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Nation, state and globalisation
Nation, state and globalisation
(In memory of Edmund Wolf, who taught me to hate totalitarianism and love freedom)
Martin WolfAssociate Editor and Chief Economics Commentator, Financial Times, London.Keywords: Globalization, Socialism
Every line of serious work that I have written since 1936 has been written, directly or indirectly, against totalitarianism and for democratic socialism (George Orwell, "Why I write", 1946, in Crick, 1984). What this war has demonstrated is that private capitalism – that is an economic system in which land, factories, money and transport are owned privately and operated solely for profit – does not work (George Orwell, 1940, "The lion and the unicorn", in Crick, 1984). From the moment that all productive goods have been declared the property of the state the common people will feel, as they cannot feel now, that the state is themselves (George Orwell, 1940, "The lion and the unicorn", in Crick, 1984).
George Orwell was a political writer. Equal weight should be placed on adjective and noun. Bernard Crick, author of the definitive biography, places him together with Thomas Hobbes and Jonathan Swift as one of "three names" that "seem indisputably preeminent" (Crick, 1980). Orwell himself wrote that it is "invariably where I lacked a political purpose that I wrote lifeless books and was betrayed into purple passages, sentences without meaning, decorative adjectives and humbug generally" (George Orwell, "Why I write", 1946, in Crick, 1984). He became the West's most effective polemicist against fascism and communism. But he also wrote in support of democratic socialism.
If Orwell were alive today, how far would he be disappointed and how far pleased? The answer must be that he would feel both emotions. He would observe the absence of totalitarian communism and democratic socialism. He would, presumably, find the former heartening and the latter depressing. Orwell was a prophet in the biblical mould. His writings contained both a warning of dangers and a hope for a better world. What he warned against has collapsed; yet what he hoped for has never arrived.
Today, Orwell would see the worldwide spread of liberal democracy. This is the first time in history that more than half of humanity lives under an elected government. But he would also be aware that the global capitalism he believed wicked and inefficient had triumphed. Yet he might not find this that surprising. Already, in 1947, he wrote that
…a Socialist today is in the position of a doctor treating an all but hopeless case…Our activities as Socialists only have meaning if we assume that Socialism can be established, but if we stop to consider what probably will happen, then we must admit, I think, that the chances are against us (George Orwell, "Towards European unity", 1947, in Orwell and Angus, 1970).
My aims in this lecture are as follows: to explain why socialism failed; to consider the origins and nature of today's global market economy; and then to analyse what "globalisation" means for the state and the nation.
Why socialism failed
We must start by trying to understand why Orwell was wrong when he declared, in 1940, that "what is quite obviously happening, war or no war, is the break-up of laissez-faire capitalism and of the liberal Christian culture" (George Orwell, "Inside the whale", 1940, in Crick, 1984, p. 131). Christianity does not look very healthy, at least in Europe. But capitalism and liberalism have proved far more adaptable and durable than he – and most others – imagined.
A part of the explanation for Orwell's error is that his lifetime was more exceptional than he understood. Between 1914, when he was 11, and 1949, when he died, Orwell witnessed the Great War, the Bolshevik revolution, the Great Depression, the rise and defeat of fascism in the Second World War and the beginnings of the cold war. This was an era of calamities. It was also an era of politics rampant, as Orwell himself often remarked. Even in a country as sheltered as England, politics became more central to people's lives than at any time since. In much of the world, it became a question of life and death. It was natural for intellectuals to believe that there were only political solutions. If the market economy had ceased to function, the obvious answer was to nationalise it – make it a department of the state.
Yet the time in which Orwell lived proved more directly misleading. In war, state direction of the economy is more efficient than the market. But this relative effectiveness of the state is not to do with capitalism, but rather to do with war. If the challenge is to mobilise the resources of an economy for the short-term purpose of winning a war, nothing rivals the capacities of a modern, well-run state. The aim of economic activity is then clear. Moreover, because all citizens are potentially equal in death, they must also become more equal in life. Thus to the practical need to focus human and material energies on war is added the moral obligation to convince citizens of their equal worth. Total war is a collective activity. Collectivism is the result.
Yet war is not the inevitable fate of humanity. In an age of atomic weapons, great powers cannot contemplate it, unless governed by lunatics. Today, almost all of the world's wars are low-level conflicts between – or, far more often – inside undeveloped economies. War is a plague for the poor. Since 1945, there has been no full-scale conflict among great powers, with the arguable exception of the Korean War.
The planned economy was invented and perfected for war. It failed in peace. Then, what Orwell called capitalism and I would call the market economy, comes into its own. Over the long term, a successful economic system has to meet the divergent desires of hundreds of millions – today billions – of consumers; it has to encourage producers to meet those desires at the lowest possible cost; and it has to provide motive and means for improving existing – and inventing new – ways of satisfying human desires. In three words, the tasks are: discovery, coordination and innovation. As the great Austrian economists – particularly Joseph Schumpeter and Friedrich Hayek – argued, only a decentralised market economy is suited to these tasks. Schumpeter's notion of creative destruction and Hayek's of the market as a discovery process are both apposite.
The market is no utopia. It is, like democracy, the worst possible system, except all the others. It rests on greed. It is indifferent to equality. But a properly established market economy can generate sustained growth and unprecedented prosperity.
The failures of the socialist planned economy are evident in the experience of Soviet communism. Consider the "twins" – West and East Germany and North and South Korea. In both cases, the socialist part was, initially, at least as advanced as the capitalist one. Over a period of half a century, the ratio of the average standard of living of capitalist West Germany to that of the East became about two-and-a-half to one. In the two Koreas, it is today of the order of eight to one. To take another example, in 1950, according to the economic historian, Angus Maddison, Czechoslovakia's standard of living was much the same as Italy's. By 1990, it was less than half the Italian (Maddison, 2001, p. 185).
Communism did not collapse because of its brutality and lies alone. Closer to the truth is that as its economic failures became more evident, nobody – not even Mr Gorbachev – was prepared to defend it. State socialism failed because it could not solve the economic problems of a modern advanced economy. It provided no incentive to innovate, meet market demand or economise on scarce resources. While well adapted to total war, it was a failure in peace.
If economics destroyed the planned economy, does it also doom democratic socialism? At this point, let us consider what Orwell himself meant by this phrase. It included, he wrote, "common ownership of the means of production", but, he continued, "one must add the following: approximate equality of incomes (it need be no more than approximate), political democracy and abolition of all hereditary privilege, especially in education" (George Orwell, "The lion and the unicorn", 1940, in Crick, 1984, pp. 160-1).
Could Orwell's desire for "common ownership of the means of production" have worked? The answer is: no. But distinguished economists, including Schumpeter (1943), thought that a market form of democratic socialism might be workable.
As Schumpeter argued, if one could impose credibly "hard" budget constraints on socialist firms, if one could make a board of civil servants as prudent and as risk-taking as competing private financial institutions and if one could motivate people to innovate without adequate incentives, a socialist market economy might work. But none of this is plausible. It is impossible in practice to make an economy without owners work as if it had them. Bureaucrats and politicians do not behave like entrepreneurs and financiers. A market economy without private ownership is a skyscraper without foundations.
It is equally implausible that a socialist economy – even a market socialist economy – would long remain a democracy. The distinguished Hungarian economist, Janos Kornai, notes that: "there has been no country with a democratic political sphere, past or present, whose economy has not been dominated by private ownership and market coordination" (Kornai, 2000, pp. 36-7). The connection is two-fold. First, a political party that controls all resources through the state is most unlikely to allow access to the means of campaigning to any opposition. Private property is thus a necessary condition for political pluralism.
Second and more fundamental, in an economy where all economic decisions are ultimately political, a loss of power is tantamount to a loss of livelihood. For this reason, elections in countries where all economic decisions are political are civil wars. It is only when politics are not a matter of personal survival that a stable democracy is conceivable. For democracy to function, the domain of the political has to be circumscribed. It is no accident therefore that, although all capitalist economies are not democratic, all democracies are capitalist.
Orwell was wrong to believe that the market economy was less efficient than central planning. He was also wrong to hope that one could combine social ownership with democracy. The planned socialist economy has failed. But democratic market socialism – the idea that animated the Prague Spring of 1968 – is as mythical as the centaur.
How the global market economy returned
If not socialism, what? The answer is a regulated market economy. After the end of the Second World War, that is what the Western world constructed, under the influence of Keynesian ideas of macroeconomic demand and the Anglo-American view that liberal international exchange, particularly in trade, had to replace the beggar-my-neighbour devaluations and trade restrictions of the inter-war period. The reconstruction was an expression of US hegemonic power. But it was not simply imposed. Ludwig Erhard's then controversial ideas for liberalisation in post-war Germany came out of an intellectual tradition that had pondered the disasters of the 1920s and 1930s more deeply than the socialists and reached more sensible conclusions.
It is impossible in a short lecture to consider how a global market economy has been reconstructed over the past half century and how far it is similar to the laissez faire world system of a century ago. But we should bear five points in mind.
The first is that for the world economy as a whole, though not for all people and all countries, the past half century has been one of extraordinary growth, led by international economic integration. The share of trade in global output has increased from about 7 per cent in 1950 to over 20 per cent by the mid-1990s. In constant prices, ratios of trade to gross domestic product are higher today than ever before (Table I). Between 1950 and 1998, the volume of world production increased six-fold, while the volume of world merchandise exports rose 19-fold. Over the same period, the volume of world output of manufactures increased nine-fold and the volume of world exports of manufactures 36-fold. These are historically unprecedented numbers.
Table I Total trade to GDP
The second point is that huge reductions in the cost of transport and communications have been pushing the world in the direction of integration. In current prices, the cost of a three-minute telephone call from New York to London fell from about $250 in 1930 to a few cents today (Cairncross, 1997). The number of voice paths across the Atlantic has risen from 100,000 in 1986 to over 2 million today. The number of Internet hosts has risen from 5,000 in 1986 to close to l00 million now.
Yet – and this is the third point – integration is chosen. Regimes that wanted to cut their economies off from the world economy – the former Soviet Union, Mao's China, Nehru's India or Kim Il Sung's North Korea – were (and remain) able to do so. But they – and their hapless citizens – pay a heavy price in terms of lost access to technology, diminished competition and foregone growth.
The fourth point is that today's international economic integration has novel underpinnings. Particularly significant is the role of the corporation – a form of organisation that emerged at the end of the nineteenth century, but came into its own over the past half century. Meanwhile, governments have established significant intergovernmental economic organisations – such as the International Monetary Fund, the World Bank, the World Trade Organisation and, at a regional level, the European Union.
The final point is that, while integration does have to be chosen, it is also close to inevitable. Market economies are not naturally national. The merchant, as merchant, knows no boundaries and no national loyalties. He will deal with anybody who allows him to buy cheaper and sell dearer. Globalisation is no more than what happens, in an era of low and declining costs of transport and communications, if businesses and businessmen and women are allowed to transact freely. It is the private market economy operating across national borders.
What globalisation means for the state
What people call globalisation is a natural – though not an inescapable – result of the now almost universal acceptance of the market economy and private property; and this acceptance of the market economy is, in turn, a consequence of the bankruptcy of socialism. Opponents and proponents both draw the conclusion that the state is now helpless before market forces. To the former this is a horror; to the latter a delight. But, as I have argued at length in an article published by the American journal, Foreign Affairs, this view is a gross oversimplification, verging on nonsense (Wolf, 2001a).
The starting point is with states that want to integrate their economies into the international economic system. They will follow fairly liberal policies towards international trade, though not necessarily free trade. They will have a liberal attitude to the movement of capital, though they may be concerned about the risks created by free movement of short-term capital. They will welcome inward direct investment by multinational companies. They will restrict immigration of unskilled labour, but are likely to welcome inflows of highly skilled labour and of wealthy foreign business people.
Politicians will have made these choices because they believe they are in the best interests of their people. Nobody compelled Eire to become a base for inward investment by US technology companies in the European Union. Nobody has forced the Chinese government to invest so much effort in the attempt to join the WTO. Both governments made the choice because international economic integration seemed a wise way of using their sovereign discretion.
Choices constrain. One cannot expect to remain part of a club whose rules one flouts. But how far do these choices constrain? Critics argue that openness means a collapse of the welfare state, a regulatory "race to the bottom" and control over democratic politics by vile corporations. Is there anything in this? The answer is: almost nothing.
First, what is striking is how high and variable tax ratios continue to be. In 1999, the ratio of tax and non-tax receipts to GDP among OECD member states varied from 31 per cent in Japan and 31 per cent in the USA, to 50 per cent in France, 57 per cent in Denmark and 59 per cent in Sweden. The latter ratio is slightly down from its peak of 61 per cent in 1989, but in many high-income countries tax ratios were higher in 1999 than ever before: Germany was one example; France was another. For the European Union, the tax ratio was also higher than ever before and, intriguingly, the same was true for the USA, though at a lower level. On average, the share of public spending in GDP of advanced countries is four times what it was a century ago. There is no evidence that this is reversing. Nor is there any evidence that countries with relatively high taxes are suffering a huge outflow of capital, labour or other valuable resources.
Second, taxable capacity disappears only to the extent that labour, capital, resources or spending are mobile. But the extent of such mobility across frontiers is – and is almost certain to remain – highly constrained. The movement of people is, on the whole, more limited than a century ago. Corporations derive much value from the resources, skills and amenities of specific places. Most consumption is of locally produced non-tradeable goods and services or traceable physical goods. For these reasons, states can impose high taxes to finance the provision of location-specific amenities that residents desire and can consume only when present. It is because the Scandinavian and Dutch welfare states do provide such amenities that their capacity to tax remains so high.
Third, the view that an economy must be uncompetitive if it bears heavier taxes than its partners is bad economics. It is an important case of the fallacy of viewing competition across countries, in which costs are determined within the economy, as identical to competition among companies, whose costs are given by the economy. The condition for national competitiveness is, to simplify matters a little, that the marginal products of different kinds of labour are equal to their cost. If taxes are very high, there will be relatively large wedges between what workers cost to employers and receive as take-home pay. Provided workers are prepared to pay relatively high taxes in return for some benefit, there is no damage to competitiveness. Problems arise only if there is resistance to reductions in take-home pay, by powerful trades unions, or if the supply of a given class of labour is responsive to levels of take-home pay. In these circumstances, the economy will generate unemployment. But that unemployment would be generated even if there were no trade.
Fourth, regulations are equivalent to a tax on a specific activity, input or output. If the implicit tax is heavy, and the activity is mobile, it will migrate elsewhere. If the aim is to remove a local bid, that seems desirable – indeed one of the advantages of trade. But that need not happen if the reward to a relatively immobile factor of production falls to compensate for the cost of the regulation. That is what should happen in a competitive economy. As the more polluting activities close, for example, labour will be released; this will lower the real wage; and that will generate a rise in the labour-intensity of production throughout the economy.
As a matter of fact, the willingness of companies to move complex production processes from countries with high standards to ones without them seems to be small. Countries with high standards are ones with educated populations, high quality public services, probity in public life and other virtues that investors naturally desire. Nobody is going to move a complex production process to Liberia to evade environmental regulations.
The broad conclusion is that the regulatory and tax powers of an internationally integrated economy are substantial. If you doubt this, think of Denmark, The Netherlands, Finland or, in a different part of the world, of Singapore. John Gray has argued that globalisation dooms the European social model. That is wrong. What might doom the European social model is unwillingness of electorates to bear the taxes and tolerate the unemployment.
A global economy needs a degree of global regulation. If one is to provide global environmental goods, sustain taxes on mobile capital, secure access to foreign market, or enjoy national security, co-operation is needed. But open democratic economies are, on the whole, relatively good at this, or at least better than all other sorts of states.
Meanwhile, within the confines of a state that accepts the constraints and welcomes the opportunities of international economic integration, politics can vary from the redistributive social democracy of Sweden to the conservatism (compassionate or otherwise) of a George W. Bush. It does not permit a state to treat foreigners very differently from how it hopes – or expects – its own nationals to be treated abroad. But within these constraints, most of the arguments of modern politics remain alive.
My final point is that only residents of a successfully functioning state are able to make a success of international economic involvement. The state and the global economy are not in opposition, but complementary. Only if the state is able to provide civil peace, the rule of law, adequate infrastructure and an educated population will the economy function successfully. Companies do not invest in Somalia, however low its wages. They invest in Ireland or Singapore. But the rule-governed and internationally integrated economy also protects the state from the piling up of costly sectional economic demands and this, in turn, allows the state to focus upon its principal tasks.
What globalisation means for the nation
The alliance of state and nation was an invention. But it is a modern invention. In his classic, Nations and Nationalism, the philosopher, Ernest Gellner, argued that it emerged for a practical reason (Gellner, 1983). The modern state needs a shared high culture, because it requires skilled, interchangeable people. That culture will normally (though not always) be rooted in a language. Languages create a sense of nationhood in the people that speak them and that sense of nationhood, in turn, creates the demand for a state of their own.
Nationalism supports the modern state and economy: it increases the authority of the state; it enhances the state's ability to mobilise for war; and it increases the ability of the state to break down divisions that impede mobility and economic efficiency. The primary loyalty that overwhelms all others, makes a nation state an extraordinarily potent form of social organisation. But it rests on myths: as Gellner remarks, "Nationalism tends to treat itself as a manifest and self-evident principle, accessible as such to all men, and violated only through some perverse blindness, when in fact it owes its plausibility and compelling nature only to a very special set of circumstances, which do indeed obtain now, but were alien to most of humanity and history" (Gellner, 1983, p.125).
That nationalism exists because it is useful does not make the feelings it evokes less genuine. We are gregarious animals, capable of extraordinary devotion to the social unit that claims our loyalty. Nationalism taps into these primeval instincts. It offers us the idea of a great extended family – a nation. At its limits, it promises the dissolution of the pangs of individuality in the warm broth of collective harmony.
Orwell himself distinguished patriotism from conservatism and nationalism. In August 1940, he argued that "patriotism has nothing to do with conservatism", but "when the red militias are billeted in the Ritz I shall still feel that the England I was taught to love so long ago and for such different reasons is somehow persisting." Moreover, there is a "spiritual need for patriotism and the military virtues, for which, however little the boiled rabbits of the Left may like them, no substitute has yet been found" (George Orwell, "My country right or left", in Crick, 1984, pp. 137-8).
Such patriotism is not merely compatible with an open internationally integrated economy, it is helpful to it. The greater the loyalty citizens feel to their state, the easier it is for those in charge to provide public goods and secure the tranquility on which economic activity depends. But the international economy gives to the nation in its turn. One of Adam Smith's most brilliant insights was the idea that free trade gives a country the benefits of membership of a great empire. Size increases power, but it is irrelevant to prosperity. Consider Ireland or Switzerland, Hong Kong or Singapore. All these are tiny economies that have managed to achieve high and rising standards of living, while behemoths like Russia and Nigeria, India and China struggle. The power seeker's lust for size contributes nothing to the citizen's prosperity. Any well-run country of law-abiding and hard-working people can achieve that provided bullies and parasites – domestic and foreign – allow it to do so.
International economic integration can also threaten a nation's sense of internal cohesion. One reason is that it seems to have played a part – though, on the evidence, a relatively small part – in increasing the inequality of earnings in rich countries. Another way in which the opening of economies undermines collective national bonds is the opportunity it affords for the skilled to move anywhere in the world. Whether one considers either of these effects important depends on how far one wants a world of self-enclosed nations, interacting like billiard balls. To those who find the notion of exclusive loyalties to particular groups of human beings unattractive, their weakening is one of the advantages of international economic integration.
Committed nationalists will see things quite differently. But this sort of nationalism is, unlike patriotism, a malign force. It is, in Orwell's words, "inseparable from the desire for power". It is "the habit of identifying oneself with a single nation or other unit, placing it beyond good and evil and recognising no other duty than that of advancing its interests" (George Orwell, "Notes on nationalism", in Crick, 1984, p. 300). This form of nationalism is a tool for the unscrupulous and a refuge for the incompetent. It is the enemy of a durable civilisation based on the twin ideals of individual freedom and international harmony.
Economic nationalism is particularly vicious. It rests on the false notion that the wealth of one country rests on the poverty of others – that more is to be gained through imperial control than through liberal trade. Smith wrote The Wealth of Nations to disprove these mistaken ideas. But to those who delight in crushing foes and hating foreigners, his intellectually compelling arguments have never carried conviction. But there is no hope for humanity in that direction – only a return to the ruinous madness of the first half of the last century.
A summing up
I am well aware of the debates I have avoided. I have not considered the impact of globalisation on the global distribution of incomes and the prospects for economic development in poor countries. Nor have I considered how to govern the integrating world economy or manage the global commons. I have not asked how far liberalisation should proceed. And I have not considered the provision of security – either the role of the United States as sole superpower or the prospects for maintaining the Western alliance after the end of the cold war. I have also not examined how international economic integration might be reversed. The probability, however, is that it would need a mixture of economic collapse with rising nationalism. Such nationalism might, in turn, reflect frictions between a rising power – probably China – and the West.
What I have tried to do is tackle questions close to Orwell's heart. I started by pointing out that the most obvious development since his death has been the collapse of socialism. While Orwell would have welcomed the disintegration of the Soviet Union, he would have been dismayed by the failure of nationalisation. As in Animal Farm, nationalised industries turned out to be just like private ones – but even more so. Few serious people now imagine that an economy can function without extensive private ownership or that a socialised economy could support a stable democratic order.
Left and right have had to accept market-driven capitalism. The history of the past half century is that of the success of this form of economic and social organisation. What people call "globalisation" is the natural consequence of the rebirth of the market economy in the post-war era, hastened by continued declines in the costs of transport and communications. Globalisation can be halted. But it would take a catastrophe comparable to that of the early twentieth century to do it. I cannot see why any sane person should want that.
Many complain that globalisation means the destruction of the state, of democratic choice and of national self-determination. I have argued that this is nonsense. There is neither evidence nor theory in support of these propositions: states can continue to tax, regulate and redistribute incomes, if they wish to do so. Democratic politics can still range between Scandinavian social democracy and American conservatism. Anyone who thinks this is no choice is a fanatic. Patriotism will also survive. Indeed it is helpful to the modern internationally integrated state. An open economy also permits small nations to combine domestic political independence with prosperity.
I offer no utopia. But the dream of utopia is for the infantile or demented. What we have achieved is a richer, more co-operative and more hopeful world than anyone could have imagined in 1940. We have seen the end of totalitarianism and the spread of democracy. This may not be what Orwell wanted. It is something wonderful for us to build on, all the same.
The fundamental difference between the "guardian culture" of the state and its organs and the "commercial culture" of the market is explained by the US-born writer Jane Jacobs in her Systems of Survival: a Dialogue on the Moral Foundations of Commerce and Politics (Jacobs, 1994). Ms Jacobs argues that civilisation rests on uneasy co-operation between these two systems of values. If the commercial culture is repressed, as in state socialism, one ends with tyranny. If the guardian culture is destroyed, as in post-communist Russia, one ends with plutocracy.
I consider this question in a lecture delivered to the Manchester Statistical Society: "Is today's globalisation different from what has gone before?" in 2001.
3 Such unemployment is the result of forcing workers down their supply curves and/or employers up their demand curves.
Cairncross, F. (1997), The Death of Distance, Orion, London.
Crick, B. (1980), George Orwell: A Life, Penguin Books, London.
Crick, B. (Ed.) (1984), George Orwell: Essays, Penguin Books, London.
Gellner, E. (1983), Nations and Nationalism, Basil Blackwell, Oxford.
Jacobs, J. (1994), Systems of Survival: a Dialogue on the Moral Foundations of Commerce and Politics, Vintage Books, New York, NY.
Kornai, J. (2000), "What the change of system from socialism to capitalism does and does not mean", Journal of Economic Perspectives, Winter.
Maddison, A. (2001), The World Economy: a Millennial Perspective, OECD Development Centre, Paris.
Orwell, S. and Angus I. (Eds) (1970), George Orwell, The Collected Essays, Journalism and Letters, Volume 4, Penguin Books, London.
Schumpeter, J.A. (1943), Capitalism, Socialism and Democracy, Unwin, London.
Wolf, M. (2001a), "Will the nation state survive globalization?", Foreign Affairs, January/February.
Wolf, M. (2001b), "Is today's globalisation different from what has gone before?", paper presented to the Manchester Statistical Society.
This paper was presented at the Orwell Lecture at Birkbeck College, University of London, UK, 25 April 2001.