how the New Right, represented by figures like Margaret Thatcher, were able to pitch ruling-class policies to a broad swathe of voters. In a 1979 essay on the politics and ideology of Thatcherism, Stuart Hall described how Thatcher popularized the economic doctrine of monetarism through moralistic tropes, idioms, and narratives that became a reactionary common sense amongst her base.19 From moral panics about rising crime, to notions of hyper-militant trade unionists and feckless welfare scroungers, Thatcherism popularized an economic agenda of the ruling class by weaponizing divisions within and between classes.
Scholars characterized Thatcherism as a “Two Nations” project, which strategically mobilized layers of the populace by weaponizing internal divisions emerging from the socio-economic dislocations of the 1980s.20 This form of “divide-and-rule” politics was wielded as part of a broader program to defeat the organized left and restore conditions of capitalist profitability, and has since become an integral feature of electoral politics in the modern epoch. Applied to the contemporary deployment of austerity, this framework explains how economic policies that benefit the interests of a narrow ruling class nonetheless continue to command broader support amongst populations. Pitting employed against unemployed, unionized against non-unionized, native against immigrant, public- against private-sector worker, indebted against debt-free, and ultimately deserving against “undeserving”, the divide-and-rule politics exploited by Thatcher has remained key to the political coalitions of underwriting today’s austerity.
When historic levels of public resources were devoted to bailing out banks and socializing their risks after the 2008 global financial crisis, such antagonisms were central to orchestrating a return to austerity. Indeed, behind every invocation of the need for belt-tightening or collective sacrifice was an undeserving welfare recipient, an overpaid public-sector worker, or an encroaching immigrant depleting public coffers. Beyond a mere rhetorical strategy, these social antagonisms legitimized the starkly asymmetrical class burden of macroeconomic adjustment behind the return to austerity in many countries after 2010. The class character of austerity was revealed plainly in the UK Coalition Government’s (2010–2015) “80-20” rule of thumb, for instance, which outlined how 80 percent of fiscal consolidation measures were to be realized through cuts to spending (disproportionately on social services and local authority grants), with only 20 percent comprised of tax increases.21 In addition to the technocratic and depoliticized forms of governance that animate Mattei’s book, understanding the ideological contours of this form of politics remains central to grasping the durability of austerity in the twenty-first century.
The current landscape
When central bankers embarked on a rapid and synchronized phase of monetary tightening in 2022, the stark power dynamics of macroeconomic policy in capitalist democracies were once again laid bare. Despite a decade of populist upheaval and a belated recognition of the failures of austerity after 2008, the swift re-alignment of the world’s central bankers, policymakers, and political parties around an agenda of austerity has once more underscored the doctrine’s durability. As unelected technocrats have wielded the disciplinary bludgeon of interest-rate hikes, overriding nationally elected governments to discipline the alleged inflationary wage claims of workers, The Capital Order serves as a timely reminder of the indivisible class foundations of austerity and the extraordinary concentration of elite power that continues to shape it today.
Yet for all the echoes of the interwar period in the present, the current conjuncture is also marked by unmistakable discontinuities. Despite a renewal of popular mobilization and labor unrest in the aftermath of the pandemic, the political temperature of the present is a far cry from threats of socialist revolution. While unelected central bankers still possess extraordinary technocratic power in shaping the global economy, the channels of popular politics through which austerity passes today are distinct from the heyday of the gold standard. Grappling with austerity’s broader ideological foundations and tracing its trajectory through party politics today raises questions that cannot be fully answered by returning to the interwar period. Despite significant moments of popular unrest, austerity has since gained political and ideological traction amongst a larger cross-section of society. Apart from these historical differences, however, the core argument of Mattei’s book remains essential: rather than an irrational doctrine or a zombie idea that refuses to die, austerity has a fundamental and enduring relationship to the politics of capitalist crisis management.
Accounts of the rise of neoliberalism commonly emphasize the exhaustion of postwar systems of embedded liberalism during the economic crises of the 1970s and the parallel internationalization of economic activity. In Europe, this latter process is especially, and controversially, associated with the process of European integration. Aurélie Andry’s Social Europe, The Road not Taken scrutinizes the narratives behind both these processes. The book traces the debates surrounding a European-level leftwing political project throughout the “long 1970s”—a designation that captures the remarkable period of uncertainty and contestation beginning with the protest movements of the late 1960s and ending with the effective triumph of a new conservative and neoliberal politics in the early 1980s.
Andry argues that these left policies constituted a coherent alternative to the neoliberal version of European integration which ultimately manifested, but that leaders of the western European left missed a crucial “window of opportunity” to implement them. Her focus on the European Community (EC), the predecessor to the European Union (EU), distinguishes her analysis from those that unfold at the national or global levels. Though in practice agreeing with critics that the idea of a Social Europe has come to act as an alibi for the EU’s more fundamental role in promoting and consolidating neoliberalism, she holds that the earlier programs under that rubric offered a genuinely radical challenge to capitalist power and, at times, even sought to overcome capitalism itself.
Andry’s account brings to light the extent to which, in this period, radical ideas permeated policy arenas that are far more often associated with the dull and technocratic. It adds to a developing revival of interest in “roads not taken” during the crises of the 1970s, and makes a refreshing break from the dichotomies that often dominate debates on the relationship between socialism and European integration. Although it is not a central focus of her work, Andry also usefully points to a number of reasons that these policies were never successfully implemented, particularly highlighting the unwillingness of left party and union leaderships to mobilize support behind them.
Here, though, the account often raises questions that it does not fully explore. How and whether mobilization on these issues might have worked, and the structural conditions that might have enabled or inhibited this, is neglected. Moreover, the distinctions between Andry’s more radical Social Europe and its later alibi may not be as clear as she suggests. Social Europe projects today do exhibit a significant resemblance to those of the 1970s. This suggests a more pessimistic reading of what these alternative visions of the long 1970s offered, but it also presents a somewhat more optimistic reading of the situation we face today.
Roads not taken
The crisis of the 1970s is conventionally framed as a contest between new ideas associated with neoliberalism and beleaguered postwar systems based on Keynesianism or embedded liberalism. Recent years have seen a desire to challenge this narrative, with a number of works pointing to widely debated and discussed socialist alternatives to both paradigms.
Neoliberal policies, directed towards facilitating the profitability of capital at the expense of other parts of society, were boosted by the crisis of profits and heightened international mobility of capital, which were exacerbated by the breakdown in the Bretton Woods system of fixed exchange rates after 1971 and oil price spike after 1973. But for many left European parties and trade unions coping with a wave of protests and labor militancy in the 1960s, the initial response was to turn further in a socialist direction. With faltering economic growth and rising inflation, the compatibility between redistributive policies that favored workers and an economic model that was based upon the profitability of privately-controlled capital was increasingly questioned. For many socialist parties, this meant that the power of capital, protected in the postwar model, needed to be challenged. A quote provided by Andry, from a 1978 report of an employment policy working group in Confederation of Socialist Parties of the European Community (EC), sums up this calculation:
Socialists therefore face a choice. On the one hand they can rely on the profit motive, which can only operate effectively by abandoning the traditional social democratic goals…or they can supplant the private accumulation of capital by far greater state control (and workers control)…than they have so far contemplated.
The example of the Meidner Plan in Sweden, which proposed that the ownership of Swedish companies would be gradually transferred to wage-earner funds controlled by the trade unions, has particularly enjoyed a revival in scholarly interest. Alternative responses to postwar inflation, including price controls and targeted public investment, have also been skillfully examined. Another quite different strand of work has focussed on the international level—in particular, on the New International Economic Order (NIEO), a set of proposals for a more egalitarian global order endorsed by countries in the Global South in the 1970s.
Andry’s book brings in a western European focus that sits in between these domestic or global emphases. Socialist parties, Communist parties, and trade unions in the region were increasingly influenced by the idea that the power of multinational companies had to be challenged on an international, and firstly (western) European, level. The economic focus of European integration, especially since the creation of the European Economic Community in 1957, needed to be counterbalanced by a focus on “upward social harmonization.” But beyond that, the combined economic power of western Europe’s common market gave it the capacity to impose conditions on multinationals, and to regulate economic activity in a manner that was beyond the capability of individual countries.
“Social Europe”
European integration has been, as Andry notes, “one of the most contentious questions for the European Left in the twentieth century.” The historical depth of this divide, and the more fundamental ideological differences which it often captures, are summed up by two quotes from Karl Kautsky and Vladimir Lenin. In 1911, Kautsky argued that the only way to “ban the spectre of war” in Europe was through “a confederation with a universal trade policy, a federal Parliament, a federal Government and a federal army—the establishment of the United States of Europe.” By contrast, in 1915, Lenin argued that “under a capitalist regime,” a United States of Europe could only be a “cartel of European capitalists” that aimed at “jointly smothering socialism in Europe, jointly protecting the captured colonies.”
Today’s debates echo these positions, aligning with the more radical and more moderate wings of the left, with which Lenin and Kautsky are respectively, albeit often anachronistically and misleadingly, associated. On the one hand, there is the view that European integration promotes peace in Europe and offers the prospect of overcoming the limits imposed on nation-states by global capital. Some have argued that there has in fact been the steady construction of Social Europe since the 1985–95 Delors Commission, which also saw the EC become the EU, the establishment of a European single market, and the beginning of its Economic and Monetary Union (EMU). Another view emphasizes that European integration is an inescapably capitalist and indeed imperial project, and that it has played a key role in undermining social protections and national autonomy.
Andry suggests that neither is entirely true, in part because Social Europe has held multiple meanings. The “Social Europe” that has been claimed since the Delors Commission was indeed an alibi for the construction of the single market and EMU, which saw governments surrender key elements of their economic autonomy and “consecrated…a combination of ordoliberalism and monetarism.” However, she argues that this was not always the case. Projects for a Social Europe which challenged capital were boosted by a blurring of traditional left-right divisions within socialism. As social democratic parties moved towards a more radical set of policy stances and outright criticism of capitalism, communist parties’ embrace of Eurocommunism included a more favorable attitude towards European integration.
Some of the leading figures in the account, such as German Chancellor Willy Brandt, are familiar to histories of social democracy in this period. But Andry also brings attention to more neglected personalities. Perhaps the most remarkable of these is Sicco Mansholt, who served as President of the European Commission in 1972–73, while openly advocating for a break from capitalism. A member of the Dutch Labour Party and the long-serving first European Commissioner for Agriculture—he played a major role in creating the Common Agricultural Policy—Mansholt was increasingly influenced by more radical left ideas from 1968. He was fond of quoting Herbert Marcuse, and argued that there needed to be a “second Marx” and “new,” “modern socialism” that did not restrict itself to correcting capitalism. Mansholt was also influenced by warnings of the Club of Rome about the devastating potential consequences of continued economic growth, and argued for what we might today call a form of degrowth. He called for coordinated action to manage resource scarcity, challenge the power of multinationals, and tackle environmental pollution; a transition away from economic policy based around growing gross national product in rich countries; and redistribution of resources in favor of the global South. He saw a strengthening of the European Community’s competences as playing a central role in this process, even suggesting the need for EC-level “nationalizations.”
The most common policy proposals generally did not go as far as this, although they became more concrete and ambitious as the 1970s progressed. They included the coordination and planning of macroeconomic policy and public investment on an EC level, “upward harmonization” of social and labor standards, the expansion of EC-level funds, EC-level workplace protections, and representation in company boards, greater participation of social partners in EC decision-making, collective bargaining at an EC level, common environmental regulations, EC-wide reductions in working time, EC-wide interventions to control prices, a common EC energy policy, new controls over capital flows, and control over and worker participation in multinational companies. The development of this policy agenda took place in conjunction with efforts to improve the organizational cooperation and policy coordination of left parties and unions on an EC level.
In a context of Cold War détente and criticism of the US spreading into more mainstream elements of social democracy, the idea that Europe, possibly in alliance with the non-aligned movement of the global South, could support a “third force” alternative to the United States and Soviet Union also became more popular. It is not clear from Andry’s book how exactly this was meant to have worked in practice, and how these ideas would have come to terms with western Europe’s own dominant and often neocolonial position within the international economic hierarchy.
However, given the common frustration of both Europeans and proponents of the NIEO with the power and unilateralism of US economic policy and multinationals, there was a partial alignment of interests that gave an at least theoretical feasibility to such an agenda. A quote from Samir Amin, with which Andry’s book begins, shows the potentially global ramifications with which such action on a European level was conceived: “For a solution to this structural crisis of capitalism to come about, new socialist forces would have to be recomposed in the West, operating on a continental scale in Europe, replacing the failing national state with a supranational state capable of managing on that scale the new social compromise… all the hopes that might have been entertained at the time simply went up in smoke, as the Western Left missed the opportunity to renew itself.”
Although few would have gone as far as Amin’s idea for supranational state, Andry emphasizes that, at a time when socialist parties were in government in most EC member states, their ideas were not simply an abstract wish list. It was, nonetheless, a chance that they failed to take. While a less radical but substantial range of policies managed to gain the support of the European Commission, they mostly fell at subsequent hurdles, particularly when it came to securing the support of the European Council member state governments.
Window of opportunity
In Andry’s view, this failure can be explained by the left’s (national, ideological, and other) divisions and lack of coordination, its strategic inadequacies, and its failure to mobilize grassroots support for these policies. To this can be added timing and personalities, and the questionable sincerity of socialist party leaders’ leftward turn in the first half of the 1970s.
Although socialist parties could agree on general principles and certain lowest common denominator policies, they consistently failed to reach agreement on the more specific meaning of central propositions. Beyond this, there was still the problem of divisions on the very question of whether European integration could be pursued in a way that was compatible with socialist goals. In 1980, the President of the Socialist Group in the European Parliament observed that “the most fundamental problem, and where the Group is deeply split, is that of building Europe itself.”
At the same time, a key part of Andry’s argument is that “these divergences did not impede the emergence of a broad ‘Social Europe’ project.” Any effective project would have required both intergovernmental and supranational action. There are intriguing signs that at times tensions between more moderate pro-integration and more radical Euroskeptic elements could be quite productive. The entry of the more Euroskeptic British Trade Union Congress (TUC), together with other organizations such as the Danish LO and Italian CGIL, into a new European Trade Union Confederation (ETUC) in 1973, created a dynamic which made ETUC, while still favorable to European integration and dominated by more moderate currents such as the German Trade Union Confederation (DGB), adopt a “more combative stance towards European institutions” and place “far greater emphasis on the control of multinationals, environmental issues, the Third World, and peace and disarmament.”
But these organizations never gave enough attention or coordination to the European level, particularly in a context in which European capital was far more organized and coordinated. Timing and personalities also played a role in this failure. For example, Andry emphasizes the detrimental consequences of the 1974 replacement as German Chancellor of Willy Brandt—a key early driver of Social Europe initiatives and later an important advocate for the NIEO—by the more right-leaning Helmut Schmidt, who advocated for deflationary policies and opposed ideas for economic planning and the NIEO. By the time the left came to power in France, in 1981, the Socialists had lost their majority on the European Council and neoliberal ideas were already gaining an ascendance. The failure of the French government’s calls for EC-level coordination in support of a reflationary program was, in Andry’s words, a “final blow” for these projects for an alternative Social Europe.
Above all, Andry argues, these left projects failed because they showed little interest in engaging with or mobilizing on a wider grassroots level. Discussions on European policy remained confined to a small circle of elites. Andry suggests that the “Old Left”, which controlled most leaderships, saw their Social Europe project as a “paternalistic” means of reasserting authority over constituencies, “without ever trying to trigger widely mobilized popular support for their European project.”
By 1983, Andry argues, they had missed their chance. The right was now dominant politically; new Cold War tensions had undermined the possibilities opened by détente; the moral and economic weakening of the communist bloc undercut the force of an existing global alternative to capitalism; the Global South was increasingly divided; and workers’ movements in Europe had been progressively weakened by structural changes like deindustralization. This enabled a “real new international economic order” to consolidate itself, based around US hegemony and the Atlantic Alliance.
The experience of the French Socialists appeared to confirm that the left was stuck in “the European dilemma”: any kind of “socialism in one country” was increasingly constrained in an ever more interdependent world, but the left seemed incapable of bringing the coordination needed to alter a European integration process that was built on expanding markets and facilitating capital. The choice of the French government, and of its then finance minister Jacques Delors, was to renounce “socialism in one country” and to embrace a European integration process that entrenched, rather than challenged, the market and capital-oriented basis of the European Community.
Europe itself
Andry’s emphasis on the conservatism of “Old Left” leaderships aligns with a number of long-standing observations—on the indifference of Swedish Social Democratic leaders towards wage-earner funds, and the Italian Communists’ inability to incorporate new social movements, for example. At the same time, Andry is also right to emphasize that their options had become more constrained by the early 1980s, supporting literature which highlights the path dependence imposed by the successes of the right in the early 1980s, together with the high US interest rates imposed by the Federal Reserve after 1979.
But these explanations feel incomplete. It’s not clear, for example, how coherent and achievable this Social Europe project actually was. The vagueness that Andry frequently notes betrayed an inescapable uncertainty and disagreement about putting general principles into practice. The fact that the Socialist Group in the European Parliament, which should have had more potential for effective coordination and transnational action than the national parties and governments, failed to pass resolutions on any of the main objectives of the Social Europe project, also illustrates how far these ideas may still have had to go before they were implemented in any substantial form. This is particularly true of the more ambitious ideas such as EC-level planning of investment or economic democratization. It’s also not clear how the more moderate policies would have altered Europe’s general social and economic trajectory.
At times Andry seems to overstate the potential for grassroots mobilization, while understating the divisions surrounding the question of “Europe itself.” She places a deserved amount of blame upon the leaderships of the left for their reluctance to engage with or mobilize wider opinion on European policy questions. The elite focus of these leaders also reflects the little pressure they faced to do otherwise. At a time of widespread movements calling for “democratization” and increased participation in parties and trade unions, wider participation and action on a European level did not seem to have attracted much activist engagement. It could be added that, even with activist engagement, policies such as nationalizations in the UK and wage-earner funds in Sweden still suffered badly, not only from the leadership skepticism that Andry notes, but also from a general indifference on the part of the majority of trade union members and left voters.
A common exception to this activist disengagement was regarding participation in the European integration process itself. The importance of the basic question of European integration, rather than the kind of European integration that could be constructed, is evident in the experience of two leading members of the “Alternative Europe Network” of economists that pushed for planning and capital controls on a European level: Stuart Holland and Jacques Delors.
In his introduction to their 1978 book, Beyond Capitalist Planning, Holland expressed a theme whose undercurrents can be found in much of Andry’s account: that the new projects for a break from existing capitalist logic transcended the traditionally understood “moderate” and “radical” divides within the European left. But Holland’s own personal experience points to the limits that efforts to transcend such a divide came up against, and the related contradictions that emerged in the pursuit of putting these alternative policies into practice.
Holland’s ideas for a National Enterprise Board and planning agreements were embraced by the Labour left as the basis for its economic program in the early 1970s. In the process, they were rejected with growing vociferousness by Holland’s former allies on the Labour right. This was at a time when “Europe” was becoming the defining marker of division between left and right in the Labour Party. Andry suggests that the Labour left was “not as single-minded on nationalist strategy to exit the crisis as the literature usually depicts,” and points to the example of Holland. But Holland became effectively marginalized from the most influential elements of the Labour left, in part because of his European focus. The Labour left’s economic strategy also changed quietly but significantly in much of its emphasis in the second half of the 1970s. While Holland’s ideas remained part of this left program, which was often summarized under the rubric of the Alternative Economic Strategy (AES), the AES proper that developed after 1975 was often treated, by both opponents and supporters, as synonymous with the unilateralist solution of import controls.
While the extent of anti-EC sentiment was particularly strong in UK Labour, this kind of unilateralist national approach was also a recurring feature of left politics elsewhere. The radical and activist response to domination of the European agenda by elite moderates was rarely expressed in pressure for greater participation in and democratization of that process, but rather in a rejection of the European project as a whole. There was normally only a very vague sense, if any, of alternative versions of international cooperation.
On the other hand, the trajectory of Jacques Delors points to the perils of the opposite approach, which focused on European-level cooperation. It also suggests that, for all that the anti-EC left often ran into a dead-end in its practical politics, they also had a point. While Delors may have preferred a more “social” element in the Social Europe that developed in the 1980s and 1990s, he was also willing to embrace the alibi version that accompanied the intense market integration and removal of national-level autonomy that came with the Single Market and EMU. While Andry’s distinction, between the meanings of Social Europe in the long 1970s and after 1983, is instructive, the case of Delors points to its limits. As a leading proponent of a genuine Social Europe in the 1970s, and as then the leading architect of a false Social Europe that emerged afterwards, he exhibited significant consistency: a belief in forms of planning and social partnership, coupled with fears of inflation and state power. There are also other hints of Social Europe as a domestic alibi in this period. For example, Andry notes that the German Social Democrats’ role in launching new discussions on a Social Europe in the early 1970s was in part an attempt to compensate for their deradicalization in other areas. Even if the “window of opportunity” for a more profound Social Europe had been grasped in the 1970s, how different would it have turned out to be, given these continuities and the many contextual changes that it was still likely to have faced in its ongoing construction from the 1980s?
A new window
While Andry’s book is a revival of radical, forgotten ideas from the past, the language and policies will sound familiar to anyone following contemporary European debates. There are obviously some exceptions. A 1975 report by Socialist MEPs cited the Yugoslav system of workers’ self-management as a model for transitioning to a “classless society.” This certainly invokes quite a different political era, as does a President of the European Commission openly calling for a break with capitalism. But even calls for “planning,” which felt quite far away a few years ago, no longer do. Many of the policies listed by Andry from various documents would fit well in a 2023 document from the ETUC or Party of European Socialists. The same can also be said for the flaws in left politics on a European level: an elite-driven process that deliberately marginalizes grassroots engagement, insulated by disinterest on a national level, and disunity on the question of “Europe itself.”
Andry’s larger point is not so much that the policies have changed but that the context has: the alignment of political forces that provided this “window of opportunity” is no longer there. This is certainly true in many respects. Labor movements and left parties are generally weaker, and new geopolitical tensions do not carry the same ideological dimensions as the Cold War. On the other hand, the challenge of climate change has presented a new imperative and basis of mobilization for international coordination and planning. Political and civil society organization is now more institutionalized on a European level, and the very process of capitalist integration driven by the European project since the 1980s has made the European dimension harder to avoid. The notion that political union in Europe would follow if the path was set by economic integration was either naïve or cynical—and in any case reckless. But given that the EMU continues to exist, the dynamic of a political union, though far from inevitable, is an ever clearer necessity and possibility.
The Biden administration’s multifaceted industrial strategy of the past two years has ushered in an ill-defined transition away from neoliberalism. In response to the lingering supply chain constraints created by the pandemic and Russia’s war in Ukraine, as well as growing wariness over China’s market-share of dual-use technologies, the administration has promised to stimulate capital expenditure to maximize labor’s share of economic growth, build climate resilience, and promote energy independence. The goal is to expedite new allocations of labor and capital across sectors reeling from shortages, which have raised the cost of living for most workers and middle-class households.
Described as a novel approach to liberal-left policymaking, supply-side progressivism (also referred to as supply-side liberalism) primarily entails a wide range of government initiatives to strengthen market capacities. It combines incentives and parameters to accelerate production of critical goods that, in theory, sustain tighter labor markets, higher wages, and increased public revenue. As indicated by Treasury Secretary Janet Yellen, supply-side strategies to kickstart a new era of national economic dynamism are meant to also exemplify a renewed commitment to economic justice and opportunity by American liberals. They are a corrective, we may surmise, to neoliberal austerity and regional disinvestment, whose harms cannot be made up for in welfare alone.
Contrary to what some contemporary commentators have claimed, however, supply-side progressivism has been one of the leading traditions of American political economy for a century. “This worldview,” argues historian Brent Cebul in his new book, Illusions of Progress: Business, Poverty, and Liberalism in the American Century, “was born in the late New Deal, when liberals situated targeted public investments in and insurance for commercial, industrial, and residential development as wellsprings of virtuous cycles of economic growth and expanding tax revenues that might also underwrite a broader progressive social agenda.” If New Deal liberalism—a combination of a regulated market economy with expanded public sector responsibilities and union rights in core industries—amounted to a diluted version of European social democracy, then supply-side progressivism is the American analogue of indicative planning.
Cebul reconstructs how this method of market-making and developmentalism was implemented during the New Deal order and beyond. He interrogates supply-side progressivism’s historical propensity to preserve—and effectively underwrite—the discretion of private business over major investments that shaped the general welfare of local populations. This orientation, Cebul argues, is intrinsic to the supply-side logic: its goal is not to reserve spheres of the economy for long-term public ownership, but to use state stimulus, various public-private bodies, and regulation to make private investment more productive. In essence, it combines Hamiltonian and voluntarist traditions to strengthen the reciprocity of local capital formation and modern liberal government.
The upshot for Cebul is that, in key instances, the record of supply-side progressivism did not serve egalitarian ends. Cebul’s account illustrates how the approach failed to buttress efforts toward racial equality and economic advancement for Black Americans, and even inflicted new hardships.
But the book also offers insights on the strategy’s persistence as a stealthy political maneuver to bypass, fragment, or otherwise placate conservative opposition to any hybrid developmental-welfare state. New Deal planners, administrators, and economists faced formidable political constraints, as Cebul himself notes. Despite the accommodation of local elite interests, their developmental strategies nonetheless leveraged cross-class coalitions to support regional planning projects that were previously considered politically infeasible.
Today, as in the New Deal, supply-side progressivism remains a means of eluding reflexive opponents of “big government” while seeding development and expectations of shared prosperity. If supply-side progressivism is indeed a recurrent feature of American industrial strategy, Cebul’s history is vital for understanding how to avoid its past mistakes.
Forging local partners
Though guided by a belief in the virtues of democratic localism and voluntarism, liberals’ affinity for supply-side methods was, Cebul writes, ultimately pragmatic. It was structured by the reality of federalism, in which the ideology of states’ rights and a mercurial and dispersed hostility to national authority compelled progressives to embrace public-private partnerships. Although their underlying goals may have diverged, Franklin Roosevelt’s advisers and agency leaders, urban Northern Democrats, and Southern developmentalists all found it politically advantageous to execute New Deal policies in a way that suited local needs as articulated by pro-growth business allies. The array of national, regional, and subregional planning boards formed in the 1930s and 1940s reflected a conscious attempt to link cities and regions, not just state governments, to New Deal agencies. At the very least this cultivation of municipal and regional interests would undercut conservatives in both parties who jealously opposed greater federal intervention in economic affairs.
In addition to channeling federal money, planning boards promised a level of coordination, scalability, and support for new infrastructure and innovation that local business associations and municipalities could not muster on their own. These efforts modernized a “decentralized administrative state,” which typically subordinated state activism to the whims and prejudices of local politics. New administrative capacities were pliant—and business elites ensured they wielded maximum discretion over local development.
In this respect, planning boards and local divisions of public works agencies augmented rather than superseded the “boosterism” that had characterized urban development initiatives before the New Deal. Meanwhile, decentralized planning stimulated regional and interregional competition over federal contracts for public works and other projects. These included “roads, sewage systems, airports, public buildings, improved utilities,” which were distributed through agencies such as the Works Progress Administration, Public Works Administration, and Civil Works Administration. These kinds of contracts created much needed local capital, which firms then absorbed to build infrastructure. Local business associations lobbied aggressively for their share of funds despite their espoused faith in “free enterprise.” Reconciled to the merits of planning and confident in the long-term growth it would generate, they eschewed the dogma of national organizations such as the National Association of Manufacturers and US Chamber of Commerce that were hostile to the New Deal. As Cebul writes, “Even the Tennessee Valley Authority , then among conservatives’ and national business elites’ most hated liberal initiatives, was a boon to smaller-scale business-people, who benefited from its cheaper and more reliable electricity as well as its developmental ripple effects.”
The spread of public-private planning, underpinned by the advance of social science and its integration with a burgeoning administrative state, thus led to an unprecedented consensus over government’s role in development. While it caused business associations to identify more closely with their regional interests, this orientation was nevertheless constrained by biases and insular practices, including an ideological defense of the associations’ civic prerogatives. Business leaders decried “waste” in other locales while inflating the merits of their own pet projects. Financing, in fact, was significantly furnished via local banking intermediaries that disbursed federal loans made available by the Reconstruction Finance Corporation; the expectation was that loans would generate sufficient productive investment to be “self-liquidating.” This arrangement, Cebul explains, only reinforced business leaders’ predilection to raise capital through municipal bonds—and later, increase tax abatements for enterprise—at the expense of regular taxpayers and municipal finances far into the future.1
Ultimately, supply-side progressivism in its New Deal iteration was capacious enough to transcend ideological and partisan divides over economic planning. It facilitated growth in comparatively capital-starved locales while promising new avenues of development for more prosperous areas, without specifying what the sectoral or social outcomes should be. Even as it expanded a web of public-private administration that was inscrutable to the average citizen, supply-side progressivism was not a manifestation of “command-style” big government as caricatured by the New Deal’s most hostile opponents, but a means to prime private initiative and lending, industrial diversification and competition, mass consumption, and homebuilding, especially where state governments were unable or unwilling to. As long as government agencies could support private development geared toward elite-mediated notions of civic improvement, Cold War-era debates over economic policy mattered relatively little in practice. From the perspective of supply-side progressivism’s architects in the private sector, federal spending, properly delegated, promised more prosperity, more business opportunities, and patterns of investment and consumption that generated municipal revenue without the threat of wealth redistribution.
Cebul illustrates these dynamics by comparing the developmental trajectory of Cleveland, Ohio—a historical bedrock of Republican-aligned manufacturing interests and business associations—with that of Rome, Georgia, a small city representative of the intraparty divisions brewing in the Democratic Solid South between the 1930s and 1960s. Both cases exemplified a prevailing ethos of “business producerism,” in which the authority of local capitalists over development decisions sprang from “the notion that because businesspeople risked their capital, they were entitled to special consideration from political authorities.”
Beneath its premise of serving the public interest, this producerism was intrinsically undemocratic. Its purpose was not merely to guard against federal overreach but to uphold businessmen’s self-image as responsible and paternalistic yet also forward-looking. Following the depths of the Depression, and reeling from a period of labor insurgency, private enterprise was keen to demonstrate that it was a knowledgeable collaborator, not an implacable foe, of economic recovery. New Dealers, meanwhile, needed local partners to realize the fiscal multipliers promised by public and commercial infrastructure. Ultimately, they saw the expansion of social welfare policies—and in the South, democratization and civil rights—as proceeding from economic development.
Cebul argues that supply-side progressivism reinforced the authority of local white elites because of its tendency to accept, a priori, the virtues of localism and existing civic associations. This often intensified the consequences of Jim Crow in the South while fueling new forms of segregation and ghettoization in the North. The New Deal state’s deference to prevailing local distributions of power thus made it incapable of tackling deep racial inequalities. At the same time, it arguably fostered broad support for regional planning among whites, whether or not they named it as such. Consequently, it was able to generate cross-class constituencies who counted on federal stimulus to realize local development goals. At their most sagacious, advocates of planning incubated new industries and firms critical to upward mobility.
Crucially, this catalyzed a transformative if still elite-centered shift in power in the South. For those Southern interests that were most eager to pursue rapid industrialization, supply-side progressivism was a boon that facilitated the rise of a new generation of Southern moderates—Georgia governors Ellis Arnall and Jimmy Carter among them—who successfully challenged the arch reactionaries opposed to development. While they had their own manifest limitations on issues of desegregation and racial equality, these politicians were determined to overcome abject poverty and sectional backwardness—characterized by low literacy rates, widespread child labor, and stagnating or even declining capital formation—that distinguished the region from the more advanced Northern states. Georgia’s Agricultural and Industrial Development Board, Institute of Technology, Coosa Valley Area Planning and Development Association, and other organizations were emblematic of a broader Southern developmentalism that unabashedly harnessed federal support to expand a new middle-class composed of Southern whites. Once achieved, however, the region’s dominant interests generally disposed of liberalism, even as elements of planning were preserved by organizations such as the Southern Growth Policies Board.
Perpetuating inequality
In Cebul’s account, the most impressive fruits of public-private development during the postwar era are overshadowed by the inequalities and racism that it perpetuated. Although contributing to the celebrated economic growth of the period, supply-side progressivism was chronically undermined by its administrative logic, market orientation, and elite capture. Nearly all gains, one may infer from Cebul’s book, accrued to whites at the expense of poor and even middle-class Black people. At seemingly every turn, supply-side progressivism privileged the commercial possibilities entertained by local magnates, chambers of commerce, and, later, the burgeoning financial and luxury real estate sectors, with city-operated municipal services and public housing a secondary concern. Amid the surge in home ownership among working-class whites, facilitated in part by the Federal Housing Authority, most business elites deemed public housing construction a poor investment that would amplify blight and deter growth oriented around white-collar employment and upscale consumption.
In the worst cases, local development did not merely exacerbate segregation, legal or otherwise. Public-private partnerships repeatedly failed to promote the economic integration that appeared so essential to self-sustaining growth and the advance of “colorblind” liberal democracy. As illustrated in Cebul’s case studies, the very opposite occurred. Under the sweeping authority granted by ordinances for slum clearance, entire Black neighborhoods were leveled for new development. This destroyed decades of painstaking capital formation among African-American businesses and civic groups and often pushed Black families into areas afflicted with serious environmental hazards.
By the early 1970s, Black communities were pressed between rising unemployment in major Northern cities and racist efforts across the country to ostensibly preempt the spread of urban crime and poverty. Black Americans found themselves struggling to exercise newly won political rights within an unstable New Deal coalition whose dominant forces had so often undercut and fractured their communities. Though Cebul highlights campaigns waged by Black community activists in the late 1960s and 1970s that sometimes resulted in more Black political influence over local development, he shows that increased representation on city councils and even the election of Black mayors could not fundamentally alter the patterns of urban development that supply-siders had sanctioned. With the exception of the Community Action Programs set up by Lyndon Johnson’s Great Society, Black participation in economic development was largely thwarted or co-opted.
The spread of George Wallace-style populism during a period of growing economic uncertainty compounded the pattern of marginalization. As with the broader evolution of American liberalism, the scope of supply-side progressivism hinged on the changing politics of working-class Southern whites and Northern white ethnics. While the spirit and vernacular of the New Deal order can be construed as meshing economic populism with Keynesian expertise, its electoral linchpin had consisted of a rising tide of homeowners, the majority of whom were single-wage white families dependent on manufacturing employment or adjacent white-collar services.
Reforumulation
Deindustrialization in the advanced economic core of the Northeast and Midwest posed an acute threat to living standards, not least because non-commercial property taxes were an important source of municipal and state revenue. In the growing suburbs of the South, meanwhile, hostility to further federal enforcement of desegregation dovetailed with an ideological insurgency against the fiscal system that helped furnish Southern prosperity—the fear was that Northern states with heavy fiscal burdens would restructure the federal budget during stagflation and the energy crisis to their advantage.2
While elites in both the North and the South may have steered local development, they still had to accommodate the aspirations and concerns of the demographics that swung elections. Rocked by anti-tax populism in the face of staggering municipal debts, declining revenue due to white flight to the suburbs, and the growing economic demands of civil rights activists, the cross-class (and frequently bipartisan) coalitions of postwar urban development frayed as the fiscal crises of the 1970s mounted. Pervasive anti-government sentiment enervated the mainstream appeal of economic planning, hastening the turn toward neoliberalism.
While the macroeconomic changes of the Reagan revolution resulted in severe austerity for many cities and regions, in some ways they accentuated a process of adaptation and consolidation for local development practices that was already underway. Countering the scholarly and popular tendency to sharply segment American political economy between New Deal and neoliberalized “orders,” Cebul makes the case that, with certain modifications, supply-side progressivism was the throughline that bridged the policies, strategies, and ultimate convictions of most New Deal liberals and their New Democrat heirs. Community Development Block Grants—a cornerstone of Richard Nixon’s “New Federalism” and implemented by Presidents Ford and Carter—effectively restored elite control over state and local development, following the grassroots experiments of the Great Society. Instead of challenging the block grant model, which helped enable Reagan to make sweeping cuts to federal aid, the Clinton administration adopted it for welfare reform.
Bipartisan resistance to “big government”—exemplified by this fiscally-restrained form of federalism—ignored other economic changes that hindered the desired revival of associational life. Amid increasing trade liberalization, excessive deference to capital would ultimately undermine the localism that generations of liberals had supported. Clinton, for instance, extended corporate subsidies for job training in a labor market increasingly divided between low-wage service workers and salaried professionals. Beyond advancing free-market prescriptions over federal and municipal reinvestment, this approach concentrated power in the hands of multinationals, rather than medium-size domestic firms that were more embedded in and dependent upon their regional economies.
Cebul echoes historians Lily Geismer, Claire Dunning, and Gary Gerstle in noting that Third Way governance, with its decentralized and deregulatory thrust, was not merely a form of liberal acquiescence to conservative arguments about poverty, bureaucracy, and economic growth. An ad-hoc “post-industrial policy” based around advanced technology, venture capital, and a plethora of development corporations promised to stimulate entrepreneurship, but it primarily advanced financialization and a new wave of corporate mergers. Although the era’s private-public partnerships were heralded as a fresh approach, they reflected the continuation of earlier development strategies. What had changed was a regulatory framework that had once forced business to substantiate its claims to a “producerist” ethos. Midcentury investments in public infrastructure and diversified manufacturing were replaced with high visibility private projects—from medical research centers to stadiums—with relatively limited long-term employment opportunities. Without guardrails, an overreliance on tax abatements fueled a race to the bottom, as municipalities struggled to attract fixed investment amid secular stagnation and rampant outsourcing.
Developmental coalitions, past and future
While the book highlights the indisputable failures of this approach, it also suggests that the strategy will likely continue to mark American developmental policymaking. We must consider, then, the leaps in human development that supply-side progressivism aided under daunting political conditions. Cebul writes that when Franklin Roosevelt and his allies identified the South as “the Nation’s No.1 economic problem,” they fatefully “emphasized developmental over democratic solutions for social and racial crises of poverty.” This framing was conditioned by the Democrats’ bipolar, bisectional coalition. As Cebul acknowledges, committed New Dealers had to defang the most anti-industry, anti-Black, anti-statist, and patriarchal elements within their own party to promote market diversification in the South and wean the region off its utter dependency on a few crops.
The federal government thus had a range of urgent socioeconomic problems to solve, many of which originated from inter-elite bargains that were struck post-Reconstruction. Planning boards and industrial policy were a way to circumvent deep-seated hostility to national authority, even as their function favored gradualism in electoral politics over empowerment.3
These problems manifested in the North as well. Prior to the New Deal realignment, the formal two-party system was arguably characterized as much by disorganized, insular, and personalistic opposition to the status quo as it was by the commercial and industrial interests that controlled the distribution and benefits of economic growth. Labor-oriented politics, haphazardly harnessed and mediated by Northern Democrats, was repeatedly subsumed by the developmental paradigm of the Republican Party. Despite periods of labor militancy and vigorous social reform, the North had wanted for a clear developmental alternative as it underwent successive and overlapping stages of what we would now call growth-based politics—industrial protectionism, municipal boosterism, and the market-making and technological focus of Herbert Hoover’s “associative state.” Together, these stages had structured the sectors, social networks, and nexus of corporate-Northern interests which the New Deal state had to alternately penetrate and accommodate to advance democratic capitalism.
Throughout the greater industrial Northeast and Midwest, pragmatic partnerships with local business associations tempered the ascent of the labor left, further inhibiting the possibility of a national labor party. But this in part was because New Dealers had to build upon a preexisting form of state activism, over which labor-friendly Democrats in the Gilded Age and Progressive Era had sporadic influence, at best. Their unenviable task was to figure out how to both restore manufacturing employment in the North to solidify the support of workers there and create manufacturing employment in the South to isolate some of the region’s most obstructionist demagogues.
Given this challenge under the emergency conditions of the Depression, it is not surprising that Republican-aligned business associations proved critical to supply-side progressivism’s structure and content in Northern cities. While this arrangement had obvious limits, bringing Northern industry back online was an unavoidable precondition of moving forward with Roosevelt’s “No.1 economic problem.” Furthermore, federal income tax revenue leaned on productivity in the industrial North through the late postwar era. New Deal liberals, therefore, were disinclined to contest business producerism’s negative consequences for labor movements and racial equality.
What should policymakers conclude about supply-side progressivism’s historical flaws, particularly as they look to overcome regional divisions that show few signs of abating? If not accompanied by policies that halt the displacement of low-income and minority communities, contemporary supply-side progressivism risks replicating earlier injustices. Its advocates must focus on inclusive growth that corrects the mistakes and deliberate exclusions that Cebul documents. This entails forging a patchwork of regional developmental coalitions that bypass the enduring obstacles presented by federalism and gerrymandering; overcome high rates of civic disengagement and broad distrust of all levels of government; and arrest the spread of anti-growth politics from the right to the left.
How these coalitions might differ from historical precedent is a question of great concern. Beneath rightwing rhetoric, there is, in fact, a growing bipartisan enthusiasm for electric vehicles and clean energy diversification, alongside an emerging consensus that the country’s flagging industrial base demands reinvestment. However, this very tentative accord does not signal agreement over whether government policy should promote dynamic growth, equality of opportunity, demographic-specific “equity,” or universal socioeconomic security. It is also unclear if these competing ideas can somehow be reconciled in order to weaken the disproportionate power of far-right reactionaries.
Other complications loom. Three decades of hyper financialization and asset stripping have hollowed out the civic obligations that an older species of industrial capitalists had intermittently charged itself with. Compared to today’s footloose capital and the reign of shareholder value, midcentury business leaders’ self-designation as stewards of civic welfare, however compromised, seems quaint. Of course, it is highly debatable whether progressives would ever welcome a revival of business producerism along these lines. Indeed, Cebul’s book raises profound doubts over whether such localist forces are truly compatible with democratic oversight and social democracy.
Although there are promising signs of investment in decarbonization—itself the linchpin of an economy that will maximize social utility—it is unclear if Biden’s industrial strategy will generate durable constituencies for the green energy transition. In a party system where ideology and polarization make it extremely difficult to launch state owned enterprises and other forms of public ownership, sustainable progress will demand the kind of multifaceted pluralism that the developmental coalitions examined in Cebul’s book failed to embrace.
The Triumph of Broken Promises by Fritz Bartel is a new history of the end of the Cold War. Challenging conventional narratives that focus on Reagan’s military-ideological assertiveness or Gorbachev’s openness to reform, the book gives a material and structural explanation of Western victory and Eastern defeat.1 This makes for fascinating history: finance and energy emerge as silent but vital battlegrounds, unlikely connections—like those between Japanese investors and Hungarian central bankers—come to the fore, and several East-West similarities surprise the reader.
More than just fascinating history, however, the book makes a profound theoretical contribution. It demonstrates the importance of two institutional features of democratic capitalism, which state socialism lacked: the polity-economy distinction and competitive elections. It also highlights the importance of neoliberal ideology, providing certain Western policymakers with a framework to justify and even praise the unraveling of social democratic Keynesianism, while Eastern leaders struggled in vain to legitimize a similar turn to austerity within state socialism.
These features help explain why the West won the Cold War, and why this victory coincided with–and was in part fueled by—the rise of neoliberalism. In tracing their impact, the book also speaks to a set of wider questions: what is the nature of capitalism’s recent crises? What are the implications for progressive politics today? And is capitalism vs. socialism even the most useful framework for discussing these questions?
Promises had to be broken
Why did the Cold War end with the peaceful proliferation of liberal capitalism, and why did it do so in 1989–91, rather than a decade earlier or later? Some historians foreground President’s Reagan’s decision to confront rather than appease the USSR or Mikhail Gorbachev’s “new political thinking.” Others “focus on the rigid economic stagnation of the Eastern Bloc during the 1970s and 1980s,” separate from and in contrast to an unproblematically prosperous, dynamic West.2
Bartel presents a different history, drawing on new archival evidence from West Germany, Britain, and the US on the one hand, and Poland, Hungary, East Germany, and the Soviet Union on the other. His account highlights shared (economic) problems rather than unique (Western) prowess. It stresses structural factors—growth, finance, energy—rather than the contingencies of individual choices.
“Contrary to the confident predictions of both democratic capitalism and state socialism” runs the opening gambit, “economic growth in both systems severely stagnated” in the 1970s and 1980s.3 Indeed, the book reminds us, it was the West that looked weaker to contemporary observers: “Could democratic leaders solve the riddle of stagflation if it meant inflicting pain on those they governed? Smart money said no.”4 In its emphasis on economics, on shared challenges, and on Western trouble, this is a refreshing and new take.
The East and West faced similar challenges, and their respective analyses and responses to it were similar too. Analyzing politburo transcripts and internal memos, Bartel shows how both sides reached the same diagnosis: decades of promises made and delivered had woven a dense tapestry of contracts and expectations, all premised on high future growth rates. Given that those growth rates had declined, leaders on both sides regretfully observed, the promises built on them had become untenable. The upshot: promises had to be broken.
Built on this shared diagnosis, Bartel shows there was also “a fundamental similarity between the quintessential project of neoliberal reform, Thatcherism, and the seminal project of socialist renewal, perestroika.”5 Both aimed at “carrying out painful domestic economic reforms in the hope of relaunching economic growth.”6
That Thatcherism meant a “fall in living standards; yet more unemployment” and a direct confrontation with the trade unions7—in the hope that “10 years of vulgarly pro-business and pro-industry policies” would boost investment and move labor and capital from declining into rising sectors8—is well known. More surprising may be Bartel’s finding that the East was pursuing a similar project: Soviet economists stated bluntly that Perestroika would replace “administrative coercion” with the “economic coercion” of the market9 and “lamented the ‘structural fatigue’ of their industrial economy and the ‘egalitarian mood’ of their population.”1011 To be sure, Gorbachev and other Eastern leaders were looking for a way to relaunch growth without social pain: “As a country where power is in the hands of the workers… it is natural that we should want to have no unemployment.” But unable to find one, Gorbachev himself had to concede that “Unemployment… will inevitably follow in the course of Perestroika.”12
Both Perestroika and Thatcherism, then, meant scaling back economic and social security to drive efficiency gains and shift labor and capital from declining to rising industries. If this similarity between East and West is unsettling to readers today, it is nonetheless one that, as Bartel’s archival work demonstrates, was recognized behind closed doors at the time.13
Easier said than done
Both Perestroika and Thatcherism were easier said than done. While both sides eventually concluded that there was no alternative to breaking promises—reducing wage growth and economic security—only the West could actually do it. Why this is the case is perhaps the book’s central question, especially since strong trade unions, free elections, rising inflation, and a general sense of malaise had all looked like immovable obstacles just years prior.
Two institutional features of democratic capitalism emerge as central in Bartel’s history: the polity-economy distinction and competitive elections. They are partly what made the system more ideologically flexible. Neoliberal thinkers and policy makers could frame expenditure cuts and reductions in economic security, even if primarily driven by declining growth, as unleashing entrepreneurial energies and vindicating citizens’ economic freedoms. This was a clear break with the social-democratic settlement of the post-war era. But neoliberalism was nonetheless compatible with democratic capitalism. It provided a “sincerity of conviction” that “proved decisive” as Western leaders confronted the politics of breaking promises.14
Elections in turn allowed for the anger of disappointed expectations to flow into system-internal competition, rather than into demands for wholesale regime change. When it came to Thatcherism, “elections allowed her to credibly claim no responsibility for past government policy and instilled in most British people a confidence that their government was legitimate,” even as Thatcher shredded the promise of full employment, passed austerity budgets, and cracked down violently on trade unions.15
In contrast, according to Bartel, “communism… made no sense in an era of breaking promises.”16 Because state socialism integrated the political and economic spheres, governments could not shift responsibility for economic woes. An economic crisis was, by necessity, the fault and responsibility of the political regime. Leaders did of course try to justify the breaking of promises: for example, Károly Grósz, Hungary’s penultimate communist leader, argued that “Marxism has never accepted egalitarianism, but rather the postulate of equal opportunity.” But the argument did not land: in December 1986, he observed that Hungarian society “still barely tolerates” rising inequality.1718
TINA’s foundation: the polity-economy distinction
Perhaps the central feature allowing democratic capitalism to break promises without breaking its regimes was the polity-economy distinction. A defining feature of capitalism, it had two effects. First, it implied that Western governments had only ever promised to influence, but never fully to control, economic outcomes. This meant that Western regimes, even at the height of the mixed economy model, never made the same ambitious commitments as communism, which had pledged planned economies and fully socialized risks. “Democratic capitalist governments made fewer promises to their people, and this meant they had fewer promises to break.”19
Second, the polity-economy distinction created a discursive object—the nonpolitical economy—to which Western elites could point in justification of promise-breaking. When economic reforms were initiated in the West—whether a bout of Keynesian stimulus or austerity, of tax increases or decreases, of deregulation or re-regulation—subsequent movements in inflation, unemployment, strike rates, growth, or currency fluctuation could be read as signals of whether these were succeeding or failing. The signals generated were noisy and imperfect, to be sure, but because under capitalism, so the logic went, “the economic is nonpolitical,” the credibility of these signals was largely independent of the government’s. Margaret Thatcher’s words, for example, might not have convinced majorities of the need for austerity and a confrontation with trade unions; but high inflation, high unemployment, and low growth could.
The workings of this mechanism are best understood by example. Bartel looks to the case of Conservative Prime Minister Ted Heath, who could not muster a majority for the politics of breaking promises. When he confronted trade unions and pushed for lower wage growth to fight inflation in 1974, he lost the next election.20 This confirmed Tory grandees’ beliefs that it was better to accommodate than to confront Britain’s powerful unions. Even after Thatcher won the Conservative leadership election in 1975, “the career Tory politicians who had survived by not provoking conflict with the trade unions slowly buried” her proposed anti-union, monetarist, and austerity agenda “under deafening silence.”21
Had this “burial by deafening silence” continued, even competitive elections would not have helped to bring about the politics of breaking promises in the UK, for neither the Conservatives nor the Labour Party would have offered it as an option. As it was, however, economic signals and “new data” in the years 1976 to 1979—continued stagflation, the 1976 currency crisis and IMF bailout, and the 1978–79 Winter of Discontent—convinced the British public that the old settlement was broken. Following rather than leading this shift in opinion, Thatcher could then convince her grandees to run on a Thatcherite program—“Labour isn’t working” and “There is no alternative”—and win the 1979 election with it.
The centrality of the polity-economy distinction in this shifting of opinion is made clear in a chapter where Bartel compares Poland’s and the UK’s attempts to grapple with the economic and legitimation crises of the 1970s. Senior Polish leaders, too, saw a need to implement austerity, and believed that they had to convince a critical mass of the Polish population before they could do so. But whereas the escalation of economic crisis and the intensification of labor unrest convinced a majority of the British population that there was no alternative to breaking promises—because the signals were read as non-political signs of the exhaustion of the previous economic regime—similar signals were simply read as the failure of the political regime in Poland.
Because of this fundamental difference, when attempts to maintain the Golden Age tapestry of contracts and expectations provoked inflation, strikes, and currency crises in the West, these were read as largely objective signals that provided support for the dismantling of the economic regime of social democratic Keynesianism. By contrast, when attempts to maintain similar promises in the East led to growing indebtedness, shortages, and rising black market prices, these were read as political signals that further eroded support for state socialist regimes as a whole.
Breaking promises at home, building power abroad
Carried by neoliberal ideology, competitive elections, and the polity-economy distinction, Western regimes could break promises, whereas Eastern ones could only buy time.
This flipped the Cold War on its head. After a series of difficult crises in the 1970s, a Capitalist Perestroika—one of Bartel’s many deft phrases—eventually swept the Western world. This consisted of three prongs: breaking promises at home, flipping the balance of payments;,and converting financial interdependence into one-sided Western leverage.
The first prong was central: in the UK, Margaret Thatcher passed the 1981 austerity budget, “the defining landmark in the fiscal history of Thatcherism” and beat the National Union of Mineworkers into submission.22 In the US, Ronald Reagan broke the PATCO Strike, continued Carter’s deregulation of finance, telecommunications, and transport, halved the effective tax rate on capital, and provided the political backing for Paul Volcker to raise interest rates to the “highest levels ‘since the birth of Jesus Christ.’”23
Breaking the Golden Age promises to workers (full employment and the priority of labor over capital investors) “created a perfect storm of attractive conditions for capital.”24 Investors now knew that their claims would be prioritized. Once promises were broken at home in the West, capital that was previously flooding towards the global South and the state socialist countries suddenly came rushing back to the global North, leaving both the South and the East hanging.
This enabled the second and third prong of the Capitalist Perestroika. Whereas previously, public deficits were seen as dangerous capitulations of Western governments before trade union and worker interests, likely entailing inflationary consequences, the same deficits now looked like attractive investment opportunities. This allowed the Reagan administration to have its cake and eat it too: guns and butter, defense spending and tax cuts, could alike be financed without a weaker dollar or inflation.
The international consequences were severe, too. As the US (and, to a lesser extent, the UK) drained capital from the rest of the world, debtor countries had to scramble for dollars, allowing the US government, the Federal Reserve, and the IMF to end the interdependence that previously existed between debtors and creditors. By giving vulnerable US lenders enough time to reduce and hedge their exposure, dependence became one-sided. Leveraging this, “the Reagan administration and the IMF [could] impose their economic vision on the rest of the world.”25
Ending the Cold War
With this, the end of the Cold War was in sight. Thanks to the prior disciplining of the American working class and the Volcker Shock, Reagan’s massive fiscal deficits—a “financial buildup,” in Bartel’s felicitous phrase—achieved what his foreign policy could not: it soaked up global capital and thereby dried up lending to the Eastern Bloc.26
This was unexpectedly devastating for the Eastern Bloc. One of the most fascinating subplots of Bartel’s book is the centrality of international capital markets in the end of the Cold War. When growth dropped in the 1970s, both East and West had first reacted by borrowing: “The impulse to continue making promises was perfectly natural,” and “governments found in finance capital a lifeline that made making promises still possible.”27 This lifeline had become possible because, in the wake of the oil crises, petrostates had accumulated vast export surpluses that were now available for international lending.
Reliance on this lifeline, however, was asymmetric. The West had looked unstable and stagflationary in the early 1970s. Prior to the rise of neoliberalism, widespread support for social democratic Keynesianism undermined the claims of capital. As a result, investors lost patience relatively soon. In the UK, this was as early as in 1976; in the US it was in 1978–79; and in France, the frustrations arrived in 1981–83. When this happened, the West had no choice but to confront the politics of breaking promises.
The East, in contrast, had “energy, authoritarianism, and no inflation.”28 This allowed Eastern Bloc governments to borrow extensively on international capital markets.29It was only once the West was breaking promises at home that the East could borrow no longer—throwing it into crisis and forcing Eastern Bloc governments to finally break promises.
This became their undoing. Persuasion was tried and failed, ruling out peaceful austerity. Violence, in turn, was hard to justify, given the ideological exhaustion of state socialism. It had become ineffective in any case: crackdowns scared away Western creditors, as Poland painfully found out after 1981. Even existing loans could then not be rolled over, falling due in their entirety instead, so that violence ended up leading to even heavier austerity.
With neither austerity nor violence viable, Eastern leaders opted for exit instead. In Eastern Europe, “they gave up their power… in order to gain the political legitimacy they believed was necessary to implement the politics of breaking promises within their own countries,” writes Bartel.30 The Soviet Union adopted the Sinatra Doctrine and let its client regimes collapse. Even with respect to East Germany, the jewel in the Soviet Union’s crown, Gorbachev preferred the “riches of retreat”31—over twenty billion Deutsche Mark in West German grants and subsidized loans tied to a peaceful withdrawal of the Red Army from East Germany—to violence abroad or discipline at home.32
Thus the Eastern European revolutions in 1989–1990 “had not originated in the socialist world with perestroika,” as is commonly held.33 Nor had they originated in doux commerce or in the softer, cultural components of Ostpolitik. Instead, Bartel shows, they were driven by a whiplash effect of energy, finance, and politics interacting in unexpected ways: In the early seventies, the East’s new energy supplies, (outwardly) stable politics, and good credit allowed for ample borrowing. The West’s energy import dependence, weak investor trust, and (apparent) inability to break promises meant buying time was hard, so that decisive confrontations between finance and Western governments took place comparatively early. But when, due to the polity-economy distinction, economic crises helped persuade majorities in the West that promises must indeed be broken, the tables suddenly turned. With labor disciplined, capital came rushing back in. Precisely because it had borrowed so much before, the East was now exposed. Unable to break promises at home without sparking major backlash, and no longer convinced that repression was the answer, Eastern elites gave way in the face of the revolutionary wave. Deep down, then, the end of the Cold War was an “economic adjustment”—failed in the East, painfully pushed through in the West—“masked as political revolution.”34
Buying time or breaking promises? Implications for crisis theory
The implications of Bartel’s account are striking. They undermine any notion of Western triumphalism. For Bartel, “democratic capitalism prevailed in the Cold War because it proved capable of breaking promises and imposing economic discipline. Communism collapsed because it could not.” Moreover, by illustrating what “breaking promises” looked like in practice, the book leads one to ask who precisely won the Cold War: some general entity called the “West,” or a specific subgroup therein? Excellence in promise-breaking and winning on the back of others, the book makes clear, is not conducive to triumphalism.
Bartel is similarly disparaging about the results of Eastern Europe’s peaceful revolutions: when electoral democracy and neoliberal markets arrived in Eastern Europe, he writes, “the seat of government was returned to the people only so that their power to resist the government could be transcended.”35 Popular power in Eastern Europe was not a means of resisting TINA-economics, but of implementing it.
But the framework of buying time and breaking promises speaks to questions that go beyond the Cold War and its aftermath. Concerning the dynamics of democratic capitalism, The Triumph of Broken Promises challenges recent crisis theories which predict an inevitable collapse. Advocates of this view emphasize the tendency and inadequacy of “buying time” in the face of stagnant economic growth. Public debt, inflation, and other mechanisms might paper over the cracks for a while, but either voters or investors will be disappointed eventually. When this day comes, democratic capitalism will collapse.
Challenging these theories, The Triumph of Broken Promises shows that it was the Eastern Bloc, not the West, that relied on buying time. By effectively navigating the polity-economy distinction, democratic capitalism broke promises.
Admittedly, the conditions for promise breaking have changed. The ideological resources of neoliberalism have weakened, particularly since 2008; insecurity and inequality have risen significantly across the West, and spectacularly so in the Anglophone world; trust in the fairness of elections has declined and the democratic nature of Westerngovernments is in doubt, questioning the extent to which elections can still provide legitimacy for painful policy changes.
Further, the substance of a “politics of breaking promises” may look quite different today, and potentially more challenging for democratic capitalism. Whereas the post-1979 stabilization regime broke promises to workers, the crises faced since 2008 revolve around financialization, inequality, insufficient aggregate demand, and environmental breakdown. This suggests that, this time around, promises to carbon billionaires and millionaires are what must be broken—potentially a taller order.
Nevertheless, the polity-economy distinction may still facilitate adaptation. Neoliberalism is, after all, just one version of democratic capitalism. Other models like technocratic Keynesianism, full employment democratic Keynesianism, or a big green state, are waiting in the wings. The distinction may permit the same feedback cycle of problem, policy response, and data generation (be it with regard to unemployment, strikes, or inflation) as it did in the 1970s and 1980s—once again bypassing the collapse predicted by crisis theorists.
Arguably, this is what has happened over the last fifteen years in the US, from the Great Financial Crisis to the Inflation Reduction Act, and in the EU, from the first Greek bailout to the NextGenEU program. An exhausted policy paradigm was pushed beyond its limit; economic signals (in this case, low growth, low inflation, and low interest rates) indicated its failure; popular beliefs about feasible alternatives shifted; and politics followed opinion and shifted policy. As in the Cold War, this cycle was slow and painful. It was a contingent process that could have gone otherwise.36 Nevertheless, after well over a decade of crisis, democratic capitalism may be moving towards adaptation rather than self-destruction. Even if the durability of democratic capitalism remains an open question, the preponderance of evidence suggests that breaking promises has not been a one-time trick.
Utopias past and present
Beyond challenging recent crisis theory, Bartel’s book carries powerful implications for progressive politics: what could an end to capitalism look like? If utopia has become exhausted (Habermas), history has ended (Fukuyama), capitalism stands alone (Milanovic), and capitalist realism prevails (Fisher), what sort of alternative future can we credibly envision? For those of us who bring progressive political commitments to historical research on the 1970s and 1980s, this translates into the question: What was the road not taken? If there was truly no alternative back then, is there one today?
By detailing how socialist leaders exhausted all the alternatives at their disposal—from buying time to reaching for growth, from disarmament to dismantling empire—Bartel urges us to let go of the producerist utopias underpinning the state socialist project and some of its Western cousins. Given their politics, the communist leaderships were highly motivated in their search for alternatives to neoliberalism and austerity. And, at the time, they were well positioned to do so—they were a large, geopolitically independent, and energy-self-sufficient bloc. If they could not find an alternative, if they themselves declared “There is no alternative to perestroika!” and if they faced the same problem as the West—then perhaps the model indeed could not survive.37 That this rhymes with the experience of the UK Labour Party as it tried to avoid an IMF bailout in 1976, with French President Mitterrand’s turbulent first two years in office in 1981–83, as well as with the evolution of US energy policy over the course of the 1970s is powerful evidence for TINA.38
Of course, as 1989–91 showed, a lack of alternatives to economic discipline does not mean there were no meaningful political alternatives. To the contrary, there were world-historical choices to be made about what politics and what economics could coordinate and legitimize deindustrialization and economic discipline. Getting those wrong meant regime collapse. Getting them right meant successful adaptation.
Moreover, in light of both Bartel’s and Isabella Weber’s recent book, one cannot help but wonder whether targeted reforms in agriculture and energy, instead of economy-wide perestroika, would have been a more rational approach for the Eastern Bloc. Here, as with the recycling of petrodollars, Bartel’s book may leave certain contingencies underexplored.39
Political and sector-specific alternatives notwithstanding, there seems to have been no alternative to breaking the mid-century promises of ever growing prosperity and economic security.40 If there had been, one can presume that such an alternative would likely have been found—by Eastern leaders desperate to stay in power, by French Socialists trying to deliver on their election promises, by the British Labour Party maximally eager to avoid the IMF, or by US politicians seeking to manage the 1970s energy crisis in line with voters’ egalitarian preferences.
Recognizing this is painful, but potentially liberating. For in demonstrating that producerist ideals of abundance were very likely beyond reach, that there simply was no alternative back then—“TWNA”—The Triumph of Broken Promises may open new horizons today. Alluring utopias like fully automated luxury communism easily steal the limelight. Bartel’s book tells us to look to other utopias, less shiny, less techy, and more political. Two such alternatives are in the air already: a hard-nosed Kaleckian one, in which running the economy hot is used to provoke the political contradictions identified in his famous 1943 paper on full employment;41 as well as a deeper, more hopeful, historically more ambitious project to reformulate abundance as a social rather than material-technical project.42
Decarbonizing industrial society
Beyond its rich implications for reflecting on capitalism, crisis, and utopia, Bartel’s book stirs a third great theme: in highlighting that East and West faced similar challenges, and played with much the same toolkit of responses, The Triumph of Broken Promises raises afresh the question as to whether the binary of capitalism versus socialism is the best lens for studying twentieth century political economy. Perhaps, it subtly suggests, “the debate which confronted capitalism and socialism as mutually exclusive and polar opposites will be seen by future generations as a relic of the twentieth-century ideological Cold Wars of Religion,” as Eric Hobsbawm wrote in 1994.43 Maybe “industrial society” offers a firmer analytical grip.44
Implicit in the book is a Latourian point: what industrial societies, in both their colorations, encountered was the great difficulty of governing always imperfectly understood modern economies. If their “true state” is always contested because industrial societies are bustling with different modes of existence and because our knowledge about them is always socially constructed, in politically contestable ways, then managing significant economic disappointment is fantastically difficult. Who would accept the need to retrench their particular prosperity because of some nebulous necessity that can never be proven? TINA is never obvious—even when actually true!
This brings us, like Latour’s later work, to the politics of decarbonization. It is obvious that there is no alternative to a green transition. But if decarbonization involves significant economic disappointment—not a given, but a definite possibility—we may face difficulties that echo those recounted by Bartel.
As a final reflection, then, it is worth pondering the two very different mechanisms that successfully broke promises in Bartel’s telling, and how they might fare when confronted with climate politics. In the “Western” mechanism, majorities accepted economic pain because they came to believe there is no alternative to it. In the “Eastern” mechanism, majorities accepted economic pain once it was a legitimate, i.e. their, government that imposed it.
The first mechanism relied on creating a sense of necessity. Applied to climate change, this would involve demonstrating that green growth is impossible, before and as a means for legitimizing degrowth measures. The gambit would be that, just as the UK had to go through an IMF bailout and the Winter of Discontent before majorities could be found for deindustrialization, so fossil fuel societies would have to see the failure of green growth before majorities could contemplate degrowth measures.
It is unclear if this would work. What generated beliefs of necessity around deindustrialization were phenomena like inflation, unemployment, fiscal deficits, currency crises, GDP stagnation, and empty shelves, visible on time scales from months to a few years. With climate, the relevant feedback loops may take decades. By the time beliefs of necessity are established, it may be too late.
The second, Eastern mechanism followed a radically different logic. Here, the acceptance of economic pain went via viewing the painful reforms as self-imposed. There may be different ways to create the salient feelings of agency and self-determination around decarbonization, but a prima facie plausible way may be to pull more decision-making into democratic politics, to lean more on planning and less on markets in coordinating the transition.
Could this work? Here, too, the answer is unclear. Much turns on whether it was self-determination per se that enabled the politics of breaking promises in the former Eastern Bloc, or whether it was the shift to self-determination that did it. “Tough decisions, freely taken,” or a one-off sugar coating—“trading factories for freedom,” to echo Judith Stein? The first would be promising for a specifically democratic climate politics. The second would be problematic, for although the countries of the Global North have considerable democratic deficits, they remain more democratic than the Eastern bloc countries were. Boosting democracy today would provide for a thinner sugar coating. There would be less freedom to win in exchange for trading away further factories.
Bartel’s book does not provide answers to these questions. But its framework proves fertile indeed for contemporary analysis. Perhaps producerist utopias of abundance should be jettisoned, together with hopes for capitalism’s demise. Perhaps the social construction of scarcity, and how to undo it, should move to center-stage. And perhaps the hardest challenge before us, as decarbonization becomes ever more urgent, may not be escaping TINA when there are real alternatives; but how to act, when there are none.
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 ethnonationalcore 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 MarshallPlan, 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, SusanStrange, 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.
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.
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 expanded “foreign 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.
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.
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 crisisconfronted 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 partwithin 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 IIand 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 formerNewDealerswentindifferentdirections.) 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 beingregressive and based on absurdassumptions 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.
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