Tackle failed markets, not failed states By Henry C K Liu This article appeared in AToL on March 26, 2002 As a new century begins, the US advances the notion of "failed states" in international affairs, which claims 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 historically been 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 European Union. Since the international system was essentially French, nationalist movements were generally anti-French, except in territories outside French influence. The nationalism of the period was a melange of conservative and liberal forces, with conservatives emphasizing the 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 different 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 counterreformation and counterrevolution, aiming to restore the corrupt clergy and the dethroned Bourbons. German nationalism rebelled not only against Napoleonic rule, but against century-old ascendancy of French civilization. The age of the 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. After the Peace of Westphalia, German nationalism was largely dormant until the late 18th century. The German upper class was contemptuous of anything German: their taste and mannerism and literature were French; their music, art and architecture were Italian. Frederich the Great (1740-86) 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 he 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, had 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, Friedrich 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 in the 1850s 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 modern world politics, with the consolidation of large nation states. War between capitalist states dominated the 20th century. Nationalist sentiments overran socialist internationalism at the start of World War I. 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 Stalinist split with Trotskyism centered on the conflict between socialism in one country and international revolution. The Asian financial crises of 1997 revived economic nationalism around the world against US-led neo-liberal globalization, while the North Atlantic Treaty Organization attack on Yugoslavia revived military nationalism. Market fundamentalism as espoused in the US, far from being a valid science universally, is increasingly viewed as merely US national opinion, suited only to US historical conditions. Just as anti-Napoleonic internationalism was essentially anti-French, anti-globalization and anti-humanitarian intervention are essentially anti-US. US unilateralism and exceptionism have become the midwife for 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 are the market failure of competition. Microsoft has been convicted of monopolistic practices, although the final legal decision is still pending. AT&T was a monopoly that the US Supreme Court broke up in 1983 after a 10-year legal battle. The US 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. US president 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 such as Microsoft has market power, 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 non-competitive markets. The recent rejection of the GE/Honeywell merger by the EU was primarily based on GE's financial market power in vendor financing. The world is awash with overcapacity in manufacturing and telecommunication because finance capitalism promotes monopolies in finance that thrive on ruinous over-investment in manufacturing and telecommunication. 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 monopoly that permeates all sectors of the global economy. Another market failure economists have identified is the underprovision of public goods. Examples of public goods range from national defense to street lights. 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-September 11 insurance crisis surrounding the US airlines and the property casualty sector is another example. AIG, Citigroup and GE are selling their property casualty units. The US market, on its own, also fails to supply adequate loans for education and small-business ventures, as well as urban development for black neighborhoods. In each of these cases, government programs to complete or supplement the naturally incomplete markets are the only solution. 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 find it necessary to 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 based on the rules of market fundamentalism in the past decade has grossly underprovided public goods. The mostly obvious examples are environmental protection and poverty elimination. 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". These 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 wages and working conditions, together with unfunded environmental protection and cleanup, are other negative externalities that benefit the US inflation rate. Another market failure stems from the market's inadequate provision of information. The effect of asymmetrical information on the proper functioning of the market has been well recognized, having been cited as the basis for selecting last year's Nobel Prize on Economics. But the real information market failure is Western domination of the world media. Thirty years after developing countries first called for a new world information order, Western media are still being faulted for distorting and ignoring much of the world around them. Even as Western media bolster their domination of global news, Western news content seems less and less informative, particularly about issues not central to Western concerns. Another form of information monopoly 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 April 15, 1994. Under TRIPS, the less developed nations will be condemned to intellectual feudal serfdom perpetually. Incomplete markets are another form of failure. There are some goods and services that may not be "pure" public goods, which are nonetheless undersupplied 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 multibillion-dollar complementary market. While the world is faced with food overproduction, famines continue to be regular occurrences. All governments coordinate, if not regulate, businesses and the markets in which they operate. 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 outguess and outperform 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 played the game of industrial capitalism while 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 consummate beneficiary of globalized markets, 26.3 percent of all children in the US live in families that are below the official poverty level, according to the United Nations Children's Fund (UNICEF). On the global level, 30 percent of the population lives on less than US$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. To preserve world peace, the real regime change needs to be on failed markets.   March 2002