Failed States and Failed Markets

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

As a new century begins, the US advances the notion of "failed states"
in international affairs, which provides a mandate for the sole
remaining superpower to stage regime changes in any nation deemed a
failed state in the world order of nation states that has existed since
the Peace of Westphalia of 1648.

Edmond Burk prophetically recognized the first partition of Poland in
1773 as the beginning of the crumbling of the old international order.
The principle of the balance of power had been historically invoked to
preserve the independence of European states, to secure weak or small
states against Universal Monarchy. Poland was the first nation in the
European system to be partitioned out of existence without a war, a
source of great satisfaction to the participating powers: Russia,
Austria and Prussia. The event showed that in a world where great powers
had risen, controlling modern apparatus of state, it was dangerous not
to be strong. A century later, Africa, lacking strong governments, was
also partitioned without war among the states of Europe.  Furthermore,
the partition of Poland profoundly altered the balance of power in
Europe.  Emerging Western European powers, such as France and England
began championing the cause of Polish resistance and nationalism for
geopolitical reasons.

Resistance to the coercive internationalism of the Napoleonic empire
gave rise to modern European nationalism in protest against the
Napoleonic idea of a European continent united by uniform law and
administration, with a single economic system and foreign policy and a
unified command of its armed forces, the forerunner of the EU.  Since
the international system was essentially French, nationalist movements
were generally anti-French, except in territories outside of French
influence.  The nationalism of the period was a melange of conservative
and liberal forces, with conservatives emphasizing preservation of
traditional national culture while liberals emphasized
self-determination and decentralization. Nationalism thus was highly
complex and dependent on a larger political context that was deferent in
each country. Patriotism in England during the Napoleonic Wars helped
her through the social crisis of the Industrial Revolution, caused by
dislocation, unemployment and associated revolutionary agitation. With
minor exceptions, Spanish nationalism was counter-revolutionary and
counter-reformation, aiming to restore the clergy and the Bourbons.

German nationalism rebelled not only against Napoleonic rule, but
against century-old ascendancy of French civilization.  The age of
French Revolution and Napoleonic triumph coincided with German cultural
efflorescence, with Beethoven, Goethe, Schiller, Herter, Kant, Fichte,
Hegel etc, who embodied German romanticism against the rational dryness
of the French dominated Age of Reason.

Following the Peace of Westphalia, German nationalism was largely
dormant until late 18th century  The German upper class was contemptuous
of anything German, their taste and mannerism and literature was French;
their music, art and architecture were Italian.  Frederich the Great
hired French tax collectors and wrote in French.  J.G. Herder wrote in
1784, five years before the French Revolution, his "Ideas on the
Philosophy of the History of Mankind" in which his asserted that all
true culture must rise from native roots, the life of the common people
"the volk", not from the cosmopolitan mannerism of the upper classes.  A
sound civilization must express the Volksgeist, or national character.
The French, in comparison, has a less developed tolerance for cultural
relativity. The idea of Volksgeist became a highly significant idea
through Europe and later around the world.  It was the fundamental
appeal in romantic thought against rationalism. It celebrates difference
along with similarity in mankind, in contrary paths against the Age of
Enlightenment and its coercive universality. Hegel asserts that for a
people to enjoy freedom, order, and dignity, it must be in control of a
potent and independent state, the institutional embodiment of reason and
liberty.

In economics, Frederich List, in his "National System of Political
Economy" (1841) asserts that political economy as espoused in England,
far from being a valid science universally, was merely British national
opinion, suited only to English historical conditions.  List's
institutional school of economics asserts that the doctrine of free
trade was devised to keep England rich and powerful at the expense of
its trading partners and it must be fought with protective tariffs and
other protective devises of economic nationalism by the weaker
countries.  Henry Clay's "American system" was a national system of
political economy.

The failure of the Frankfort Assembly was more nationalist than social.
Its desire to retain non Germans in the new Germany at a time when
nationalism was on the rise, forced it to depend fatally on the
military. After its failure, German liberal and revolutionaries
emigrated in large numbers to the US, known as "forty eighters",
contributing to the American socialist tradition.

>From 1870 on, a nation state system prevailed in world politics, with
the consolidation of large nation states. Nationalist sentiments overran
socialist internationalism at the start of WWI. The anti-war Zimmerwald
program split into a Zimmerwald Left, led by Lenin whose aim was
revolution in the belligerent countries caused by the continuation of
war, while the rest aimed for peace.

The Asian financial crises revived economic nationalism around the world
against US led neo-liberal globalization while the NATO attack on
Yugoslavia revived military nationalism. Just as anti-Napoleonic
internationalism was essentially anti-French, anti-globalization and
anti humanitarian intervention are essentially anti-US.  US
unilateralism has become the midwife of a new revival of political and
economic nationalism.  The Bush Doctrine of nuclear posture pours
gasoline on the smoldering fire of nationalism everywhere.

The notion of failed states advanced by US neo-liberals is not
accompanied by any notion of failed markets, despite signs of market
failure everywhere.  Yet a real failed state is one that tolerates, nay,
promotes failed markets.

When the market does not provide efficient outcomes for society,
economists say that the market has "failed." Economists have identified
different types of market failures:

Monopolies: The Failure of Competition.
Microsoft is a monopoly, albeit the final decsision is still pending.
AT&T was a monopoly which the Supreme Court broke up in 1983 after a
ten-year battle. The Congress passed the Sherman Antitrust Act in 1890.
It declared illegal every contract, combination (be it a trust, monopoly
or otherwise), or conspiracy that restrained interstate and foreign
trade. The Supreme Court refused to uphold its constitutionality.
Theodore Roosevelt's "trust-busting" campaigns and a change in the
opinion of the Court achieved some results. In 1914, Congress passed the
Clayton Act and established the Federal Trade Commission, expanding and
tightening antitrust laws by explicitly forbidding actions taken to
force competitors out of business by slashing prices, buying up and
hoarding supplies, bribery or intimidation.
When a firm has market power, such as Microsoft, it tends to restrict
production in order to drive up prices and increase profit margins. This
results in too few goods and innovation being produced in noncompetitive
markets.  The world is awash with overcapacity in manufacturing and
telecommunication because finance capitalism is concerned only with
monopoly of finance that thrives on ruinous competitive markets for
manufacturing and telecomunication. It also means that income is
concentrated in the hands of those who have market power at the expense
of those who do not.  Under financial capitalism, dollar hegemony is a
fundamental monoploy that permeate all sectors of theglobal economy.
Two years ago, the Oxford Union held a debate: Resolved that the US is a
failed state. The resolution failed by only a narrow margin.

Another market failure economists have identified is the underprovision
of public goods.
Examples of public goods include national defense and navigational
devices such as lighthouses and buoys. Public goods will either be
underprovided or not provided at all by the market. Because the benefits
from a public good enjoyed by any individual are almost always less than
the cost of producing the public good, the market does not provide
them.  The market has tended to under supply insurance for particular
kinds of activities or risk (especially health insurance). The post 9:11
insurance crisis surrounding the airlines and the property casaulty
sector is another example.  AIG, Citigroup and GE are selling their
property casaulty units. The market, on its own, also fails to supply
adequate loans for education and small business ventures and well as
urvan edevelopment for black neighborhoods. In each of these cases,
there are government programs to complete or supplement the naturally
incomplete markets that exist. Medicaid and Medicare are government
financed "insurance" programs for the poor and the elderly. The
Department of Education and state and local student loan agencies
underwrite or guarantee loans to students attending accredited colleges
and universities. And the Small Business Administration helps
individuals secure the funding they need to start their own businesses.
Globalization in the past decade has grossly underprovided public good.
The mostly obvious is environmental protection.

Externalities.  When someone other than the recipient of a benefit bears
the costs for its production, the costs of the benefit are external to
its enjoyment.  Economists call these external costs negative
"externalities." Externalities amount to a market failure to distribute
costs and benefits efficiently.  Globalization is basically a game of
negative externalities, as evidenced by the infamous Summer World Bank
memo on the immaculate logic of locating pollution in the poorest
countries. Inhuman wagesand working conditions is another negative
externality that benefits US inflation rate.

Another market failure stems from the market's inadequate provision of
information. The effect of asymetrical information on the proper
functioning of the market has been well discussed on this list. But the
real information battle is Western domination of world media. Thirty
years after developing countries first called for a 'New World
Information Order' (NWIO), Western media are still being faulted for
distorting and ignoring much of the world around them. Even as Western
media have bolstered their domination of global news, Western news
content seems less and less informative, particularly about issue not
central to Western concerns.  Another form of information monoploy is
structurally built into TRIPS (Agreement on Trade-Related Aspects of
Intellectual Property Rights) which is Annex 1C of the Marrakesh
Agreement Establishing the World Trade Organization, signed in
Marrakesh, Morocco on 15 April 1994. Under TRIPS, the less developed
nations will be condemned to intellectual feudal serfdom perpetually.

Incomplete Markets is another form of failure. There are some goods and
services which may not be "pure" public goods which are nonetheless
under-supplied by the market. There are numerous goods and services that
have the potential to improve the economic fortunes of individuals and
of society that are not widely available. In such circumstances, the
need or demand for a particular good or service is higher than the
available supply of that good or service, hence there is an incomplete
market.  In many circumstances the amount of coordination required to
complete a market is so extensive that government intervention is
required.  In the case of the Internet, governmental support is largely
responsible for the creation of a massive multi-billion dollar
complementary market.

All governments coordinate, if not regulate, businesses and the markets
they operate in. For years, Japan's Ministry International Trade and
Industry (MITI) has been held up as a shining example of successful
governmental coordination of a nation's economy through an industrial
policy.  Economic setbacks in Japan during the last decade have been
blamed by Western analysts on the inability of MITI to out-guess and
out-perform the natural forces of the market. A case can be built that
MITI's error was not industrial policy per se, but its failure to
understand the destructive power of dollar hegemony under finance
capitalism.  It is not enough to plan. Planning needs to be
intelligent.  Japan's failure was that it was play the game of
industrial capitalism when the US moved to finance capitalism.

The "Business Cycle" is a structural and recurring market failure of
market capitalism.  Unemployment as a devise to combat inflation is a
policy market failure.

In a market system there is a structural tendency for income to be
distributed unevenly. Even in the US, the consumate beneficiary of
globalized markets, 26.3% of all children in the U.S. live in families
that are below the official poverty level (UNICEF).  On the global
level, 30% of the population live on less than $1 a day, mostly women
and children.  No amount of sophist argument can deny such obvious
market failure.

Failed markets threaten the future of the world much more than failed
states.  The real regime change needs to be on failed markets.

Henry C.K. Liu