Lisa&Dacey (91-103)

Global Political Economy
Global Political Economy (GPE) is a broad and varied field of study and draws insight
from a great number of fields and approaches. One of the serious problems confronting
academics and students is the sheer mass of theories and debates in the field. This
textbook provides up-to-date summaries of the debates and approaches that are currently
at the forefront of both European and American GPE.
This new revised and expanded second edition contains updated versions of most
of the original chapters. In addition, there is a new section entitled ‘Emerging issues
in contemporary Global Political Economy (GPE)’ and six new chapters.
The second edition is structured around three themes:
• Part I focuses on the six central concepts of GPE: state, firm, power, labour, finance
and globalization. Each one of them has been increasingly subjected to a rigorous
and critical evaluation in recent scholarship.
• Part II covers a select number of theories and debates currently at the forefront
of GPE: game theory; behavioural economics; neo-, sociological and evolutionary
institutionalism; neo-Marxism; development and post-development; libidinal
economies; and economic constructivism.
• Part III, which is new to this edition, is entitled ‘Emerging issues in contemporary
Global Political Economy (GPE)’ and focuses on war, state and International
Political Economy (IPE); race, gender and culture; environmental politics; and the
rise of China.
This is essential reading for all serious scholars and advanced students of IPE.
Ronen Palan is Professor of International Political Economy at City University,

London, UK.
Global Political
Economy
Contemporary theories
Second edition
Edited by
Ronen Palan
First published 2000
Second edition published 2013
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2000, 2013 selection and editorial matter, Ronen Palan;
contributors, their contributions
The right of Ronen Palan to be identified as editor of this
work has been asserted by him in accordance with the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including photocopying
and recording, or in any information storage or retrieval system,
without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks
or registered trademarks, and are used only for identification
and explanation without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Global political economy: contemporary theories/edited by
Ronen Palan. – 2nd ed.
p. cm. – (RIPE series in global political economy)
Includes bibliographical references and index.
1. International economic relations. 2. Economic policy.
I. Palan, Ronen, 1957–.
HF1411.G6469 2013
337 – dc23 2012008711
ISBN: 978-0-415-69407-0 (hbk)

ISBN: 978-0-415-69411-7 (pbk)
ISBN: 978-0-203-09776-2 (ebk)
Typeset in Baskerville
by Florence Production Ltd, Stoodleigh, Devon
Contents
List of figures ix
List of tables x
Notes on contributors xi
Acknowledgements xv
List of abbreviations xvi
1 New trends in Global Political Economy 1

RONEN PALAN
P A RT I
Concepts and themes in Global Political Economy
(GPE) 15
2 Late twentieth-century globalization: the evolution

and differentiation of states and forms of public
authority 17
MICK MOORE
3 The firm, the corporation and contemporary capitalism 29

RICHARD PHILLIPS
4 Labour shapes the global political economy 46

ROBERT O’BRIEN
5 Money and finance in a globalized economy 58

ANASTASIA NESVETAILOVA
6 Globalization: a project in crisis 75

PHILIP MCMICHAEL
vi Contents
PART II
Theoretical innovation and contemporary debates 89
7 Game theory: international trade, conflict and

co-operation 91
LISA CARLSON AND RAYMOND DACEY
8 New directions for international political economy:

drawing from behavioural economics 104
DEBORAH KAY ELMS
9 New institutionalism and International Relations 117

HENDRIK SPRUYT
10 An evolutionary approach to global political economy 129

HERMAN SCHWARTZ
11 Globalization and theories of regulation 140

MICHAEL DUNFORD
12 Transnational historical materialism: ‘neo-Gramscian’

theories of class formation and world order 162
HENK OVERBEEK
13 Trends in development theory 177

JAN NEDERVEEN PIETERSE
14 Constructivism in International Political Economy 193

ANDRÉ BROOME
15 Libidinal political economy: a psycho-social analysis

of financial violence 205
EARL GAMMON AND DUNCAN WIGAN
PART III
Emerging issues in contemporary Global Political
Economy (GPE) 217
16 From environmental to ecological political economy 219

SIMON DALBY, RYAN KATZ-ROSENE AND MATTHEW PATERSON
17 The rise of China and the future of the international

political economy 232
MARK BEESON
Contents vii
18 Globalizing globalization: a worldist intervention 244
L. H. M. LING
Bibliography 255
Index 298
Figures
1.1 Discrete mathematics 5

1.2 Continuous mathematics 5
7.1 Games 93
7.2 Two-level game 101
8.1 A typical value function for prospect theory 105
8.2 A hypothetical weighting function 109
11.1 Walrasian and decentralized markets 142
11.2 Trends in profitability, 1929–2010: the United States case 145
11.3 Trends in the distribution of income, 1913–2008: pre-Second
World War inequality, the post-war great compression and
the neo-liberal inequality 146
11.4 Average real income, excluding capital gains, of top 1 per cent
of tax units and remaining 99 per cent in the United States,
1913–2008 157
11.5 Average annual rates of GDP growth measured in 1990
US$ converted at Geary–Khamis PPPs over several successive
economic cycles 159
13.1 Dimensions of development theories 183
13.2 General trends in development theory over time 188
14.1 Methodological distinctions in economic constructivism 197
16.1 Herman Daly on the economy and the ecosystem 223
Tables
5.1 Holism: some crisis-related macro paradoxes 72

11.1 Output, employment and productivity growth in the EU15,
the United States and Japan: average annual percentage
rates of growth 148
13.1 Meanings of development over time 182
13.2 Global hegemony and development theories 184
13.3 Actors in the development field: different stakeholders,
different development 185
13.4 Current trends in development theory 192
14.1 The rationalist–constructivist divide in International
Political Economy 196
14.2 Contemporary research agendas 203
Contributors
Mark Beeson is Winthrop Professor of Political Science and International Studies at

the University of Western Australia. His recent books are Institutions of the Asia-Pacific:
ASEAN, APEC and Beyond (Routledge, 2009); Securing Southeast Asia: The Politics of Security
Sector Reform (with Alex Bellamy; Routledge, 2008); and Regionalism and Globalization
in East Asia: Politics, Security and Economic Development (Palgrave, 2007).
André Broome is Senior Lecturer in International Political Economy in the Depart-
ment of Political Science and International Studies at the University of Birmingham,
UK; and Principal Research Fellow in the Centre for the Study of Globalisation
and Regionalisation at the University of Warwick, UK. His research focuses on the
politics of ideas in global economic governance, and his publications include The
Currency of Power: The IMF and Monetary Reform in Central Asia (Palgrave, 2010).
Lisa Carlson is Professor of International Relations in the Political Science Department
at the University of Idaho, USA. Her research interests include game theory,
prospect theory, conflict escalation, deterrence and foreign policy decision making.
Her articles have appeared in the Journal of Conflict Resolution, International Interactions,
Conflict Management and Peace Science, Mershon International Studies Review and Peace
Economics, Peace Science and Public Policy.
Raymond Dacey is Professor of Business and Statistics and Adjunct Professor of
Philosophy at the University of Idaho, USA. His research and publications are in
the areas of behavioural finance, general decision theory, peace science and the
philosophy of science. He teaches in the areas of finance, general decision theory
and statistics. He is an associate editor of Conflict Management and Peace Science, and
area editor (Philosophy of the Social Sciences) of Synthese. He served as president of
the Peace Science Society (International) for the 2003–4 term.
Simon Dalby is CIGI Chair in the Political Economy of Climate Change at the
Balsillie School of International Affairs in Waterloo, Ontario, Canada. He is co-
editor of the Geopolitics journal. Recent publications include: Security and Environmental
Change (Polity, 2009) and The Geopolitics Reader (with Gearóid Ó Tuathail and Paul
Routledge; Routledge, 2006, 2nd edition).
Michael Dunford is Professor of Geography in the School of Global Studies at the
University of Sussex, UK; and Visiting Professor in the Institute of Geographical
Sciences and Natural Resources Research at the Chinese Academy of Sciences.
Since 2005, he has published After the Three Italies: Wealth, Inequality and Industrial
xii Notes on contributors
Change (with Lidia Greco; Blackwell, 2006) and numerous journal articles on growth,
inequality and social cohesion; economic reconstruction; the development of the
textiles and clothing, steel, motor vehicles and new energy industries; regional
differentiation in China; and global convergence
Deborah Kay Elms is Head of the Temasek Foundation Centre for Trade &
Negotiations (TFCTN) and Senior Fellow of International Political Economy in the
S. Rajaratnam School of International Studies at Nanyang Technological University,
Singapore. Her articles have appeared in International Studies Review, Political Psychology
and International Negotiation.
Earl Gammon is Lecturer in International Relations at the department of International
Relations, University of Sussex, UK. His research examines the psycho-social dimen-
sions of political–economic transformation.
Ryan Katz-Rosene is a doctoral candidate in Geography with specialization in
Political Economy at Carleton University, Canada.
L. H. M. Ling (PhD, MIT is Associate Dean of Faculty Affairs, New School for
Public Engagement (NSPE) and Associate Professor in the Graduate Program in
International Affairs (GPIA), Milano School of International Affairs, Management,
and Urban Policy, at The New School in New York City, USA. Recent publications
include: The Dao of World Politics: A Post-Westphalian Approach (Routledge, forthcoming),
Transforming World Politics: From Empire to Multiple Worlds (with Anna M. Agathangelou;
Routledge, 2009) and Postcolonial International Relations: Conquest and Desire between Asia
and the West (Palgrave Macmillan, 2002).
Philip McMichael is Professor of Development Sociology at Cornell University, USA.
He has consulted with the UN Food and Agriculture Organization (FAO), the United
Nations Research Institute for Social Development (UNRISD) and the International
Planning Committee (IPC) for Food Sovereignty, and served as president of the
Research Committee on the Sociology of Food and Agriculture for the International
Sociological Association. He has authored Development and Social Change: A Global
Perspective (Sage, 2012, 5th edition) and Settlers and the Agrarian Question: Capitalism in
Colonial Australia (Cambridge University Press, 1984). He has recently edited The
Politics of Biofuels, Land and Agrarian Change (with S. M. Borras Jr. and I. Scoones;
Routledge, 2011), Contesting Development: Critical Struggles for Social Change (Routledge,
2010) and New Directions in the Sociology of Global Development (with F. H. Buttel; Elsevier,
2005).
Mick Moore is Professor of Political Economy in the Institute of Development Studies
(IDS) at the University of Sussex, UK. He is the founding chief executive officer of
the International Centre for Tax and Development. He has done extensive field
research in Asia and Africa, especially in Sri Lanka, Taiwan and India.
Jan Nederveen Pieterse is Mellichamp Professor of Global Studies and Sociology
in the Global & International Studies Program at the University of California, Santa
Barbara. Recent publications include: Development Theory: Deconstructions/Reconstructions
(Sage, 2010), Is There Hope for Uncle Sam? Beyond the American Bubble (Zed Books, 2008),
Ethnicities and Global Multiculture: Pants for an Octopus (Rowman & Littlefield, 2007) and
Globalization or Empire? (Routledge, 2004).
Notes on contributors xiii
Anastasia Nesvetailova is Reader in International Political Economy at City
University, London, UK. Recent publications include: Financial Alchemy in Crisis (Pluto,
2010) and Fragile Finance: Debt, Speculation and Crisis in the Age of Global Credit (Palgrave,
2007).
Robert O’Brien is LIUNA–Mancinelli Professor of Global Labour Issues at McMaster
University, Canada. He is co-editor of the open access online Global Labour Journal.
His publications include: Global Political Economy: Evolution and Dynamics (with Marc
Williams; Palgrave Macmillan, 2010, 3rd edition), Solidarity First: Canadian Workers
and Social Cohesion (University of British Columbia Press, 2008) and Global Unions?:
Theories and Strategies of Organized Labour in the Global Political Economy (with Jeffrey
Harrod; Routledge, 2002). He is presently working on a book examining labour
internationalism.
Henk Overbeek is Professor of International Relations at the Free University of
Amsterdam, the Netherlands. Recent publications include Rivalität und ungleiche
Entwicklung. Einführung in die internationale Politik aus der Sicht der Internationalen Politischen
Ökonomie (VS Verlag für Sozialwissenschaften, 2008); and The Transnational Politics of
Corporate Governance Regulation (co-editor with Bastiaan van Apeldoorn and Andreas
Nölke; Routledge, 2007).
Ronen Palan is Professor of International Political Economy at City University,
London, UK. Recent publications include: Tax Havens: How Globalization Really Works
(with Richard Murphy and Christian Chavagneux; Cornell University Press, 2010)
and the Imagined Economies of Globalization (with Angus Cameron; Sage, 2004).
Matthew Paterson is Professor in the Faculty of Political Sciences at the University
of Ottawa, Canada. He has written a prize-winning book entitled Automobile Politics:
Ecology and Cultural Political Economy (Cambridge University Press, 2007). His most
recent book is Climate Capitalism: Global Warming and the Transformation of the Global
Economy (with Peter Newell; Cambridge University Press, 2010) and he is currently
a lead author for the UN’s Intergovernmental Panel on Climate Change (IPCC).
Richard Phillips is Lecturer at the Manchester Business School, UK. His articles
have appeared in Austrian Journal for Development Studies; British Journal of Management;
Economy and Society; Sociology; Competition and Change; and Journal of Social Policy.
Herman Schwartz is Professor in the Politics Department at the University of
Virginia, Charlottesville, USA. His most recent book is Subprime Nation: American
Power, Global Capital and the Housing Bubble (Cornell University Press, 2009); he is also
author of States versus Markets: Globalization and the International Economy (Macmillan,
2009, 3rd edition) and In the Dominions of Debt: Historical Perspectives on Dependent
Development (Cornell University Press, 1989). He has also co-edited three books on
Denmark’s welfare state, OECD employment policy and the politics of the recent
housing bubble.
Hendrik Spruyt is Norman Dwight Harris Professor of International Relations and
Director of the Buffett Center for International and Comparative Studies at
Northwestern University, USA. He is author of Contracting States: Sovereign Transfers
in International Relations (with Alexander Cooley; Princeton University Press, 2009),
Ending Empire: Contested Sovereignty and Territorial Partition (Cornell University Press,
xiv Notes on contributors
2005) and The Sovereign State and Its Competitors: An Analysis of Systems Change (Princeton
University Press, 1994).
Duncan Wigan is Assistant Professor of International Political Economy in the
Department of Business and Politics at the Copenhagen Business School, Denmark.
His main research interest lies in the political economy of finance. Past and ongoing
research addresses derivatives markets, private equity, global capital flows and secrecy
jurisdictions.
Acknowledgements
It is always rewarding to see a second edition of a publication come to life. Global

Political Economy: Contemporary Theories was initially published in 2000, reflecting the then
ongoing debate on the lessons of globalization. Much has changed in the decade that
followed. I would like to thank the contributors to this volume for managing the nearly
impossible task of revising their chapters (or contributing new ones), yet keeping them
short, succinct and, most importantly, informative.
I would like also to thank Jerry Cohen, Helen Milner and the two anonymous
reviewers for constructive, timely and critical advice on the changing agenda of global
political economy.
This second edition would be impossible without the generous help, editorial support
and high standard of professionalism of the production team at Routledge. I am most
grateful to Craig Fowlie who has accompanied the project from its first edition and
made sure there would be a second one. I am indebted to Nicola Parkin and Lindsey
Hall for their supportive and helpful feedback and close collaboration in editing and
revising the volume; and in particular, to Helen Lund for her generous help,
extraordinary patience and hard work on the copy editing of the manuscript.
Abbreviations
AFL–CIO American Federation of Labor and Congress of Industrial Organizations

ANC African National Congress
APSA American Political Science Association
APT ASEAN Plus Three
ASEAN Association of Southeast Asian Nations
BIS Bank for International Settlements
BRICS Brazil, Russia, India, China and South Africa
CCP Chinese Communist Party
CDP Carbon Disclosure Project
CDM Clean Development Mechanism
CDS credit default swap
CNOOC China National Offshore Oil Corporation)
CTM Confederacíon de Trabajadores Mexicanos [Confederation of Mexican
Workers]
ECB European Central Bank
EEC European Economic Community
EMT efficient market theory
EMU Economic and Monetary Union
EU European Union
FDI foreign direct investment
FIH Financial Instability Hypothesis
FTAA Free Trade Agreement of the Americas
GATT General Agreement on Trade and Tariffs
GDP gross domestic product
GNP gross national product
GPE global political economy
GUF Global Union Federation
HST Hegemonic Stability Theory
ICT information and communications technologies
ILO International Labour Organization
IMF International Monetary Fund
IPCC Intergovernmental Panel on Climate Change
IPE international political economy
IR international relations
LDP Liberal Democratic Party (Japan)
M&A mergers and acquisitions
List of abbreviations xvii
MDGs Millennium Development Goals
MIC middle-income countries
MNC multinational corporation
MNCB multinational collective bargaining
NAFTA North American Free Trade Agreement
NATO North Atlantic Treaty Organization
NGO non-governmental organization
OECD Organisation for Economic Co-operation and Development
OPEC Organization of the Petroleum Exporting Countries
OTC over-the-counter
PD Prisoner’s Dilemma
PPPs purchasing power parities
PRC People’s Republic of China
PT Partido dos Trabalhadores [Workers’ Party] (Brazil)
SEZs special economic zones (China)
SOE state-owned enterprise
THM transnational historical materialism
TNC transnational corporation
TRIPS Trade-Related Aspects of Intellectual Property Rights
UN United Nations
UNDP United Nations Development Programme
UNEP United Nations Environment Programme
UNESCO United Nations Educational, Scientific and Cultural Organization
UNFCCC United Nations Framework Convention on Climate Change
USSR Union of Soviet Socialist Republics
WHO World Health Organization
WTO World Trade Organization
WWF World Wildlife Fund
1 New trends in Global
Political Economy
Ronen Palan
Four decades after the emergence of International Political Economy (IPE) in the early
1970s as a branch of international scholarship (Cohen 2008; Denemark and O’Brien
1997; Gill and Law 1988), the nature, boundaries and intellectual ancestries of this
field of study are still hotly disputed. Even the label IPE is under dispute: Gill and Law
(1988: xxiii), for instance, prefer the term ‘Global Political Economy’ (GPE), privileging
the global arena over inter-national relationships. Nowadays (2013) the two labels are
used interchangeably, although the denomination IPE is generally adopted by those
who view this field of study as a sub-field of political science and International Relations
(IR), whereas GPE is normally the preferred label for those who view it as a trans-
disciplinary effort, closer to political economy than to IR. I will use the GPE label in
this introductory chapter.1
Behind the veneer of contestation, IPE or GPE represents a community of scholars
from a variety of social science disciplines who share something important in common.
It is easier, however, to describe what they share in common in negative terms, as a
critique of other approaches, whereas it is more difficult to agree upon much else. I
tend to think of the field of IPE/GPE, therefore, not as a distinct academic discipline,
but as a suggestive research programme that brings together studies from a range of
social science disciplines which either implicitly or explicitly take seriously two sets of
propositions:
• first: that an international economy which operates in an environment that is

divided among sovereign states of various power and size is profoundly different
from an international economy that inhabits some abstract and integrated space
imagined in conventional international economics textbooks;
• second: that the dynamics of political action in a world that is witnessing an
increasingly integrated and integrating economy is very different from the one
imagined in conventional political science and International Relations.
How different is the ‘real’ world of a global political economy that operates in a state
system from the one imagined by economists and/or conventional political science/
International Relations; and more crucially, how we should go about conceptualizing
the differences are questions that have never been settled.
In very broad terms, the field of GPE has approached the conundrums of the global
political economy from two related perspectives: from a broad theoretical perspective
that serves the ‘general theoretical orientations’ (Katzenstein et al. 1998: 647) in political
economy; and from related developments in key themes or concepts in the field, such
2 Ronen Palan
as the state, power, capital, trade, finance and so on. As GPE is closely related to
political economy, it has also adopted with various degrees of success the four general
theoretical orientations that have dominated political economy. These are:
• standard economics, sometimes referred to as neoclassical economics;

• Marxian or radical political economy;
• evolutionary political economy (or evolutionary institutionalism); and
• libidinal political economy – the least known, but equally important.,
Standard economics makes up the current orthodoxy in the field of IPE; the rest fill
the contested area that is heterodoxy in GPE. The four general theoretical orientations
often diverge on issues of substance, but also on the questions of philosophy, methodology
and ethics.
Standard economics and Marxist political economies tend to share, however, in the
words of Gammon and Wigan (Chapter 15 in this volume), the rationality postulate,
which ‘views motivation in terms of pleasure seeking and pain avoidance’. Standard
economics and Marxist political economy diverge, however, on the sort of questions
they believe must be at the core of GPE. Standard GPE addresses questions such as:
why do states fail to pursue the optimal course of action by imposing tariffs on their
trading partners’ goods and services? (Carlson and Dacey, Chapter 7); what explains
the decisions made by individuals over economic issues? (Elms, Chapter 8); what is the
role of institutions in shaping economic behaviour? (Spruyt, Chapter 9). Marxist theory,
in contrast, is concerned primarily with processes of exploitation and asymmetrical
access to power and resources on a global scale (Dunford, Chapter 11; Overbeek,
Chapter 12).
Evolutionary approaches, in contrast, tend to view the acquisitive individual, or
homo economicus of standard economics, as representative of certain historical ‘habits of
thought’, and hence not a particularly useful starting point for investigation (Schwartz,
Chapter 10; and to some extent, Broome, Chapter 14). Whereas libidinal theories
question the basic assumptions of standard economics: they question whether individuals
are maximizing anything in particular. Instead they believe that individuals are
strategizing to achieve the conditions that Freud described as primary narcissism
(Gammon and Wigan, Chapter 15, and Ling, Chapter 18). Each of these general
orientations yields, unsurprisingly, very different perspectives on the world.
The four general theoretical orientations tend to diverge also on other fundamental
questions; for instance, on the nature and meaning of capitalism and capital. Standard
economics regards capitalism essentially as a market economy (contrasted, for instance,
with a planned economy). The institution of the market is seen as one of the greatest
achievements of humanity. Market techniques of organization and co-ordination of
human societies are based on the free interchange of communication between people.
The freer the exchange, the better they function. Standard economics shares much
more with libidinal economy than may appear at first glance. Both view markets
essentially as ‘economies of desire’. Markets are communication devices employing the
medium of the prices mechanism to transmit and communicate people’s desires for
goods, services or non-material values. The theories diverge, however, in their reading
of what desires are about, and how individuals express them. Standard economics
believes that individuals are trying to maximize their lot – mostly their material lot –
in this world. Libidinal economists ask, if that is so, why then do so many individuals
New trends in Global Political Economy 3
appear to desire their own oppression or even their personal annihilation? Why do so
many people seem to be prepared to sacrifice their own lives, in the name of abstract
concepts such as God, the nation or the working classes?
Marxists, in contrast, view capitalism as a variant on an existential theme – the
theme of exploitation by one (group) of people by another. World history – that is, the
history of sedentary people – is a history of class struggle. And we are still struggling
today. Evolutionary economists believe, in contrast, that the concept of capitalism is
a misnomer. Capitalism evolved towards the end of the nineteenth century into
something else. They call it business civilization. Businesses are viewed as ‘going
concerns’, and capital nowadays is primarily ‘intangible’, representing what in accounting
and legal language is defined as ‘goodwill’. Intangible capital is denominated as the
capitalization of business concerns based on their anticipated earnings discounted against
current rates of interest. Today (in 2013), business and the businesspeople and their
techniques of buying and selling dominate the ‘economic’ agenda.
Standard economics-derived IPE is broadly associated with the ‘American school in
IPE’: meticulous, exact and parsimonious. This school has tended to stress analytical
rigorousness over conceptual innovation, and critical methodological thoroughness at
the cost of asking some of the ‘big questions’ of the nature of the status quo of our
time (Cohen 2008). The rest – Marxian, evolutionary institutionalist and libidinal
theories – have tended, on the whole, to be associated with the ‘British’ or continental
schools (although the evolutionary approach was very American to start with). They
tend to stress conceptual innovation (sometimes) at the cost of some analytical clarity,
preferring to answer ‘big questions’, but not necessarily providing new answers to the
traditional questions of economics or politics.
We have, therefore, many approaches to choose from in the study of GPE. Should
we pay attention to all four? Most GPE textbooks clearly favour one over the rest. I
tend to be pragmatic on such matters: I ask whether the whole is more than the sum
of its parts? I think it is. Hence, I think that we should pay attention to recent
developments among the four approaches. Indeed, it is noticeable how the combined
effects of the two sets of related theoretical developments (among the general theoretical
orientations, and specific research programmes) have shifted our understanding of the
nature of the global political economy since the publication of the first edition of this
volume in 2000. The changes in perspective are due partly to the tremendous
developments in the world ‘out there’; but partially because of (often) grudging acceptance
of the validity of some of the arguments put forward by members of the other group
– for example, the concept of GPE is now increasingly acceptable to both orthodoxy
and heterodoxy; whereas the formalism that was nearly the exclusive terrain of orthodoxy
is now adopted increasingly by heterodoxy as well.
And then there are important issues that concern us all. There are diverse topics:
changes in the nature of the state (Moore, Chapter 2), business and the corporation
(Phillips, Chapter 3), labour (O’Brien, Chapter 4), finance (Nesvetailova, Chapter 5),
globalization (McMichael, Chapter 6), ecology (Dalby, Katz-Rosene and Paterson,
Chapter 16), the rise of China (Beeson, Chapter 17), and the future of alternative
politics (Ling, Chapter 18).
I also think that an informed reader would like . . . well, to be informed, before they
reach their own conclusions. This volume is intended, therefore, to serve precisely such
a purpose. It charts this shifting zonal terrain that marks the outer boundaries of
4 Ronen Palan
contemporary European, American and developmental IPE and GPE. Our intention
here is not to adjudicate among competing approaches, but to inform and educate the
reader who may find it difficult to keep abreast of the range of scholarship that is
relevant to contemporary GPE. A cursory acquaintance with GPE reveals it to be a
broad and somewhat inchoate field of study. While the great majority of GPE texts
still give the impression of a field divided into three so-called ‘paradigms’ – realism,
liberalism and structuralism – it is evident that contemporary GPE has by and large
moved on to a considerable degree. Global Political Economy has absorbed and, in
turn, has been absorbed into, the broader trends in the social sciences, loosening in
the process its ties to the discipline of International Relations. As a result, the main
division lines in contemporary GPE no longer trail International Relations’ controversies,
but reflect broader issues and contemporary debates in political economy and the social
sciences.
This introductory chapter maps out contemporary debates in GPE. I stress in
particular the rising in significance of the methodological debate between, on the one
hand, rationalist and methodologically individualist approaches; and on the other, the
critical or post-rationalist traditions.2 The book is divided into three parts. Part I focuses
on seven of the central concepts of GPE: state, firm, capital, power, labour, finance
and globalization, each of which is increasingly subjected to a rigorous and critical
evaluation in contemporary scholarship. These are not necessarily the seven fundamental
concepts of GPE, but they are the seven which have been the subject of the greatest
debate and innovation in the past two decades. Part II covers a select number of theories
currently at the forefront of GPE. These theories and approaches are drawn from the
three broad traditions of rationalism, Marxism and institutionalism. Part III discusses
some of the important issues, issues that are likely to dominate future agendas: ecology,
China, and alternative conceptualizations of the human condition.
The epistemological foundations of orthodoxy

and heterodoxy
At one level, the debates that are taking place in GPE replicate important debates in
the social sciences more generally. They concern the salience of a range of approaches
that are described as orthodoxy, and another range of approaches that are described
as heterodoxy. The dispute is largely epistemological in nature, although in more
practical terms, it takes shape as a methodological debate. At its core, the dispute is
about the most efficient and useful ways in which we should go about investigating
the nature of the ‘units’ out there and the relationship they establish between them
over time.
Orthodoxy in the social sciences is predicated on the assumption that the best available
methodologies are drawn from a genre of theories that mathematicians call discrete
mathematics. Discrete mathematics is a branch of mathematics and logic that is dealing
with objects that can assume only distinct, separated values (like discrete numbers –
1, 2, 3 and so on). Graphs like the one in Figure 1.1. represent the sort of objects
studied by discrete mathematics.3 (For an excellent discussion, see Easley and Kleinberg
2010.)
Discrete mathematics is contrasted with another branch of mathematics called
‘continuous mathematics’. Continuous mathematics deals with objects that can vary
smoothly like liquefied or gaseous topological forms; in other words, objects of irregular
Figure 1.1 Discrete mathematics
X Y
V
U
f(U)
x f(x)
Figure 1.2 Continuous mathematics
shape and size. It also deals with cases of species sharing a habitat, how each different
species develops its own ecological niche. A more abstract depiction of continuous
functions between topological spaces where there is generally no formal notion of
distance (typically described by mathematicians as Figure 1.2) may represent better
real-life situations in the international political economy, where the ‘units’ – states or
businesses – are amorphous and the ‘system’ cannot be reduced to interaction among
unit-like entities. So, for example, in a set ‘U’, which can represent a state, there could
be internal changes that could be represented by f(x) without changing the nature of
U (or the state itself).
Although rarely described in such terms, many of the important debates in the social
sciences broadly, and GPE specifically, are concerned with the utility and scope of dis-
crete mathematical models of the behaviour of people and organizations (such as states
or firms) that populate our mental images of the social world. Orthodoxy is associated
in the social sciences, on the whole, with the covering law- type of generalizations
6 Ronen Palan
based on correlations, statistical probabilities or even intuition, attributing universal
behavioural characteristics to discrete entities. Charles Tilly describes covering law
accounts in the following terms: ‘In covering law accounts, explanation consists of
subjecting robust empirical generalizations to higher- and higher-level generalizations,
the most general of all standing as laws . . . Investigators search for necessary and
sufficient conditions of stipulated outcomes, those outcomes often conceived of as
dependent variables’ (Tilly 2001: 23). Formal modelling techniques, quantification and
methodological questions tend to dominate orthodox inquiries of behaviour in the
social world.
While the precise meaning of heterodoxy in the social sciences is contested, broadly,
heterodoxy theories are founded on the assumption that the ‘units’ of the social world
– be they individuals, states or any other organizations – are driven by diverse, often
conflicting, sets of motivations and rationales. Causation in a social world has to be
demonstrated inductively, rather than deductively. Social scientific inquiry is descriptive
(or historical), open-ended, empirical and continuous.
Redding (2005: 128) points to three shared core assumptions that define the heterodox
position: they sound like a description of Figure 1.2:
1 There are multiple and complex connections and constant flows of reciprocal
influences between social phenomena.
2 The phenomena themselves change over time.
3 Social systems are open to new external influences that affect them as they evolve.
So because the social world is in constant flux, attempts to understand it based on
Newtonian physics [e.g. discrete mathematics], where units of analysis are fixed
and relations between them permanent are misapplied.
Many heterodox scholars maintain, furthermore, that the social sciences are ‘second-
order fields, in that they can only study phenomena through the medium of people’s
conceptions of what is going on’ (Redding 2005: 128). The medium of thinking and
language is considered opaque. That is, the diverse techniques that structure or determine
the way by which humans produce a mental picture of the world ‘out there’, such as
narrative rules, imagination and ideology, are considered salient to the investigative
process itself (Cameron and Palan 2004).
Heterodox scholars have tended to use formal modelling techniques less frequently
than orthodox scholars. That may partly be to do with the technical difficulties most
of us are having with the complexities of continuous graph theory, but also is due to
an intuitive belief that the complexities of the social world are best approached historically
and empirically.
Where orthodoxy is heading to today: beyond

state and firm
In a talk given at the 1996 annual conference of the European Association for
Evolutionary Political Economy (EAEPE), Paul Krugman defined economics in the
following terms:
1 Economics is about what ‘individuals’ do: not classes, not ‘correlations of forces’,
but individual actors. This is not to deny the relevance of higher levels of analysis,
but they must be grounded in individual behavior. Methodological individualism
is of the essence.
2 The individuals are self-interested. There is nothing in economics that inherently
prevents us from allowing people to derive satisfaction from others’ consumption,
but the predictive power of economic theory comes from the presumption that
normally people care about themselves.
3 The individuals are intelligent: obvious opportunities for gain are not neglected.
Hundred-dollar bills do not lie unattended in the street for very long.
4 We are concerned with the ‘interaction’ of such individuals: Most interesting
economic theory, from supply and demand on, is about the ‘invisible hand’; processes
in which the collective outcome is not what individuals intended.
(Krugman 1996: 2)
Krugman alludes to a particular tradition of political economy that has evolved out
of economics when he talks about ‘higher levels of analysis’. The reference is to the
fledgling field of economic approaches to politics, or as it is sometimes called, ‘new
political economy’ – a very different set of literature to the ‘new international political
economy’ that Murphy and Tooze (1991) espouse. These are sets of theories that adopt
neoclassical conceptual armoury to explain the determinants of policy making (or
preference formation). For example, new political economy state theory maintains that
government policies can be explained with the aid of concepts such as marginalism,
optimization, equilibrium (Meier 1990:185). As opposed to conventional International
Relations, the new political economy disaggregates the state and views it as ‘simply
another of the myriad institutions contained in any society, owned of necessity by
certain individuals and not by others’ (Auster and Silver 1979: 21). The state, however,
is a privileged institution. Domestically, the state behaves as a ‘natural monopoly’ and
the ‘surplus’ that the state maximizes is a sort of monopoly ‘rent’ that the sovereign
can enjoy. As a result, the surplus that the state garners attracts hordes of office-seekers
and other interests anxious to get their hands on it.
The state is viewed therefore as an exogenous factor introducing friction and
disequilibrium into the proper functioning of the market. Markets, alas, never work as
they are supposed to in theory because of the tremendous impacts that states are having
on them. Among the Organisation for Economic Co-operation and Development
(OECD) countries, for instance, nearly 40 per cent of gross domestic product (GDP)
is routed, in one way or another, through the state. Whereas states have gobbled
considerable portions of markets, large firms have swallowed a good portion of the rest
(Phillips, Chapter 3). A pure theory of markets is simply unrealistic in such conditions.
At the same time, politicians cannot ignore the political imperatives produced by
the markets as well, even if these markets are dominated in reality by hierarchical
organizations that we call multinational corporations. In modern capitalist economies,
‘the entire society depends on the allocation of resources chosen by owners of capital
. . . with the inference that because the entire society depends on the owners of capital,
so must the state’ (Przeworski and Wallerstein 1988: 12). So whereas political science
and International Relations assume that
particular governments have interests and goals of their own or they act on behalf
of a coalition of groups or a class, the pursuit of any objectives that require material
resources places governments in the situation of structural dependence. Politicians
8 Ronen Palan
seeking re-election must anticipate the impact of their policies on the decisions of
firms because these decisions affect employment, inflation, and personal income
of voters: vote-seeking politicians are dependent on owners of capital because
voters are.
(Przeworski and Wallerstein 1988: 12)
States can hardly be assumed to be independent, in the way that some IR theorists
have tended to assume. The pure theories of politics and economics tell us very little
about actual behaviour. The fields of IPE (and increasingly GPE) seek to bridge that
divide between theory and reality. Conceptually, the field starts from the assumption,
in the words of Robert Gilpin, that:
The parallel existence and mutual interaction of ‘state’ and ‘market’ in the modern
world create ‘political economy’ . . . In the absence of state, the price mechanism
and market forces would determine the outcome of economic activities; this would
be the pure world of the economist. In the absence of market, the state or its
equivalent would allocate economic resources; this would be the pure world of
[the] political scientist.
(Gilpin 1987: 8)4
Marxian political economy

Marxist theory never accepted the conventional dividing lines of academia and certainly
never adopted the analytical division between domestic and international politics. If
anything, Marxism proceeds from a unified theory of political economy, a global political
economy. For Marxism, the central institution of the modern world is capital and
hence the dominant social institution is that of capitalism.
Capitalism is defined as a social system based on the profit motive and the dominance
of commodity relations, including the commodification of labour. The rise of capitalism
as the dominant social institution entailed a set of profound socio-economic transforma-
tions, including the dominance of contractual relationship over familial and coercive
relationships, the rise of capitalist law and the capitalist state. One strand of Marxism
maintains, rather problematically, that political and ‘cultural’ transformations are the
unwitting results of the rise of capitalism. In other words, societal, political and ideological
transformations are merely by-products of the changing ‘material conditions of life’.
Modern Marxist thought strives, however, to transcend this base/superstructure model
with a more nuanced historical and holistic political economic account.
Marx viewed capitalism as a particular ‘logic’ that imposes itself historically. Capital
was first and foremost a self-expanding value. Capitalism expands in a series of waves:
at certain historical periods, capitalism tends to expand spatially, penetrating new and
distant markets. In other periods, capitalism deepens its grip on social life. These two
types of expansionary tendency can form the background of a holistic account of
diverse developments, from the colonialism of nineteenth-century capitalism, to the
formation of the Bretton Woods system in the twentieth century and the rise of
globalization towards the twenty-first century (McMichael, Chapter 6). At the same
time, Marxist political economy also accounts for the deepening of capitalist social
relations and the extension and commodification of all aspects of social life. With its
emphasis on capital, Marxist political economy, therefore, subsumes GPE within a
broader theory of society and history. In fact, since the 1930s, Marxist thinkers like
Adorno and Horkenheimer – and more recently Deleuze, Guattari, Hardt and Negri
– were predicating what Lyotard (1984) called the ‘post-modern’ condition as the
furthest extension of the subsumption of society under capital.
Marxist GPE analyzes institutions in three ways:
1 While new institutionalism views institutions as historically emergent solutions

to market failure (Spruyt, Chapter 9 of this volume), Marxists view institutions
primarily as forms of the institutionalization of power (Poulantzas 1968). According
to this theory, social classes entrench their gains by normalizing and institutionalizing
them. Institutions contain therefore layer upon layer of embedded class gains. In
time, these gains are so deeply entrenched that institutions such as the state, the
family, the firm and the like, appear to be class-neutral and are widely accepted
as such. We need to reflect carefully upon persistent inequalities and power
differentials to begin to unravel the class nature of these institutions and the
manner by which they ensure the persistence of power differentials.
2 Contemporary Marxist theory maintains, however, that institutions cannot be
reduced exclusively to the above; they are, in addition, representative of the complex
manner of the changing nature of the material base. The institutional constitution
of the contract, private property, democracy and so on are not directly determined
by capital, but overdetermined by the central institution of capital.
3 In addition, certain key institutions, particularly the state, have an important
remedial role to play in class-divided societies. The state cannot be viewed simply
as the epiphenomenon of the materialist base, or simply as a tool in the hands of
the ruling class. The state has evolved structures that contribute to the long-term
survival of capitalist relationships. So the state entrenches ruling-class power and
interest; and yet at the same time, it must remain relatively autonomous of these
interests (Poulantzas 1968).
With its emphasis on the complex, class-based nature of institutions, Marxism provides
GPE with two strong hypotheses. The first concerns the issue of development, which
is central to all branches of political economy. For neoclassical development theory,
the solution to development is quite simple: let market forces do their job. Considering
the relatively low level of industrialization among the less developed countries, the law
of diminishing returns suggests that the bulk of international investment should have
been directed towards third world countries.
The law of diminishing returns predicts therefore a faster rate of economic growth
among the less developed countries. This, of course, has not happened until fairly
recently. On the contrary, the post-war world economy exhibited traditional patterns
of concentration and centralization of capital. In one interpretation, the one favoured
by the World Bank, the International Monetary Fund (IMF) and so on, such disturbing
counterfactual evidence does not invalidate the law of diminishing returns or the broader
theoretical edifice of ‘developmental economics’. On the contrary, the failure of develop-
ment is due (again!) to ‘exogenous factors’; namely, the failure of third world countries
to develop appropriate political systems. Thus, modernization theory, which is closely
allied to neoclassical economics, prescribes changes in the domestic political system of
10 Ronen Palan
developing countries combined with open markets and free competition worldwide. In
this light, the recent development of emerging markets forces a profound rethink of
Marxist thought (Dunford, Chapter 11; Beeson, Chapter 17).
Marxism maintains, however, the centrality of the law of uneven development so
that ‘imperialist expansion on the one hand, and monopolistic developments on the
other, give a new lease of life to the capital system, markedly delaying the time of its
saturation’ (Mészáros 1995: 34). The ideal of global market equilibrium is delayed and
‘sabotaged’ in order to ensure higher profit margins. In a number of ways, then, neo-
Marxism introduces the issue of hierarchy and power into the analysis of the world
economy. Thus, in contrast to Keynes’s ‘frightful muddles’, Marxism incorporates into
the core of its theoretical edifice precisely those elements that economics treats as
‘exogenous’ or contingent. As a result, it reaches diametrically opposed conclusions to
those favoured by standard economics.
The second strong Marxist hypothesis concerns the issue of transnational or so-called
global governance. Marxism reminds us that bourgeois ideology seeks to eliminate
labour from the analysis. Growth and economic welfare is attributed to the invisible
hand of the market, to the acumen of the modern chief executive officer (CEO), to
the successful policies of government, to technology, but certainly not to the sweat and
toil of the millions upon millions of workers that make up the ‘economic system’. But
labour is the ‘hidden’ substructure of the modern economy, both as the true producer
of goods and services and the ignored but ever-present face of resistance. Michel Aglietta
argues that classical Marxists failed to appreciate that labour power is not a commodity
like all the others (Aglietta 1979: 46). In contrast to the homogenised or ‘fungible’
nature of the commodity form, labour power can be incorporated into capital as wage
labour only in certain definite labour processes. Consequently, society, which includes
social and political relationships, is pivotal to the organization of labour and hence
cannot be considered ‘external’ or exogenous to the economic system. The question
of global governance, then, is the question of the global governance of labour and the
maintenance of transnational class hierarchies (O’Brien, Chapter 4 in this volume).
Indeed, the French school of regulation with its focus on the relationship between
capital and labour explains to us why an already transnational capitalism took a sudden
‘national’ turn in the 1930s and has only become global again since the 1970s.
Marxism, then, provides GPE with a critical and holistic interpretation of the modern
economy as a global political economy, viewed as a set of structures, patterns and relationships
that can only be understood with the aid of a political–economic, as opposed to either
a political or an economic interpretation.
The return of institutionalism

In ‘the legal foundations of capitalism’, John Commons distinguishes among three
traditions of economic thought: the classical economics of Adam Smith, David Ricardo
and Karl Marx, which is centered on production and the commodity; the ‘hedonist
economists’ such as Bentham, Senior, Jevons and Clark, who concerned themselves
with the subjective side of economic theory; and volitional theories of economics
associated with thinkers such as Hume, Malthus, Carey, Bastiat, Cassel, Anderson and,
especially, the Supreme Court of the United States. Volitional, or as it is now called,
evolutionary economics, ‘start[s], not with a commodity or with a feeling, but with the
purposes of the future, revealing themselves in rules of conduct governing transactions
which give rise to rights, duties, liberties, private property, governments and associations’
(Commons 1959: 4).
John Commons and Thorstein Veblen are the high priests of this tradition. They
argue persuasively that towards the end of the nineteenth century, the law courts in
the United States effectively altered the nature of private property laws, and by so
doing, orchestrated a mutation in the institutional framework of capitalist economy,
ushering in a quite distinct form of capitalism from the one described by Marx. Private
property turned from an exclusive right to hold physical objects for the owner’s private
uses, to a principle of control of limited resources needed by others.5 Such property is
in essence ‘intangible’.
According to Commons, these momentous events took place between the years 1872
and 1897. In a number of important rulings, the US law courts effectively altered the
traditional meaning of property, which meant ‘any tangible thing owned’, to mean instead:
any of the expected activities implied with regard to the thing owned . . .
comprehended in the activities of acquiring, using and disposing of the thing. One
is Property, the other is Business. The one is property in the sense of the Things
owned, the other is property in the sense of exchange-value of things. One is
physical objects, the other is marketable assets.
(Commons 1959: 18)
The original meaning of property, the owning of things, did not disappear, but was
relegated to what may be described as the internal ‘economy’ of a going concern (the
firm) or a household. Our perception of our personal private property still corresponds,
by and large, to the older, corporeal view of property. Modern capitalism, however,
is concerned almost exclusively with the non-corporeal property. The management
and shareholders of General Motors (GM), for instance, are not particularly concerned
with the use-value of GM cars, machine tools and so on, but with their exchange-
value, their marketability. But as Commons notes (1959: 19): ‘exchange-value is not
corporeal – it is behaviorist. It is the market value expected to be obtained in exchange
for the thing in any of the markets where the thing can or might be sold.’ The value
of one’s holding becomes capitalized earning capacity.
What is the value of a company – say, IBM? Is it the value of IBM as an aggregation
of the value of its machines, real estate, ‘knowledge’ and managerial practices? Classical
political economy and Marxism appear to suggest so. There is, however, another way
of measuring the value of IBM and that is its valuation of the company in the stock
market. What determines the latest market value of an IBM share? The price is
determined by what buyers are prepared to pay for these shares. Buyers reach their
decision primarily on the basis of their estimate either of the company’s future earning
capacity or their perception of other buyers’ perception of the company’s future earning
capacity. In other words, the value of IBM is entirely subjective; it is based on aggregate
estimates of the future and not on any corporeal assets. Accountants define the difference
between the replacement value of a company’s assets, and its value in the market
(which tends to be higher – although interestingly, in crisis times such as the one
experienced as I write these words, some companies trade at a lower rate than the
replacement value of their assets!) as ‘goodwill’. It is estimated that the vast majority
of wealth in the world is in fact denominated in ‘goodwill’.
12 Ronen Palan
These ideas then form the theoretical underpinnings of evolutionary economics,
the implications of which are discussed in particular in this volume by Phillips
(Chapter 3) and Schwartz (Chapter 10). The question that neither Commons nor
Veblen sought to answer was whether the changes in the concept of private property
and the concomitant transformation of capitalism can be described purely in
institutionalist terms, or whether there were some ‘exogenous’ material interests that
determined the sort of choices that were made. Was it not the case, as Hardt and
Negri (1994) argue, that jurists were actively seeking to accommodate the needs of capitalist
accumulation? Is it not the case, after all, that a Marxist political economic theory can
accommodate Veblenian institutionalism? This remains an open question. But the
perception of the market as an institution has become central to modern GPE.
Towards post-rationalist GPE6

Although different, the three ‘residues’ of classical political economy share rationalist
epistemology – although even that is debated with regard to the evolutionary approaches.
State or transnational firms are assumed to be rational, calculating ‘actors’, with clear
– usually utility-maximizing – preferences and goals (from power to profits). Differences
in opinion tend to focus on whether the actors are individuals or institutions, and
whether the choices are constrained or not by information and knowledge gaps or
uncertainty. But what of everyday recurring phenomena which imply that the world
is not a rational order driven by a set of universal rules, iron laws or systemic logic?
There is evidence for a growing interest in post-rationalist (not anti-rationalist) modes
of explanation in GPE. Post-rationalism consists of sets of theories that explain order
– and disorder – as the product of institutional and historical continuity, formal and
informal rules of conduct, social and institutional interaction, common pathologies,
consciousness and language, conflict and contest, and so on.
Broadly speaking, post-rationalist GPE adopts an open-ended historical narrative in
which outcomes are not predictable, but negotiated and contested, with each actor-
network perpetually frightened of loss or stasis. States and multinational enterprises
are viewed no longer simply as instrumentalist advantage-maximizing institutions, but
as complex organizations which exceed their goals and functions, but in non-utilitarian
ways. Their language, their scripts, their histories, their techno-structures and their
artefacts matter; analysis of these reveals them to be trapped in their own evolutionary
logic but also constantly at work to renew themselves. Consequently, we have witnessed
the ‘opening up’ of GPE from its economistic and material base to broader questions
of history and culture.
For such post-rationalist GPE, which is a truly diverse and broad movement, the
significance of Foucault’s work in particular cannot be underestimated. Among other
things, Foucault problematized the concept of agency in a way that places Marxism
(after Marx) and mainstream political economy firmly in the camp of ‘rationalism’.
Foucault’s studies of power and discipline have demonstrated that historical change
comes about at least in part through collective agencies that cannot be defined as
institutions or as social classes, but are contingent forms of alliances and identities
emergent in discourse. In Discipline and Punish (1975), for instance, Foucault identifies
a group of reformers who innovate new forms of discipline and power. These studies
then provided the basis for his research into the history of subjectivity, or the very
historical conditions that have produced the modern subject and modern rationality
as the underlying ‘infrastructure’ of modern capitalism.
Today’s critical wing of Global Political Economy is a mixture, but not a synthesis,
of Marxist, institutionalist and post-structuralist thought. Marxism provides us with a
strong hypothesis about the long-term trajectories of capitalism. But Marxism has
proved particularly weak in predicting or prescribing short- to medium-term trends.
The challenge, then, is to bridge the broad social critique of Marxism with the robust
empirical bent of institutionalism and post-structuralism.
Between economics, political economy and

Orthodoxy and heterodoxy have adopted diametrically opposed views of the nature
and purpose of interdisciplinary research; their conception of the nature and boundaries
of GPE differs as well. To the rationalists, particularly to those who pursue a
methodological individualist GPE, the boundary between GPE and other disciplines
is clearer: GPE is a sub-field of International Relations and political science which
stands at the intersection between domestic and international politics, on the one hand;
and trade and finance, on the other. However, as Carlson and Dacey (Chapter 7) note
– in recognition of the fact that it is not states that engage in trade, but individuals
and firms; states only determine the terms of trade – contemporary rationalist GPE
has tended to disaggregate states and encompass ‘domestic’ determinants of trade policy.
The broadly critical tradition in the social sciences is naturally attracted to holistic
interpretations of social relations. The assumption is that there are totalizing processes
driven by a predominant logic which we call capitalism, and that such totalizing processes
manifest themselves in all aspects of social life. The critical tradition maintains, therefore,
that there is no point in studying each facet of social life as an independent system of
relationships – for the simple reason that they are not independent but interdependent.
Consequently, the critical tradition does not accept the analytical legitimacy of formal
academic divisions. The critical tradition is then divided between its rationalist and
post-rationalist wings.
There is a subtle but important difference between totalizing processes and the
concept of a totality. Totalizing means a system of thought and practices which seeks
to universalize and dominate its surroundings; such systems are expansionary, but they
never truly obtain their aim: they never create a truly total system. In that case, there
is neither one concept, nor one set of dynamics or rationale that can provide a full or
even partial explanation for any singular process or event. Everything is complex and
multifaceted. Consequently, a system of thought that is grounded in the assumption
of totalizing processes is evolutionary, historicist, non-teleological and often accepting
of eclecticism; a system of thought premised on the assumption that the world ‘out
there’ is a totality, a whole, tends to privilege homeostasis, equilibrium and lack of
history. A political economy that seeks to incorporate all these variables and more
specifically, apply them in a systemic study of the economic system, tends to be critical,
evolutionary and dynamic.
We can see now how the notion of totalizing processes forces a distinct interpretation
of the relationship between GPE and political economy. Since there is no one global
system (a totality), the international cannot be treated as a separate realm, but as an
important ingredient of societal theories. And yet, the uniqueness of the institution of
14 Ronen Palan
the state and sovereignty should not be ignored. Consequently, political economy in
principle is indistinguishable from International Political Economy, in the sense that
good political economy is international in character. But if we were to insist on a
distinction, then I would argue that while political economy is grounded in a theory
of the state, critical GPE supplements it by offering a theory of states, of the plurality
of states; or more appropriately, critical GPE seeks to develop a theory of the nature
of a transnational economy operating within a system of fragmented political authority.
Whereas political economy has tended to concentrate on the analytical as well as
prescriptive question of how order and change come about in a ‘social formation’ (its
theorizing is predicated on the assumption that each social formation is subject to its
own autonomous set of dynamics), critical IPE or GPE changes the order of question;
it asks how order and change come about in a system of fragmented political authority.
The very discontinuity between the political and economic spaces is one of the major
sources of continuing change in the international political economy.
Although deeply divided and heterogeneous, there is still therefore a line threading
its way through the fascinating maze of conflicting and multifaceted topography of the
social sciences and political economy, a line that can rightfully be described as IPE
and GPE. It has to do, fundamentally, with the unique problematic of the operation
of the modern economy within a fragmented political system.
Notes
1 I gratefully acknowledge the constructive comments on an earlier draft of this introduction from
Lisa Carlson, Raymond Dacey, Earl Gammon and Duncan Wigan.
2 The term ‘critical tradition’ or ‘traditions’ does not imply (and often indeed is not synonymous
with) analytical or theoretical rigour. The term ‘critical tradition’ is generally reserved for those
studies that take a critical view of the status quo and explicitly seek to replace the predominant
form of power structures, be they capitalism, industrialization or the prevailing gender and race
power relationships with what they see as more just and equitable social arrangements. The term
‘critical tradition’ should not be confused with critical theory, otherwise known as the Frankfurt
School tradition of Marxist thought.
3 Now, and that can be confusing, whereas neoclassical growth models work in continuous time,
they are still founded on discrete mathematics as represented in Figure 1.1, or to use social science
terminology, they are methodological individualist in orientation.
4 States and Markets is the title of another famous book, by Susan Strange (1988). Strange, however,
chose this title in irony to convey her criticism of the then reigning orthodoxy in IPE. She deeply
regretted her choice, as clearly she became associated with the state and market approach to
IPE.
5 For an excellent analysis, see Screpanti (1999).
6 This section draws on Amin and Palan (2001).
Part I
Concepts and themes in
(GPE)
2 Late twentieth-century
globalization
The evolution and differentiation
of states and forms of public
authority
Mick Moore
Introduction
This chapter connects two issues and literatures.1 The first issue is the problem of weak,
fragile or failed states. Since the 1980s, we have become accustomed to the fact that
many de jure governments lack de facto authority. They have so little control of their
territories and populations that they do not meet the classic criteria of statehood. There
is a vast literature on individual cases and on the many ways in which external actors
might intervene to provide or reconstitute public authority. But there are few attempts
to explain why the phenomenon of weak and failed states became so prevalent in the
late twentieth century. While the issue is seen as important from the policy perspective,
it has from the intellectual perspective been almost naturalized: it is just there. The
second issue is the impact of globalization on states and governance. Again, there is a
vast literature. But it barely addresses this phenomenon of weak and failed states. The
literature focuses on the putatively ‘normal’ (advanced, wealthy, OECD) state, and on
the questions of whether and in what ways globalization is either eroding its power or
changing the ways in which it exercises that power. As illustrated by the prevalence
of the phrase ‘the state’, actual or emerging differences among states are at most a
secondary concern. The literature implies that all states – at least those that matter –
are being similarly affected and shaped by globalization, and possibly further
homogenized.
This implicit expectation that globalization will stimulate convergence in state forms
or structures is counter-intuitive. Globalization means increased interaction. What
would we expect to happen when any random external process brings into closer
interaction a set of entities, like states, that have the potential both to compete among
themselves for scarce resources and positions and to co-operate for collective benefits?
Evolutionary biology and the social sciences, especially economics, suggest that we
might expect conflicting consequences. On the one hand, these entities are likely in
some respects to co-operate more with one another and, through processes that
organization theorists label isomorphism, come to emulate and to resemble one another
more closely. On the other hand, evolutionary biology tells us also to anticipate
contradictory processes: increased interaction among a set of entities is likely to intensify
pre-existing competition among them for resources and positions, and therefore stimulate
processes of niche-seeking, specialization and differentiation. States are not biological
18 Mick Moore
entities. But they have many features of organisms, compete with one another for
resources and positions, and are clearly capable of learning and adaptation (Palan
et al. 1999).
In this chapter, I use my specialist knowledge to identify ways in which late twentieth-
century globalization is leading to the specialization and differentiation of states, and
of patterns of public authority more generally, in what used to be termed ‘the global
South’ (or developing countries). I make that case from the perspective of a strand of
political economy historically labelled ‘fiscal sociology’, by employing a novel concept
of ‘political revenues’, and through paying considerable attention to the opportunities
which late twentieth-century globalization provides to gatekeeper-elites in the global
South. In general terms, my argument emerges from a combination of fiscal sociology,
the evolutionary perspective on states sketched out above, and an appreciation of the
role of elites. One specific product is the proposition that we might better understand
the phenomenon of weak and failed states if we view them less as an unexplained
pathology and more as an outcome of late twentieth-century globalization and a
structural feature of the contemporary world.
Globalizations
There is broad agreement among scholars that a period of globalization in the late
nineteenth and early twentieth centuries was followed by an era of retraction and
nation-centricity that lasted from World War One until approximately the 1960s. That
was succeeded by a further period of intense globalization that can in most respects
be dated from the 1960s and 1970s. Let us label it the late twentieth-century
globalization.
There is a common point of departure for the debate about the impact of late
twentieth-century globalization on states: an image of the typical Organisation for
Economic Co-operation and Development (OECD) state at the starting point, in the
middle of the twentieth century. Its defining characteristics include:
1 the rooting of political and military institutions in individual countries;

2 the attribution of a distinct nationality to most economic enterprises, including
those operating transnationally;
3 the continued orientation of states to inter-state military conflict and to the possibility
of large-scale inter-state warfare;
4 major legitimating roles for mass-membership parties in the political realm and,
in the administrative realm, for distinctive, centrally controlled, accountable
Weberian state civil and military apparatuses; and
5 the dedication of significant state resources to popular welfare (the ‘welfare state’).
This was taken as the typical state on which globalization was to impact.
What was that impact? There seems to be less scholarly agreement now than earlier.
The pioneer scholar – and in many respects, the founder of the discipline of international
political economy – Susan Strange argued (1996) that globalization was empowering
international markets and international market actors at the expense of governments
and political institutions generally. That broad proposition remains popular, but has
been challenged in two main ways. One set of scholars emphasize counter-trends: the
ways in which the increasing importance of transnational economic transactions might
Late twentieth-century globalization 19
actually increase the size or power of the state (Cameron 1978; Evans 2007; Kahler
and Lake 2004; Rieger and Liebfried 1998; Rodrik 1998; Weiss 2005). The other
challenge, the ‘transnationalization thesis’ (Orenstein and Schmitz 2006), is less direct.
Its proponents emphasize what Weiss (2005) calls ‘entwinement’, i.e. the ways in which
political institutions and processes hitherto rooted in individual national states
increasingly engage with, influence and co-construct one another, to the extent sometimes
of creating a space for genuinely global policy making and administration (Stone 2008)
– and in that sense help to protect political power from drowning under rising market
forces.
I am less interested here in the truth of these contending propositions about the
political impact of globalization than in the ways in which arguments are framed, and
the assumptions that are implied. A powerful theme in much of the literature is that,
as the threat of large-scale inter-state warfare has diminished and globalization has
intensified market competition, states have been focusing less on military competition
with one another and more on economic competition. At least in the eyes of its most
cited theorist, this new competition state (Cerny 1997) is forced to give priority to national
economic competitiveness at the expense of welfare-ism. The latter proposition about
declining welfare-ism seems overstated. And, as Palan et al. (1999) have argued, relatively
inclusive, social democratic welfare-ism can be quite consistent with international
economic competitiveness for some states. However, Cerny’s contentions that it is
international economic competition that is to a large extent driving changes in the
political character of (OECD?) states, and that those changes are similar from country
to country, seem to be shared by a range of other theorists, including those engaged
with a loosely defined and variously labelled set of ideas about changes in institutional
configurations (‘architecture’) and in modes of rule that I will label network state (or
network polity) theory.
The central proposition of network state theory is that the mode of exercising state
authority is changing: away from one-way command-and-control-type activities initiated
from within the formal state apparatus (‘Weberianism’), towards more two-way, informal,
exchange relationships that cross formal organizational boundaries. The capacity of
the benchmark 1950s OECD state was believed to have derived to a large extent from
the financial and organizational resources that could be mobilized in command-and-
control mode within the formal state apparatus. In the network state model, state
capacity derives much more from the strength of – and ability to mobilize – networks
and connections within the state apparatus itself, across states, and between state and
non-state actors (Ansell 2000). Other scholars writing on the evolution of the con-
temporary state make similar arguments focusing on changes in the institutional
architecture of the (OECD) state (Jayasuriya 2004; King and Lieberman 2009; Majone
1997; Rhodes 1996).
Diverse as these theorists and theories are, they are significantly animated by real-
world changes in the character of inter-state competition. Among the more advanced
states in particular, the emphasis does seem to have shifted from military towards
economic competition. And states are competing for the kinds of investment that, by
generating technological upgrading, jobs and tax revenues, continue to provide the
material underpinnings to the political–economic system characteristic of OECD states:
a relatively stable compromise between capital and labour mediated by electoral
democracy, high public spending and near-continuous economic growth. The theories
that I have mentioned above reflect observable changes in the world. To the extent
20 Mick Moore
that I disagree with them, it is not because I believe them to be wrong, but because
they do not adequately reflect other things going on at the same time. One line of
argument, which I do not have the space to develop here, is the extent to which the
emergence of less embedded finance capitalism might also be generating processes of
political differentiation among the wealthier states. I focus here on poorer states where,
because of the diversity of what I term ‘political revenues’, political elites are less
motivated than they are in OECD (and most Brazil, Russia, India, China, South Africa
[BRICS]) countries to pursue objectives of political stability, public revenues and
personal prosperity through eager co-operation with private commercial investors.
Fiscal sociology and political revenues

My approach to political economy is influenced by a school of thought that has been
labelled, not entirely happily, as ‘fiscal sociology’. The intellectual foundations of fiscal
sociology go back to the work of Rudolf Goldscheid and Joseph Schumpeter in the
early twentieth century. In recent years their ideas have been rediscovered, and typically
are introduced with the quotation of a few purple passages from Goldscheid, including,
for example: ‘the budget is the skeleton of the state stripped of all misleading ideologies’
(cited by Schumpeter [1918] 1991: 7).
In this original form, fiscal sociology constituted a set of broad assertions about the
great political and historical significance of fiscal variables. It is best viewed as a meta-
theory about grand patterns of societal evolution designed to compete with the ideas
of Marx and Weber. I define the fiscal sociology paradigm more narrowly, as the prop-
osition that sources of state revenue, and the ways in which states organize themselves
to relate to revenue providers, exercise a major influence over politics and governance.
The strength of the paradigm is that it inspires and focuses attention on variables
that have been almost entirely ignored by political scientists and political economists.
The weakness of the original is that it lacked any explicit basis in behavioural theory:
there are no behavioural micro-foundations, and no clear propositions to test. That is
a remediable problem. In my view, there is a more solid behavioural core to fiscal
sociology to be found in organization theory: the proposition that the structure of
complex organizations, and the behaviour and strategies of their managers, are
influenced by the location of their key resources and the means they employ to access
those resources (Pfeffer 1982; Pfeffer and Salancik 1978). That proposition can easily
be extended to encompass those complexes of partially co-ordinated organizational
networks that we call states.
In recent years, a body of more explicit and testable propositions has begun to
emerge, most of it from research relating to developing countries. There is now a
substantial literature that explores the implications of the fact that – unlike virtually
all OECD states for the past century and more – many states elsewhere in the world
do not finance themselves mainly from general taxation, but depend on a range of
other sources, most notably the rents from oil, gas and other natural resources, and
development aid (Brautigam et al. 2008; Chaudhry 1989, 1997; Dunning 2008; Gervasoni
2010; Martin et al. 2009; Moore 2004, 2008; Prichard 2009, 2010; Winters 1996).
Insofar as there is a core proposition, it is that governance is better where the behaviour
of political authorities is constrained by a need to negotiate and bargain for their key
financial resources with the actors – mainly, but not only, taxpayers2 – who will be
most affected by the ways in which these resources are used. Conversely, political
authorities which enjoy revenue that does not have to be ‘earned’ politically (Moore
1998) are more likely to abuse their power.
In pursuing the ideas animating fiscal sociology, I employ the novel concept of
‘political revenues’, distinguishing two categories. The first are ‘state revenues’: the
incomes of states or other legally constituted public authorities – from taxes, non-tax
revenues, and grants from other states or international organizations. These revenues
are almost always legal. The second category, which I term ‘political elite revenues’,
accrues to non-state entities through their exercise of formal or informal political
authority. It includes the incomes that ‘corrupt’ politicians, military men, public servants,
‘warlords’ and gang-leaders obtain when they: co-operate in illicit drugs, arms or other
trades; steal money from the public purse or the public through the misuse of authority;
or take effective control of parts of the economy, levying their own ‘political profits’.
Political elite revenues generally are illegal. In practice, the boundaries between state
revenues and political elite revenues often are unclear. For example, some of the ‘fees’
that timber merchants pay to fell trees in state forests might be legal and some might
be illegal. Of those that seem legal, some might get to the public treasury while others
end up in other pockets.
It is especially difficult to understand politics and state formation in contemporary
poorer countries unless we recognize the potential motive power of both state and elite
political revenues and appreciate the ambiguous, shifting character of the border between
them. These revenues have become particularly significant because of the ways in
which late twentieth-century globalization has impacted on the global South. The
characteristics of that process which are especially relevant here are: continued increases
in international economic inequality; the emergence of liberal and secretive international
finance, as exemplified by the tax haven phenomenon; growing opportunities for political
elites in the global South to appropriate rents from the exploitation of oil, gas and
mineral resources; the emergence of new illicit economies of drug trafficking and
money laundering; and the availability of large quantities of international development
aid. There are two broad consequences for political revenues. States have become
more dependent on non-tax revenues relative to tax revenues. Political elite revenues
seem to have increased relative to state revenues.
Political revenues and globalization

In our benchmark situation, around 1960, most political revenues were state revenues,
and, even more evidently, most state revenues came from broad, general taxes – as
opposed to grants, other non-tax revenues, or taxes derived from a very small number
of resource-extraction enterprises. This was the dominant pattern within the rich
(OECD) states, and the inheritance of most states in Africa and Asia that became
independent of colonial rule around that time.
Two regions of the world provided the main exceptions. One was the Communist-
ruled sphere covering China, Eastern Europe and the Soviet Union. Here, governments
mainly financed themselves directly through their ownership and control of most
productive enterprise under the central planning system – a system that has now
disappeared almost entirely. The other exception was small in scale in 1960: some
Middle Eastern rulers were already living – some very well – from oil export revenues.
In many countries, late twentieth-century globalization has tended to maintain or
reinforce the benchmark pattern, bolstering state revenues as much as, or more than,
22 Mick Moore
political elite revenues, and doing so through the channel of broad general taxation.
This is to some degree the case with most OECD countries and a number of (larger)
non-OECD countries that have had a significant impact on the global economy through
increasing exports of manufactured products (China, South Korea, Taiwan), non-
mineral commodities (Brazil), and relatively tangible services (India). Elsewhere, a
range of new sources of political revenues has become more important. They challenge
the dominance of the OECD norm of state dependence on broad general taxation,
and might be seen as replacements for the previous ‘alternative’ to that norm – direct
state control of productive enterprise – that has now largely disappeared.
My classification of the new sources of political revenues is provisional:
1 illicit political elite revenues;

2 point natural resource revenues;
3 sovereign wealth revenues;
4 property development revenues;
5 pirate sovereign revenues; and
6 other sovereign revenues.
These sources to some degree blend into one another, and map only very roughly onto
political jurisdictions. Many national governments and elites obtain revenue from several
of these sources simultaneously.
Illicit political elite revenues

Illicit elite political revenues accrue to people and groups who exercise some political
power, and typically use it to ensure that the state agents help rather than hinder their
activities, where ‘helping’ can extend from simply turning a blind eye (e.g. to drug
smuggling) to active assistance (e.g. in providing false documentation to facilitate illegal
trade in arms or diamonds). Globalization has increased the rewards from many illicit
activities through the reduction in communications and transport costs, and the
consequent increased incentives for people located in poorer countries to meet market
demands in the rich countries. Some activities in this category, including people
trafficking and the production and trading of counterfeit medicines and other goods,
are relatively dispersed over the globe (Naim 2003) and small in terms of the sums of
money involved and the perverse incentives that they create for the active weakening
of state institutions and public authority.
Other relatively small-scale illicit rent-generating activities – like permitting the
illegal felling and export of tropical hardwoods (Ross 2001) and turning a blind eye to
illegal factory fishing in the territorial waters of African states (Standing 2008) – are
more concentrated in a few locations. Large-scale piracy is a recent entrant into the
category. Although now expanding off Benin and Nigeria, it has been concentrated
mainly off Somalia, where it reflects the combination of the near-collapse of state
authority and proximity to a major shipping lane. In its current form, the pirate economy
of kidnapping ships and crews for ransom is very much a product of globalization. It
is a viable large-scale business because of the combination of modern communications,
the London lawyers who act as intermediaries between representatives of pirates and
ship-owners and insurers, and the international private security firms that deliver the
ransom money.
On the global level, the two main sources of illicit elite revenues in recent decades
have been diamonds and drugs.
Point natural resource revenues

In quantitative terms, rents from ‘point’ natural resources – i.e. minerals and energy
– have grown in recent decades to become by far the biggest single source of political
revenues. Although the international energy and minerals economies tend to be unstable,
demand and prices have tended upwards since the early 1970s, and extraction activities
have spread further into poorer regions hitherto considered too difficult, politically or
technically. Relative to the 1960s and 1970s, resource rents are now less concentrated
in the Middle East and North Africa, and have become more important around the
Caspian Basin (the Caucasus, Central Asia and Russia) and in sub-Saharan Africa.
Because the rents from mineral and energy extraction are so large, and because the
extraction processes are so distinctive, concentrated and rooted in particular locations
for long periods of time, we know more about the governance impact of political
revenues from this source than from any of the others listed in this chapter. In particular,
we know three big things – and are close to a consensus on a fourth.3
The first is that the extraction of point natural resources in almost all cases greatly
enriches the political elites who control the locations where the extraction takes place.
It provides revenues to both political elites and states. The Al-Saud family has benefited
more from oil than has Saudi Arabia. Even in more bureaucratically organized states
with some elements of formal electoral democracy, state energy corporations, often
described as ‘a state within a state’, are bastions of privilege and extra-constitutional
power (e.g. de Oliveira 2007; Winters 1996). The second thing we know is that the
extraction of point natural resources tends to generate relatively exclusionary,
monopolistic and militarized governance, and to entrench governments in power for
long periods of time. The third is that governments funded principally from point
natural resource extraction tend to treat their citizens badly – in terms of civil and
political rights, health and education services, and public infrastructure provision –
because they have so little need of them. Finally, natural resources are not an inevitable
curse; but there is strong evidence that they become a curse when they are exploited
on a large scale in poor countries; and this malign effect is closely associated, both as
cause and as effect, with poor governance (Aydin 2011)
Sovereign wealth revenues

A sovereign wealth fund is ‘a state-owned investment fund composed of financial assets
such as stocks, bonds, real estate, or other financial instruments funded by foreign
exchange assets’.4 The contemporary political significance of sovereign wealth funds
derives from a combination of three main factors. First, they are new. The first fund,
the Kuwait Fund, was established in 1953, but the pace of creation was slow until the
1990s. Most sovereign wealth funds now in existence have been established since 2000,
mainly on the basis of large surpluses generated by exports of oil and gas and, for
China, manufactured products. Second, sovereign wealth funds are, in terms of numbers,
asset sizes, or asset sizes relative to gross national product (GNP) or to government
revenue, very important in the Middle East, significant in Africa, Russia and Central
Asia, China, and other parts of Asia, but insignificant in the ‘old’ industrial regions of
24 Mick Moore
Western Europe and North America. Third, sovereign wealth funds are characterized
by lack of transparency. Excluding a few cases such as Norway, the people who control
sovereign wealth funds typically release little information about them, and have
considerable discretion over how the resources are deployed.
Most of the public debate about sovereign wealth funds has taken place within OECD
countries, and has focused on the potential threats to national security stemming from
the purchase of strategic economic assets by agencies controlled by (non-democratic)
foreign governments. The implications of large sovereign wealth funds for the governance
of nations that possess them are at least as important. The assets and profits of sovereign
wealth funds can easily be switched between overseas investments and the domestic
economy and fiscal system. Sovereign wealth funds potentially liberate executive
authorities from the need to negotiate with domestic taxpayers to obtain revenue, or
to explain their expenditures to legislatures and voters.
Property development revenues

Property development revenues derive from the least liquid and least mobile form of
domestic asset: land. The distinctive feature of the ‘property-development polity’ is that
public authorities – and often political elites – derive much of their income from either
(a) re-allocating rights in scarce land to other beneficiaries; or (b) actively participating
in income-generating real estate development, including public utilities like electricity
and water supply and public infrastructure like ports and toll roads. Many political
jurisdictions obtain a little income from these sources.
While the most distinctive property-development polities have a long history as centres
for entrepôt activities, they have flourished in recent decades in consequence of the
interaction of two sets of factors. The first is late twentieth-century globalization,
including in particular the containerization of international trade in goods and the
growing importance of transshipment hubs (Davidson 2008: chapter 8); the expansion
of air travel; the emergence of a large group of ‘global professionals’ with overseas job
postings; and the growth of the international financial services sector. The second is
various kinds of political instability and insecurity of property in the regions they serve.
It is difficult to predict how far existing property-development polities will expand or
how far new ones will emerge. Their viability depends on the lack of strong competition
from other political jurisdictions in their neighbourhood for the capital, personnel and
economic activity that they need to attract. The more elaborated property-development
polities are almost inevitably city states.5 Their potential numbers are limited. But the
same processes that produce property-development city states are also evident within
larger countries and at sub-national level. Sri Lanka is much larger than a city state,
but has a dense population and, because of its prime location on world shipping lanes
and major tourist potential, is currently receiving considerable investment in port,
airport and other transport facilities, nearly all on land made available by the govern-
ment. The Rajapaksa family, which now runs the country as an elected dictatorship,
plays a major role in these and other property developments. Sri Lanka is not Dubai,
but there is significant convergence between the two. The extent to which sub-national
governments in China are now funding themselves from land sales and property
development – and therefore arguably perpetuating their autonomy from the people
they are supposed to serve – is now a topic of significant comment and research (Man
2011: 12–13). Property development revenues are likely to continue to affect governance
in parts of the world for the foreseeable future.
Pirate sovereign revenues

Dubai, Qatar and other Gulf states compete with one another mainly by investing in
improved infrastructure and other facilities to attract businesses, investment, depositors
and visitors. While there may be some costs to these states and to the rest of the world
from this competition, many people view it positively, as doing what competition
promises to do in the economic textbooks: stimulating improvement. One major category
of (mainly new) political revenues depends on a much more destructive kind of
competition. Political jurisdictions compete to appropriate directly for themselves the
revenues that would otherwise accrue to other jurisdictions. They make themselves
better off by making others worse off. A social scientist might label these ‘zero-sum
sovereign revenues’. I prefer the more graphic term ‘pirate sovereign revenues’.
The oldest significant contemporary form of sovereign revenue piracy derives from
the willingness of the governments of Liberia and Panama, in particular, to register
merchant ships as being ‘national’ in return for lower registration fees and less stringent
regulations relating to vessel safety, environmental safeguards and labour conditions
than those imposed by the genuine home governments of the ship-owners. These
arrangements for ‘flags of convenience’ date back to Panama in the 1920s, but spread
rapidly from the 1970s (Palan et al. 2010: 140), and now account for more than half
the world’s merchant shipping. The sums of money involved are, however, very small
in comparison to those involved in the more recent and now more contentious form
of revenue piracy: tax havens. Much has been written recently on the subject. The
details are complex, and the question of what is and what is not a tax haven remains
contested.6 But the essential points are clear. Tax havens are
jurisdictions that deliberately create legislation to ease transactions taken by people

who are not resident in their domains, with a view to avoiding taxation and/or
regulations, which they facilitate by providing a legally backed veil of secrecy to
make it hard to determine beneficiaries.
(Palan et al. 2010: 236)
More simply, tax havens allow a few privileged people to enjoy the benefits of great
wealth free of any of the obligations that they might otherwise incur. They are
characterized by high levels of secrecy and the ease with which companies and other
legal entities, including trusts, can be established and registered. Tax havens are a
defining feature of late twentieth-century globalization. Some have their historical roots
in the nineteenth century, but their explosive growth dates from the early 1970s (Palan
et al. 2010: 108).
From a global perspective, the most important consequence of tax havens, in terms
of political economy, is that they permit corporations and wealthy individuals to evade
taxes. Tax burdens are shifted towards small companies, consumers and employees.
The impact of tax havens on many developing countries is greater and more damaging:
by enabling those who command what I have termed ‘elite political revenues’ to hide
these incomes and/or launder them into what appear to be someone’s legitimate
26 Mick Moore
business profits, tax havens facilitate and stimulate corruption, drug trafficking, diamond
wars, piracy, and the theft of natural resource revenues.
Other sovereign revenues

My final category comprises new globalization-based political revenues that do not fit
into the other groupings. They have in common the fact that they are almost entirely
channelled through state agencies, with little going directly to political elites. Some of
the items are trivial on a global scale, but locally important: for example, the revenues
that the government of Tuvalu gathers from commercializing the right to use its
national web domain name: tv. On a somewhat larger scale, the surge in United Nations
(UN) peacekeeping operations that began around 1990 (http://www.un.org/en/
peacekeeping/operations/history.shtml) provides revenue-earning opportunities for
governments of poorer countries that command disciplined, low-cost armed forces that
are relatively free of HIV/AIDS.7 The most significant new political revenue within
this category is development aid. The aggregate volume of aid both increased con-
siderably during late twentieth-century globalization, and became more concentrated
on the poorest countries. Further, most of those countries were suffering low or negative
rates of growth of their economies and therefore of tax revenues. In consequence, aid
became a major source of income for several dozen governments, mainly in Africa
and Central America. In 2006, it was the major single source for nearly 20 of them.8
Again, one can see aid dependence as a sensible income-earning strategy for some
governments – especially governments of small, poor countries with few prospects of
exporting manufactured products or legitimate services, whose exports were excluded
from their ‘natural’ external markets for agricultural products by the protectionist
policies of OECD countries.
Elites and weak states

Late twentieth-century globalization has not only shifted the financing of peripheral
states away from general tax revenues towards what Schumpeter might have termed
domain revenues, but it has also created many opportunities and temptations for political
elites to invest in the harvesting of illicit elite revenues – by engaging in or facilitating
drug production and trafficking, money laundering, tax evasion, the sale of government
contracts to the giver of the highest bribe – or even simply smoothing the way of aid
donors and their projects through the public service in return for lucrative consultancy
assignments.9 Because of globalization, the sources of such revenues are more abundant.
Liberal international finance, most strikingly in the shape of tax havens, has made it
easier and cheaper to hide illicit incomes, and thus has increased incentives to earn
them. The growing transnationalization of elite culture, including the practice of
educating children in the USA or some other rich country, also shifts the balance of
elite incentives towards keeping illicit money offshore in the knowledge that, should
the political basis for money making at home disappear, a very good life will be
available in some other part of the world. The re-commercialization of military capacity
has made it possible for exploitative, authoritarian elites to remain in power even if
they enjoy little domestic legitimacy or support.10 Power often lies in the hands of elites
who often lack incentives to nurture or build the institutions that might mobilize large
numbers of people into politics (parties), encourage political bargaining between different
interest groups (competitive elections and legislatures), collect revenue for public purposes
(tax agencies), make informed policy decisions and implement them consistently (civil
services), protect citizens against crime and force (police, judiciaries, prison services) or
provide the technical support needed to hold government to account for the use of
public money (public audit offices).
It is partly for these reasons that the phenomenon of weak and fragile states has
become a characteristic and relatively permanent feature of the global geo-political
landscape. Historically, the political uncertainty and instability that typically follow war
or internal conflict elicited a drive towards political resolution. Different interests and
parties competed actively for state power. Either one party emerged as dominant or
public authority was re-established through compromise between the leading contenders.
A distinctive feature of the situation in some parts of the contemporary world is that
these processes of resolution and of re-establishment of relatively effective public authority
are weak and slow. Failing governments have not been ousted militarily or supplanted
by expanding neighbouring states. Weak governance and continuous internal conflict
have become routine. For every case of apparently successful resolution, like Sierra
Leone, there are several where success is not yet in sight. A major generic reason is
that, if they can continue to act as rent-taking gatekeepers, elites lack strong incentives
to put an end to weak governance or disorder, and may actively profit from it (Munkler
2005). Control of rent-taking nodes becomes more rewarding than ruling territory and
population through the contemporary state institutions with which we are most familiar.
Conclusion
I began this chapter by pointing out a paradox. On the one hand, we have a large
literature that argues or implies that globalization is leading to convergence among
states. On the other hand, we have become habituated to the idea that a significant
number of states are failing in the most basic ways. One could reconcile the two positions
by treating the phenomenon of weak and failed states as an unexplained pathology,
and a clear deviation from the norm. I have instead sketched out a way of thinking
about the issues, combining an evolutionary perspective on states with fiscal sociology,
which is potentially more productive. It allows us to see weak and failed states as the
product of the ways in which late twentieth-century globalization has stimulated and
shaped a process of differentiation of states. Perhaps they have become a structural
feature of our contemporary globalized world?
The chapter ends here, but the argument should not. This way of thinking about
states has value well beyond the cases of fragility and failure. The hypotheses and
suggestions that I have made above apply to a much wider range of cases. I have no
space here seriously to interrogate the assumption that globalization has similar,
homogenizing effects on OECD states. The shift to a more financialized form of
capitalism, and the unequal distribution of its institutions even within the OECD world,
raises questions about potential differentiation that are well worth exploring.
Notes
1 For very helpful comments on earlier versions of this chapter, I am very grateful to Max Everest-
Phillips, David Leonard, Markus Schultze Kraft and, in particular, Ronen Palan.
2 The same idea animates much insightful literature on government–business relations (Bates 2001;
Winters 1996).
28 Mick Moore
3 There is a large literature examining the diverse effects of large resource rents on politics and
governance. Among the many sources, see Bornhorst et al. (2008), Bulte et al. (2005), Collier
(2006), Daniele (2011), Knack (2009), Neumayer (2004), Omgba (2009), Oskarsson and Ottosen
(2010), Ross (2003a, 2003b, 2008), Snyder (2006), Snyder and Bhavnani (2005), Stijns (2006)
and Torvik (2009).
4 According to the Sovereign Wealth Fund Institute, ‘These assets can include: balance of payments
surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses,
and/or receipts resulting from commodity exports. Sovereign Wealth Funds can be structured
as a fund, pool, or corporation. The definition of a sovereign wealth fund excludes, among other
things, foreign currency reserve assets held by monetary authorities for the traditional balance
of payments or monetary policy purposes, state-owned enterprises (SOEs) in the traditional sense,
government-employee pension funds, or assets managed for the benefit of individuals’
(http://www.swfinstitute.org/fund-rankings/). Other sources on sovereign wealth funds include
Monk (2009), Saw and Low (2009), Weiner (2011) and Xu and Bahgat (2010).
5 Hong Kong has never formally been independent, being first under British and then under
Chinese control. Nevertheless, it has in practice enjoyed many of the features of an independent
city state.
6 For an excellent account of tax havens, see Palan et al. (2010). Shaxson (2011) is a better read,
but more partisan.
7 In March 2011, the largest contributions in terms of troop numbers came from Pakistan, India
and Bangladesh (http://www.un.org/en/peacekeeping/resources/statistics/contributors.shtml).
However, Rwanda and Nepal provide much higher troop numbers relative to the size of their
national economies.
8 Adrian Wood estimated that in 2006, and taking into account only countries with a population
of a million people or more, 17 governments (15 in Africa) were receiving at least as much
revenue from aid as from tax; and for a further 13, aid revenues were between 50 percent and
100 percent of tax revenues (Wood 2008).
9 There seems to be very little systematic research on elite careers in poorer countries. One exception
– recent work on Bangladesh on shifts in and out of public service and non-governmental
organization employment (Lewis 2010) – tells us nothing about unofficial or illegal incomes. For
further discussion of the phenomenon of the intentional destruction of state capacity by political
elites, see Matthew and Moore (2011).
10 The Qaddafi regime in Libya survived the initial upsurge of popular opposition in March 2011
in large part because it had its mercenaries ready for just such an event, some of them already
in the country, and others available to be flown in.
3 The firm, the corporation
and contemporary capitalism
Richard Phillips
Of all the capitalist institutions that underpin modern economies, the firm has long
been seen as the principal instrument of wealth creation and distribution in society.
Firms give structure to the opportunity of participating in contemporary capitalism –
as an active participant inside its processes, as an outsider seeking to tax the fruits of
its labour and govern its behaviour, as a vehement critic lobbing Molotov cocktails at
police and burning down high-street shops in frustrated protest. And it is the largest
of these firms, what we tend to think of as the ‘multinational enterprise’, that is most
often thought of as the visible hand of globalization around which the international
system responds.
Susan Strange once commented that the intellectual forefathers of International
Political Economy (IPE) needed to ‘wake up’ and that a better future was one where
IPE broke away from what she saw as an ‘intellectual Procrustean bed, too short to
accommodate reality, so that the study of international business is either cut-off
altogether, or curled up at the bottom of the bed where it safely can be overlooked’
(Strange 1993: 101). Such calls implied that ‘the firm’ in general, and the ‘multinational
corporation’ (MNC) in particular, must be ‘brought back in’ to any effective account
of change within contemporary capitalism. But what does this mean today?
Much has changed since the days when Susan Strange was levying her criticisms.
Indeed, much has changed since the first edition of this volume was published in 2000.
In response, this chapter provides the reader with a primer for what progress in our
understanding of the firm is really about. Firms are not abstract corporate entities that
can be easily accounted for in the singular and made sense of as ‘actors’ as is often
(and often misleadingly) done with the treatment of ‘states’, ‘civil society’ or any other
participant in the play of contemporary global affairs. Rather, these entities are all
diverse organizational composites that are constructed and governed in highly variable
ways. It is those specificities that interact and make up the economy of facts and figures
that we talk about as if the macro- and micro-economic world were somehow
phenomenologically separate things. It is those specifics that give us an historical record
to talk about in the first place. It is those specifics that both our theoretical and
historical accounts must begin to capture.
Firms, international business and the global political

economy: a caveat emptor on how we read the ‘history’
of the firm
The history of the multinational pre-dates present-day capitalism by several hundred
years. In many accounts of that history, authors find meaningfulness in the observation
30 Richard Phillips
that the multinational today – say, the world’s largest producer of diamonds, De Beers
– and the (British) East India Company in the seventeenth century are not altogether
distinct beasts. Both have or had multinational operations, both have or had private
investors looking for a return on their investment and a governing board of elites to
watch over activities, and indeed, both utilized their own private armies to protect
their international exploits. Multinational corporations are like ‘little republics’, mini-
countries (often thought to be not so little any more). Indeed, both are ‘modern’ in
the sense of being a joint-stock company design, De Beers is simply a current variation
on a theme of the modern corporation.
What we might today call ‘public–private partnerships’, ‘project financing’ and ‘off-
balance-sheet financing’ were already present, in spirit and in prototype form, centuries
ago when the first joint-stock companies (which were also multinationals) were created.
For instance, the English variation of the East India Company was a joint-stock company
whereby each expedition had its own shareholders and returns accounting. The tenth
voyage of the British East India Company in 1611, for instance, returned a 148 per
cent return on that voyage’s shareholder capital of £46,092 (Micklethwait and
Wooldridge 2005). Today, we might call this a ‘project-based firm’ (Sydow et al. 2004;
Whitley 2006) whereby independent companies, or legally independent subsidiaries,
are constituted around a discrete undertaking or set of assets for which there is an
expectation of a future return.
These early experiments in joint-stock companies reflected a basic truism – the
intimate relationship between politics and economics. In fact, for most of the history
of the corporation, this fundamental political economy was well defined. Corporations
were originally ‘chartered companies’ subject to the direct hand of the state. The state
not only specified the ownership claims and limited liabilities of company owners, but
it also delineated the nature of what the enterprise was to do, its boundaries of influence
and activities (e.g. its territorial market rights), how the enterprise was to be governed
as well as the rights and responsibilities of different parties involved. Chartered companies
were in effect the creation of a new type of economic entity recognized only through
special legislative enactments that would define the nature of that venture and what
goals (above and beyond the making of money) that enterprise was to be governed by.
Why did states make this extra effort? Most probably the main reason is that it provided
a way of channelling privately held wealth into a venture whose very existence was
not only at the discretion of the state, but could also be created to pursue state interests
– a fact that manifested itself whenever those charters were up for renewal (in the case
of the British East India Company, its charter was subject to renewal every 20 years;
the modern British Broadcasting Corporation [BBC] today still operates under a 10-
year charter). In short, the invention of the joint-stock company, not to mention the
multinational enterprise, was a political innovation, a clever idea about how activities that
were in the interests of the government could be pursued ‘off balance sheet’, utilizing
resources mobilized from private individuals rather than those garnered through taxation
(a ‘public–private partnership’ to use contemporary parlance).
Much of the history of the modern corporation is the history of something more
than one specific, idiosyncratic organization. It is a lens through which we can see
continuities across history and be selective in how we raise important distinctions
between capitalism then and now. For instance, returning to the history of the
multinational corporation, the public interests of the state had the power directly to
trump the private interest in making money. In the case of the British East India
Firm, corporation and contemporary capitalism 31
Company, it was the state that stripped the East India Company of its key operational
assets, its own military, following the Indian Mutiny in 1857. This would make the
passing of its legal charter in 1874, which the state would not renew, a mere technicality
in the demise of the 274-year-old company. For many, this is a highly relevant departure
point through which to diagnose the situation of today. Back then, public pressure and
opposition over the role of the multinational corporation in international affairs could
see democracy trump capitalism. Concerns over the ‘democratic deficit’ in modern
society could see one look at this history and wonder, where did such powers go? Can
they be brought back today? The history of the corporation is not simply about the
past. It is a concern with the historical diagnosis of how the predicaments of present-
day capitalism came to be.
Yet we should not forget that how we define the firm and historicize it not only
helps to better our understanding of capitalism, it can help to worsen it as well. Simple
notions of the firm, in this case as a capitalist institution, tend to suggest an ‘essence’
to the firm. After all, the invention of the modern corporation created the legal
foundations for an entity to exist as a rights holder indefinitely and corporations, such
as the Hudson Bay Company, continue to exist well over three centuries after they
were founded. This timelessness magnifies our sense of that essence, so much so that
one can be forgiven for thinking that very little has changed in what the essence of
the corporation is fundamentally about – namely, they try to make profits out of the
resources they are legally entitled to exploit (i.e. ‘assets’) and through the force of
whatever operational army underwrites that business enterprise.
We can even ‘see’ this capitalist firm in the data so many would argue. For instance,
over the last 30 years, while the value of international trade and investment has grown,
the overall structure of this has remained much the same (see BIS 2011). The US,
Germany, France, Japan and the UK have continued to dominate the flow of
international trade. In 1980, these countries accounted for 39 per cent of world exports
and 40 per cent of world imports; while in 2008, they accounted for 34 per cent and
35 per cent respectively. The balance between manufacturing and service exports has
also remained stable with goods accounting for 85 per cent of total trade in 1980 and
81 per cent in 2008. Manufacturing still dominates world merchandise trade with
roughly two-thirds of this being in manufactured goods in 2008 compared to 55 per
cent in 1980 (although there has been a relative decline in manufactured goods vis-à-
vis natural resource commodities over the last decade, down from a historically record
high of nearly 75 per cent of goods trade in 2000). While developed countries have
been gradually exporting comparatively fewer goods than developing and emerging
economies, it is the developed nations that continue to lead in the export of higher-
value ‘branded’ products. Indeed, while China and other emerging economies may be
increasing their share of hi-tech exports, many of these exports are likely to represent
a low-value-added processing of intermediate goods by foreign subsidiaries based in
export processing zones. In short, while the value and volume of international trade
may be growing, it is still largely appropriated by the developed nations. Why? Because
the multinationals from the already advanced industrialized poles are at the centre of
these trade patterns.
The idea that the MNC is key to preserving the status quo has deep roots within
international business (e.g. Hymer 1972; Yamin and Ghauri 2004). It is a view which
sees the multinational not simply as a private firm with international operations, but
as an institutional mechanism for controlling which resources are currently required
32 Richard Phillips
to engage in some particular form of wealth creating and appropriating enterprise.
The multinational’s role in the world is literally to do what it does best – to identify
and control a range of resources that it can transform into a monetized value to
reproduce and grow. The fact that in doing so, it simultaneously limits the emergence
of rivals is a necessary consequence of a world where foreign firms have the ability to
buy firms and/or other assets in a country and can rely upon the fact that the laws of
that country will recognize and enforce the rights these entities have paid for. Where
the composition of international trade was once dominated by intra-industry (between
different firms within the same industry or production chains), by the 1990s it became
increasingly clear that the majority of international trade was actually describing a
growth in intra-firm trade between dispersed parts of a multinational’s own international
production network (Ernst 2002). Continuity in the hierarchy of positions within the
international system stems from the fact that international trade is not simply about
‘free market’ exchanges between countries, it is about a managed system of international
production.
Indeed, these patterns come as no surprise given that much of the international trade
policy agenda during the 1990s was about breaking down political and national
regulatory barriers in regard to the flow of investment and ownership. These policies
created a world where multinationals from the more advanced economies are likely to
be the same ones that are in a position to own foreign resources and production
capabilities. After all, multinationals in those advanced economies will have controlled
the lion’s share of the end market of their value-chain. The value appropriated from
the major mass market is what MNCs would use, either organically (ie. through their
‘retained earning’) or inorganically (i.e. drawing upon other people’s money), to pay
for the maintenance and reproduction of their production networks. The fact that these
production networks are located internationally means that the outflow of foreign direct
investment (FDI) will tend to run from these market centres back to the countries where
their supply chains are located; hence the fact that relatively little structural change
has occurred over recent decades – the majority of FDI outflows still runs from developed
to developing countries.
For many, therefore, the multinational corporation is simply one of those core
enduring institutions giving continuity to the age-old story about how the rich get richer
and the poor get poorer in international affairs. This historical view of the corporation
is a ‘long durée’ story about a world that invented a new kind of economic entity whose
only aim was to grow ever larger, outstripping the scale of its original ‘host’ economy
and becoming, by definition, ‘multinational’. In this world-systems-type view, what has
changed under the rubric of ‘globalization’ is merely society’s tolerance; or rather, its
dependence upon capitalist firms and the institution of private property. Where once
nation-states looked for growth through proxy fights abroad that their chartered
companies conducted on their behalf, now they do this through numerous innovations
in protectionist policies (i.e. non-tariff trade barriers), innovations in the way that
society’s pool of wealth can be thrown at their champions, and by advocating changes
to the international system of states itself through policy-making campaigns which have
a basic raison d’être to lessen the constraints under which corporations of any nationality
can grow through their ability to own and exploit private property from around the
world. These moves are legitimized through whatever economic discourses are around
at the time to use, and sold on the hope that everyone might be able to reproduce the
miracles of the so-called ‘American century’ where a form of Atlantic Fordism (see
Jessop 2002) gave the world its greatest ever model of economic development. That
model revolved around the growth of large industrial corporations producing more
and more products of higher and higher value, and the state’s ability to manage its
relationship with these firms so that their growth also led to a greater distribution of
wealth amongst society at large. The result was a managed economy based upon
increasing disposable income so that the masses could buy, well, anything and everything
that modern industries would produce, thereby fuelling a cycle of increasing standards
of living. Yet this is a world where the radicals of today tend to find their greatest
disbelief, as it looks to them like a game where ‘history’ has suggested that the only
guaranteed beneficiary is the multinational, that subset of firms that play the game of
making money out of private property better than anyone else.
Where does this view take us? The fact that international trade depicts a world of
international production managed by multinational corporations does not tell us why
this is the case. Indeed, all the descriptive labours of scholars who helped to capture
the minutiae of the regime-building process surrounding the global flow of ownership
and investment activities say nothing about why particular firms (and not other firms)
are able to exploit the stage that has been created for them, or even define what that
exploitation is about for the MNC. This reading of history leaves us only at a point
where we debate over what these ‘facts’ of history mean – what was it that enabled
the multinational enterprise to reach such prominence and who actually benefits from
their activities? History requires theory in order to make sense of it.
Theorizing the firm: whose ends are we talking about?

For much of the early history of economic theory, economists treated firms as mere
production functions. Firms existed, but the economists’ primary interest was to
understand the market. As such, the firm was only recognized as a ‘representative
agent’ that supplied products to a market at a price where profits are, theoretically,
zero and thus representing the point at which supply and demand forces are thought
to be at an equilibrium (see Hartley 1997). While micro-economic views would eventually
deviate from this position and start to look inside the ‘black box’ of the firm, macro-
economics did give economic theories of the firm an inheritance – the view that firms
exist because of ‘market failures’.
It was Ronald Coase who, after winning a scholarship from the University of
London to study US business practices, first tried to produce a general explanation for
why firms exist if markets are so capable (Coase 1937). Coase’s thinking was heavily
inspired by his interest in the vertical integration practices of General Motors (GM)
and Ford, two dominant firms that defined the American system of manufacturing (see
Best 1990). He visited GM in 1932 and was curious as to why it had acquired a body
parts supplier, the Fisher Body Company, when since 1919 it had engaged with that
firm through a long-term exclusive contract. Why did the ‘market’ disappear and get
replaced by ‘the firm’? What advantage did internalizing these transactions and
integrating them with existing production activities bring that the market could not
achieve? These types of empirical observations of business practice have dominated
much of the subsequent evolution in thinking about the economics of organization.
The GM–Fisher Body case helps to illustrate much of the basic mechanics of how
economists have subsequently chosen to see the firm, but also some of the problems
with the framework itself.
34 Richard Phillips
The Fisher Body Company was a specialist producer of bodies for automobiles,
owned by six brothers and a private investor. It was the largest supplier of automobile
bodies at the time and between 1919 and 1926 when it was acquired, it was GM’s
only source of closed metal bodies. In order for Fisher to supply GM (i.e. in order for
a market mechanism to govern the procurement of automobile bodies), Fisher would
have to invest in the machineries and supplies to service that demand. Furthermore,
this investment would be specific to GM automobiles and not one it could recoup from
supplying other manufacturers. Economists refer to this as ‘asset specificity’. The greater
the specificity, the greater is the risk that asset-specific investments may not be recovered.
To help ensure that this did not happen, GM agreed to a 10-year exclusivity agreement
to source all of its closed metal bodies only from Fisher Body. In return, to help ensure
that Fisher Body did not hold GM to ransom in this exclusivity deal, a pricing formula
was set in the contracts with an added protection clause that capped the prices charged
to GM to a level no greater than that which Fisher charged other manufacturers for
similar bodies. The arrangement lasted until 1924 when tensions emerged between the
two parties and Fisher Body refused to invest in a new factory next to GM’s assembly
plants. These tensions were eventually resolved through acquisition. When Coase
interviewed managers at GM on his travels, he was told the reason why they acquired
Fisher Body was to make sure that the plant was located near GM’s own assembly
operation (Coase 2000). Yet GM had other suppliers further away; why were these
too not acquired? So how do we interpret this response?
Nearly a century after the event, there is no single answer, but rather competing
versions within the Coasian paradigm. One possibility is to prevent ‘hold-up’ or what
economists generally refer to as ‘opportunism’ (see Klein 1988, 2000). All contractual
arrangements entail a relationship between a ‘principal’ and an ‘agent’. As contracts
are always incomplete – given that attempts to control for every eventuality are both
impractical and prohibitively expensive – the possibility for one party opportunistically
to exploit the other always exists. Accordingly, those contracts must be ‘governed’ and
this governance is a cost on the business. The ‘hold-up’ interpretation reads the situation
as one where GM’s own activities were dependent upon those of an external contractor,
thereby allowing a problem to emerge when Fisher would not agree to terms that
would reduce costs for GM. Fisher’s refusal as regards location was viewed as a ‘hold-
up’ to ensure that they continued to benefit from the terms of the contract. In a classic
‘Coasian’ interpretation, internalization was thus a way of reducing the costs of
transacting, and by governing the same set of activities in-house, the total costs of
running the system could be reduced.
What makes this case so significant to transaction cost thinking is that it has long
provided a common empirical reference point for many disparate quarters of the
tradition to come together. Different authors could identify different mechanisms to
explain a key tenet of the whole paradigm: why common ownership allows for more
cost-effective means of dealing with opportunism than market contracting does. For
instance, one of the major torch-bearers of the Coasian tradition, Oliver Williamson,
suggested that the cost-effectiveness of the firm is an institutional phenomenon (and
by implication not necessarily a feature of ‘firms’ per se) whereby contract law is different
for contracts between independent owners versus those occurring underneath a single
owner. Contractual disputes for independent owners are adjudicated through the
external courts, whereas those within a single firm are governed by the contract law
of forbearance (meaning ‘internal’ disputes would be exempt from court interference,
given that the law would side with upholding the rights of the owner). For Williamson,
this feature of contract law is what gives the firm’s managers ‘fiat’ or authority over
the use of human as well as physical assets. As the wielding of authority can adjudicate
disputes with much less cost than engagement in the courts, this, for Williamson, is
one of the key mechanisms that engender the cost-effectiveness of transactions governed
by the firm relative to market contracting. Asset-specificity is simply why these
mechanisms played out in this particular case.
Coase himself never subscribed to the dominant reading of the Fisher Body case
made by many of his followers. Coase recognized that there could have been a hold-
up potential, but he saw no reason to believe that the contracting situation lent itself,
necessarily, to vertical integration. For Coase, the theoretical issue was whether or not
comparable situations would produce a likelihood of vertical integration over the
preservation of long-term contracting. As Coase saw other instances where GM’s
suppliers were located at an even greater distance than Fisher, he had originally ruled
out hold-up over location of a factory as the principal issue, and thought that there
were more complex reasons behind the acquisition. Interestingly enough, Coase himself
never posited his own account of why GM acquired Fisher Body. For him, the case
served to reinforce the null hypothesis against a view held at the time; namely, that
the more a firm’s investments are asset-specific, the greater the tendency for vertical
integration (because of transactional hazards like hold-up). According to Coase’s (2000)
belated historical re-examination of the facts, the two companies were always intended
to be merged. The 1919 contract saw GM take a 60 per cent stake in Fisher Body at
the outset, and given that GM promoted two of the eldest of the Fisher brothers, Fred
and Charles, to the executive committee of General Motors in 1922, this was further
illustration that the original intent was to internalize the company after the ‘trial
marriage’ period.
So what was the other Coasian interpretation if not hold-up? Coase suggests that
Freeman (2000) actually solved the puzzle. On this reading, GM did not want the
company per se, but it wanted the expertise of the Fisher Brothers, particularly that of
Fred Fisher. It was the brother’s asset-specific knowledge about body construction that
GM (originally under William Durant and subsequently under Alfred Sloan) wanted
to integrate into the most senior ranks of the company. This is because at the time of
the original deal, closed body manufacturing was a new technology that both GM and
their principal rival, Ford, were exploring. With hindsight, the contracting relationship
was thus reinterpreted as an attempt to prevent a rival from accessing a key source of
knowledge about the methods of closed body production, not to mention the largest
bodies’ supplier to the industry. For transaction cost thinkers, the divisions over the
interpretation of the case are not a challenge to the framework as a whole, but simply
a call to de-emphasize hold-up as the principal mechanism through which to explain
the advantages of internalization. This would preserve the core theoretical concept that
unified ownership helps to resolve transactional conflicts (and whatever costs this imposes
upon the business) that can emerge in market exchanges when investment into
complementary, specialized assets is required. Yet for this chapter, the case highlights
three key features of what the whole paradigm is about.
First, it demonstrates how theorists look at the firm as a ‘bundle of contracts’ among
different parties, both internal and external, that need to be ‘governed’ to ensure that
costs are controlled (see Williamson 1985). This view stems from the fact that for
economists working in the Coasian tradition, the primary interest is about explaining
36 Richard Phillips
what makes the firm viable (Demsetz, 1988). The firm exists when it is viable, when
the total costs of an enterprise are below its revenues (profitability, on the other hand,
is a different concern associated with the growth of the firm, not why it exists). As
revenues are determined by forces outside the firm’s immediate control, what enables
firms to exist must include their ability to impart some control over costs. This has led
to a particular preoccupation with thinking about the types of costs that surround the
firm and what enables those costs to be controlled. In so far as cost management
concerns represent a central part of what allows a firm to exist, cost reduction and
thus ‘efficiency’ is simply a logical consequence, framing not simply how we talk about
firms, but what aspects of them we ‘see’.
Second, the case highlights how transaction cost theories of the firm draw upon
history, but not necessarily enough of that history upon which to build a robust theory.
The theory looks for generalizations. The finer details of specific cases are not important,
because to generalize based too much on the specificity of any given case would be
dangerous. As Coase himself notes, whole swathes of transaction cost theorization can,
and have been, built upon ‘erroneous facts’, and this one case history has ‘misdirected
the attention of economists and has stood in the way of the development of a more
solidly based treatment of the problem of asset specificity’ (2000: 30).
Third, the case highlights what progress in theorization is defined by. All firms are
specific means to specific ends. Coasian views of economic organization, however, have
never been particularly concerned with what those specifics are. Coase, while inspired
by an empirical predicament, did not actually care to address that particular context.
He did not actually care to explain fully why GM acquired Fisher Body. The utility
of the case for Coase was simply to validate, or in this case, to dismiss a hypothesized
claim raised amongst his peers. And while Coase initiated a long tradition in theorizing
the firm, it would take another half a century before a greater concern with those
details would emerge to rival the dominant economic account.
The capabilities view of the firm

It is true that all firms are legal entities and there is some relevance to thinking about
them as a ‘bundle of contracts’. Yet it is also true that firms are more than paper
companies. The preoccupation with understanding them in terms of a rationality
governing why certain assets are owned rather than bought in (the ‘make’ or ‘buy’
question) ignores the rather more pertinent question about how firms go about making
money. To make money, one must usually spend some money. Every company makes
some form of investment, acquires some ‘resources’ and looks to profit from this
gamble. But not everyone can succeed in this. Firms differ in how well they can create
and appropriate value. While there is always an element of luck in any gamble, some
firms nonetheless have been systematically better at capturing this value than others.
Were it only luck that differentiates one from the other, we would not have companies
that exist for decades, let alone centuries. We would not have firms that grow large
and come to dominate areas of activity for significant periods of time. Yet this is what
we do have in contemporary capitalism. To help understand this better, one needs a
set of tools more suited to helping us see what goes on inside this capitalist institution.
The first set of tools is the questions we ask. One of the most fundamental questions
in the study of firms is about their difference. What leads to differentiated performance?
Given that all firms are there to profit from their investment, a basic starting point to
understanding this difference is to think about what they do with that investment. How
are the assets that firms acquire utilized? Moreover, what allows the same assets to be
more valuable when placed in different hands? In short, the question of how firms
make money is fundamentally a question about the firm’s ‘capability’ of making money
and why some capabilities are better than others.
Attempts to answer these questions have emanated from several major alternative
traditions in the theorization of the firm – most notably, the behavioural (Cyert and
March 1963), evolutionary (Nelson and Winter 1982) and resource-based schools of
thought (Penrose 1959; Wernerfelt 1984). The modern capabilities view of the firm is
essentially an evolving attempt to provide a synthesis of these dominant frameworks
(see Augier and Teece 2006, 2008; Teece 2006). Now a good way to gain a grounding
in these accounts is first to understand that the basic questions they ask have a very
specific historical root to them. Let us begin there.
The capabilities view emerged largely in the 1980s out of a core set of observations
about the changing trajectory of international competition over the last four decades.
Prior to that time, the only model of success around was a distinctively American one.
The industrial supremacy of the US was built upon a system of mass manufacturing
governed largely within the boundaries of an industrial giant. Firm success was about
growing large through vertical and horizontal integration. While Coasian economics
had followed these developments from their beginning, its focus was on developing a
theory about how market forces impacted upon economic organization more generally
(the organization of transactions within industrial giants were treated as special cases).
This gave business historian Alfred Chandler the space to talk about the firm in terms
of its own constitution. And it is largely Chandler, and those who subsequently filled
in the theoretical space around his observations on strategy and structure, who
crystallized the dominant framework for explaining sustainable competitive advantage
at that time.
The advantage of the large industrial giant was not about reducing transaction costs;
it was about reducing production costs. The acquisitions made were about harvesting
economies of scale and scope to sell more products more cheaply than their competitors.
Vertical integration was about controlling the stages of production required to increase
industrial output. Economies of scale (the magic ingredient that reduces the unit costs
of output, thereby affording the firm a cost-advantage in the marketplace) came not
from acquisitions per se, but from how the assets were utilized after acquisition. It was
a methodology of industrial management, broadly referred to as ‘scientific management’
(the early precursor to modern operations research), that firms used to design production
processes to realize economies of scale. Horizontal integration, in turn, represented the
logical next step for a firm with such capabilities; namely, to grow through identifying
other types of industrial products for which the same way of managing efficiencies (and
perhaps some common manufacturing facilities as well) could be used to diversify the
product range. This would give the firm a second key advantage: economies of scope.
In short, it was the visible hand of management that gave the US industrial enterprise
these fabled economies. It was their way of utilizing assets, and the corresponding
economic strategies that stemmed from their methodology, that gave firms an advantage
when attempting to grow into national and international markets.
Part of this know-how had to do with the innovations of Frederick Taylor and others
in the scientific management tradition that gave managers a way of understanding and
then controlling production processes previously determined by skilled craftsmen and
38 Richard Phillips
their guilds. Yet for Chandler, this earlier know-how was only the beginning of the
managerial revolution. During the 1920s, two other interrelated innovations emerged:
the practice of organizing activities into self-contained ‘divisions’ (i.e. ensuring that
each division had its own relatively self-sufficient set of resources, activities, management
structure and financial accounts, referred to as the ‘multidivisional’ or ‘m-form’
organization); and performance managing investment into these divisions through an
accounting information system that translated the flow of money into and out of
operational activities into a single calculation – return on investment (see Fligstein
1990). These practices underpinned the historical invention of a structure unique to
the modern industrial corporation, the ‘general office’. That office, staffed largely with
those trained in accounting and financial analysis, would control the investment side
of the business. From an operational perspective, this meant that they controlled the
annual budgets that all divisions required to sustain their operations. Through budgetary
control and highly detailed financial reporting on activities, the general office had a
big stick with which to force out greater efficiencies from their divisions. And were
that stick not good enough, non-performing divisions could easily be sold off without
major disruption to other corporate activities. In short, success was not simply an
economic strategy, it was an organizational capability born out of the managerial
revolution in twentieth-century America. That revolution allowed these growth strategies
to be pursued. Yet there was one problem with this history. The same beasts that gave
rise to this model stopped growing and the more people tried to figure out why, the
clearer it became that much of the dominant history behind how firms grew did not
stack up to the later evidence.
As the fortunes of industrial giants began to change, the theories that had accounted
for that history were called into question. By the 1980s, a national debate had emerged
around why the world’s leading economy had seen such a dramatic change in fortunes.
Two things emerged from this debate – a demand for blame and a demand for a
solution to growth. The search for blame quickly turned onto the once lauded industrial
giant. At the time, one could not help but recognize a fundamental truth about the
nature of differential performance: the mere ownership of assets could not preserve
the competitiveness of US firms even in their own market. Rather, it was what you
did with those assets that mattered. The so-called ‘new competition’ from Japan had
proven this by eroding the market share of US leadership in a broad range of mass-
market product segments (cf. Best 1990; Lazonick and O’Sullivan 1996; O’Sullivan,
2000; Lazonick 2002). Adding insult to injury, widely cited cases such as Toyota’s first
foreign direct investment into production facilities on US soil, a joint venture with
General Motors in 1983, demonstrated how it was possible to turn one of GM’s worst
performing production plants, the NUMMI plant in Northern California, into one of
its best. What made this case so notable was that the Japanese did not bring in some
‘better’ capital equipment. They did not even ask for financial control over the joint-
venture site. Rather, Toyota’s experiment was based upon controlling human resource
functions and proving that a reconfiguration of working practices could turn around
the performance of the plant (see O’Reilly 1989; Boje and Winsor 1993; Spear and
Bowen 1999). Such examples suggested that a change in organizational ‘culture’ could
make the difference to a firm’s performance. Indeed, similar stories of organizational
restructuring and culture change emerged in other areas of the economy as some firms
began to find a way out of their performance doldrums. All was not lost and a race
was on to crystallize these lessons for American managers. The front-runner, a book
entitled In Search of Excellence by Peters and Waterman (1982) became one of the best-
selling management texts of all time, placing a national spotlight upon how US firms
could change for the better.
While it became increasingly clear that competitive advantage revolved around
organizational capabilities that needed to be built and managed, this did not mean
that US firms could merely imitate Japanese-style human resource management and
wait for the good old days to return. Many areas of industrial production were
systematically lost to Asian and European producers during the 1970s and 1980s.
Something more systemic was at work. To understand what went wrong, something
must have happened in the preceding years (i.e. when times were good) that led to the
bad times that followed. Something must have turned these once ‘good’ companies
into ‘bad’ ones.
Before the pressure of international competition re-emerged out of the long hiatus
caused by the Second World War, US corporations had been preoccupied by a wave
of mergers and acquisitions, particularly in the 1960s. Anti-trust policies constrained
the possibilities for vertical and horizontal integration out of fears that a monopoly
over supply chains would allow those firms to manipulate prices. Yet nothing stopped
firms from diversifying into unrelated areas (provided they did not own too much of
that area to worry the regulators). Thus, one way for firms to grow larger was to seek
out unrelated acquisitions in many different product markets. And after the war, this
option became the strategy of choice.
By 1980, most of the large corporations were heavily diversified and fewer than a
quarter of the Forbes 500 made all their sales from even the most broadly defined (i.e.
2-digit standard industrial classifications) cohort of industrial activities (Porter 1987).
The ‘firm-as-portfolio’ model had become the norm and virtually all the studies of
corporate diversification practices had demonstrated that large-firm growth in the US
during the post-war era revolved around unrelated diversification. Moreover, some
studies confirmed that this route to growth was more successful on varying measurements
of growth and profitability than firms which had engaged in vertical integration. The
notion of the classical vertically integrated ‘Fordist’ firm being the growth engine
behind American capitalism was a myth. That strategy never really flourished after
the Great Depression. Empirically speaking, vertical integration was one of the worst
growth strategies a US industrial firm could pursue (for a review, see Fligstein and
Dauber 1989).
Unrelated diversification was now at the centre of the search for a firm-level
explanation for the problems of the US economy. American corporations appeared to
have managed their way into economic decline (Hayes and Abernathy 1980). Where
are the economies of scale and scope when you engage in unrelated diversification?
This route to growth should not see any efficiency gains as firms should not bring
much value-added (i.e. productivity enhancements) to the acquired assets. That requires
know-how and in an unrelated acquisition, where does this know-how come from?!
Much of the debate about the problems of growth centred on the ‘formula’ that Chandler
had supposedly identified. What happened to the multi-division form? The ‘m-form’
structure was supposed to have been key to the success of companies like GM and Du
Pont and was widely imitated by other firms. Yet upon closer examination, it was not
immediately adopted. Many companies would only discover the value of the m-form
after the war. Yet by this time, the reasons for adoption differed from the reasons for
which its progenitors had originally used it. Its utility was not tied to vertical integration;
40 Richard Phillips
it was useful for any form of investment strategy. It merely provided a tool for corporate-
level management to ‘see’ their own firm in terms of a categorical breakdown of what
went into their returns equation. Yet the more you apply this without an underlying
attempt to improve productivity or leverage expertise to engage in related lines of
business, the more the firm is simply being run like a capital market, looking for value
by applying pressure on those with the operational ability to influence those numbers,
and wielding the threat of divestment (which often meant large culls of that division’s
management team) as the punishment for non-compliance. This is what the large
industrial firm had become – an internal capital market. Game-play between divisions
and corporate managers raged on, sometimes with divisional managers obfuscating the
figures to defend themselves, at other times opting for cost reductions that were in the
divisional manager’s sphere of influence – most notably, job-cuts. Yet none of this
wrangling produced insights on how to utilize accumulated assets more effectively.
What it did produce was a significant amount of time, effort and wasted spending on
layers of management whose role was non-productive and merely concentrated on
administering the system of accounting and reporting required by corporate heads.
While capability theories knew why the conglomerate was bad, the greatest ‘proof’ of
this came from a process that was only just emerging in the 1980s – the rise of the so-
called market for corporate control. These developments were seen as the market’s
validation of the capability view of the firm and the need for the conglomerate form
to be ‘deinstitutionalized’ (Davis et al. 1994).
The market for corporate control was not literally about capital markets taking over
listed companies in order to impart better management techniques to badly run
conglomerates. Since the Great Depression, the US political system has never allowed
financial institutions to take direct control of operating companies (see Roe 1991).
Commercial banks could not own stocks. Mutual funds were not allowed to have seats
on the boards of companies they invested in, or own more than 10 per cent of their
outstanding stock. Insurers were similarly limited in the amount of stock they could own
in any company. Pension funds were too fragmented and diversification-seeking to have
much reason to buy a large enough stake in any industrial giant. The only way for the
capital markets to own a controlling share of a company would be if intermediaries,
such as Wall Street investment banks, could form syndicates that pooled funds from
commercial banks, mutual funds or pension funds to take over large enough shares of
listed companies, and the regulations worked against this as well. But this did not prevent
other private firms from taking their money to provide enough leverage to buy out a
non-performing publicly listed company in a hostile take-over and then doing with them
what they wanted in private. And this is what happened throughout much of the
leveraged buy-out movement in the early 1980s. Hostile take-overs were seen as a move
that took advantage of the fact that conglomerates could be bought at a discount (the
so-called ‘conglomerate discount’). Yet the actual use of hostile take-overs was relatively
short-lived. The threat of it was enough and as the incoming Reagan administration in
1981 had changed its tune on mergers and acquisitions (M&A), this gave listed corpora-
tions a new-found liberty to sell off their non-performing assets to other listed companies
which could generate more value out of those assets. It was this ‘friendly’ reshuffling of
assets that spurred the great waves of M&A activity during the 1980s and 1990s. As
growth returned to the US economy and the good times, particularly over the long bull
market of the 1990s, had washed away any immediate concerns with corporate
competitiveness, it would seem that a solution had been found. But what was it?
Theorizing the firm was not divorced from such contexts. Rather, theory development
reflected prevailing interpretations of these contexts, with different traditions seeing
what they wanted to see. For some traditions, the challenge was to explain why
managerial behaviour routinely failed to maximize value for shareholders. This led to
theories about how a change in corporate governance might help alleviate this ‘agency
problem’ – the hallmarks of the so-called ‘corporate finance view of the firm’ developed
by Jensen and Meckling (1976) and their followers. For transaction cost theorists like
Williamson (1985), there was no challenge. Simply ignore the evidence which showed
that diversified firms often did not adopt a multi-divisional structure, and continue to
see the conglomerate form as a logical outgrowth of the managerial innovations
associated with the fabled ‘m-form’. In this way, the conglomerate movement could
be seen as proof of their thesis about the efficiency of firms versus markets, only now
the firm represented an internal capital market whose success meant it was more
effective than the external capital markets at being able to spot undervalued assets.
Yet it was the capability theorists whose account helped to capture many of the
patterns of history under an overarching framework. While others had tried, it was
this framework that supplied the demand for explanation both about what was wrong
with conglomerates, but also what competitive success should be about.
The synthesis provided by capability theorists is relatively simple. Firms can be
thought of as ‘repositories of productive knowledge’ that grow not because they
accumulate profits, but because they accumulate a stock of organization-specific learning
about how resources and behaviours can be structured in complementary ways that
generate that value. In short, competitive success is about owning the ‘right’ resources
and ‘knowing’ what to do with them. What does this mean? Owning the ‘right’ resources
may mean being the first to control resources with the following four qualities: they
are valuable, rare, inimitable and non-substitutable. The more one owns resources with
all of these qualities, the more it is possible to erect a ‘resource-position barrier’ that
deters others from competing directly against the ‘first-mover’ (Wernerfelt 1984). Yet
ownership is not sufficient. You must also know how to utilize these resources. This
‘know-how’ is essentially a form of transformative knowledge, a set of inferences about
how some given inputs can be transformed into outputs that satisfy organizational
goals. Now this know-how is only possessed by individuals, and given that individuals
come and go in relation to the organization, the only way in which a firm can
systematically exploit its owned resources over time is through ways of accumulating
that know-how as an organizational competence.
Organizations do this through the labour of codifying and enforcing routinized
behavioural patterns or ‘organizational routines’ (Becker et al. 2005). These routines
evolve, partly through key moments of dedicated managerial attention (e.g. when
external changes in their operating environment require new standards in response),
but also through an incremental process of refinement of the standards of behaviour
that are expected and enforced through the firm’s management control systems and
socialization processes. The secret to success is thus about a complementarity between
a firm’s activity system and its key resources.
Organizational learning and complementarities are the bedrock upon which the
capability view of the firm emerged. It reflects a world where the critique of US
conglomerates was that management was not concerned with building technical and
organizational competencies specific enough to exploit their assets (as the Japanese had
done). It reflected times where it was not only possible, but increasingly probable, that
42 Richard Phillips
even a first-mover’s ‘resource-position’ could be undermined by market and technological
changes. Consequently, the emphasis upon control of resources (popularized by the
resource-based view of the firm) was relaxed in recognition that it is possible to compete
with resources that are not unique or hard to substitute. As the NUMMI case illustrates,
what might make those resources valuable in the first place can simply be greater
know-how in the utilization of those resources. Consequently, the only source of
sustainable competitive advantage will tend to be the pursuit of innovation, and thus
managers must stay focused on building the organizational capabilities upon which
that depends.
This is where the problems of the 1970s revealed another key adjustment to capabilities
thinking: it is possible that as firms develop unique, hard-to-imitate capabilities, they
can be ‘locked-in’ by that know-how and prevented from moving into new domains
of enterprise when established lines of business eventually begin to dry up. Much of
the inability of US corporate managers to break out of their financial conception of
control attests to this ‘capability trap’. Consequently, theorists had to find a solution
for how managerial agency could overcome this ‘path dependency’ brought about by
legacy investments in past capability-building efforts and their associated resource
positions. And this has forever since stamped the capabilities view with its normative
project.
Whatever accumulated ‘core competencies’ may underlie the success of a firm at
present, sustainable competitive advantage will always draw the theorists’ attention
towards the future. For the capabilities view, the future is about understanding how
firms look for new exploitation opportunities. That search, like all organizational
behaviours captured by this framework, revolves upon organizational capabilities. But
what capabilities? Many working in this tradition have subsequently focused efforts on
distinguishing a ‘higher-order’ set of capabilities or what is commonly referred to as
‘dynamic capabilities’ (Teece and Pisano 1994; Teece et al. 1997; Eisenhardt and Martin
2000; Zollo and Winter 2002; Lazonick and Prencipe 2005; Pentland and Feldman
2005; Augier and Teece 2006; Helfat et al. 2007; Jacobides and Winter 2007). Through
this rubric, theorists have extended the idea that firms are not only a repository of
productive knowledge, enabling them to utilize their assets better than competitors,
but they also can possess the capability to sense new opportunities and seize upon them
through an extensive reconfiguration of internal processes, structures and procedures.
What are these dynamic capabilities? At one level, there is agreement that they
represent a form of managerial know-how that determines how a firm goes about a
strategic change in its resource base (i.e. capabilities used when deciding what to
acquire and shed, what to integrate together and recombine into new value-creation
strategies, etc). They are a particular subset of the organizational learning routines
central to all capabilities thinking – just ones that only apply to the ‘entrepreneurial’
management of new resource configurations. In so far as markets will always ‘emerge,
collide, split, evolve, and die’ (Teece et al. 1997), the future of this framework is a
search for a new class of capabilities that needs to exist in order for a theory of sustain-
able competitive advantage to have any relevance in times of business decline. Yet we
should not think that there is really any further agreement on the matter. The very
notion of a firm’s capabilities, competencies and routines are themselves contested
categories. In different cases, what constitutes a ‘routine’ and how it is understood to
relate to processes of organizational inertia or change can differ depending upon the
point of view of the investigator (Pentland and Feldman 2005). In some cases, ‘core
competencies’ appear to be firm-specific; while in others, they are widely shared across
organizations (Eisenhardt and Martin 2000; Helper et al. 2000; Langlois 2003) and are
even thought to be shared across whole economies (Mathews 2003). In one light,
resources may appear to capture the essence of sustained competitive advantage; yet
in another light, they can simply be seen as a post hoc tautology of the theorist who
had merely selected cases where a firm had already attained an advantageous position
at the time of analysis (Lazonick 2002). Indeed, a perennial problem in the history-as-
proof arsenal of strategic management is the possibility that in any given case, there
is no strategy behind a situation (Inkpen and Chouhoudry 1995) or that strategy is
only dimly understood by those involved and thus represents an unfolding, emergent
phenomenon that has not yet revealed its predictive lessons to the theorist (Nelson
1991).
How does one progress what is essentially a normative theory about what firms
should be doing as ‘entrepreneurs’? Unlike other attempts to provide a normative
solution for sustaining growth at the firm level, the capabilities view is thought to have
history on its side. History is proof of its theory. The historical events recounted above
and the years of restructuring that helped correct, or so it seemed, the historical failings
of the US corporation are proof of the theory. Indeed, when Teece et al. (1994) examined
the most detailed and comprehensive data source they could find, producing a picture
of what more than 18,000 diversified US firms were up to in 1987, they could measure
the relatedness among firms’ primary sales activities at the level of a 4-digit SIC code
for each of the 66,000 actual establishments of these diversified firms (i.e. the physical
sites of their different operations). In doing this, they found a strong tendency for
diversification not to be unrelated, but to be highly constrained to closely related
industrial activities. These were the signs of green shoots after a long recession, the
signs of complementarity so crucial to a capabilities viewpoint. The dominance of
unrelated diversification might thus be thought of as an historical anomaly, and a
‘coherence’ to the firm could now be seen in the empirical records. Indeed, for others,
the champagne was already out and the historical anomaly was thought to be the large
corporate organization itself. On this reading of the winds of change, an old world of
vertical integration was coming to pass, and a return to an older bedrock of capabilities
truth was upon us. Some saw the US economy returning to the historical virtues of
specialization, as originally captured by Adam Smith, and implied by all the increasing
inter-firm relationships that were cropping up as the old giants were ‘hollowing out’
through divestments and outsourcing (Langlois 2003).
The discussion above, however, suggests that great caution is in order when it comes
to understanding this core institution of contemporary capitalism. Capabilities thinking
is a normative project about strategic decisions regarding investment by firms. It never
explained who would actually be doing the investment into building innovative
capabilities or the conditions in which this financial commitment could be expected
to occur (Lazonick 2002). It never explained what ‘good’ actually looks like. Rather,
it looks selectively at history and then continues on with its own theoretical business
when content that it has captured it. Why would firms behave according to the rules
of this theory when so much of the historical record complemented the anecdotal
evidence that managers were generally too averse to investing into the great unknown,
preferring opportunities where they could already foresee how the gains might be
measured. How does the capabilities view combat this short-termism? It does not. It
merely wills it away through its appeal to history.
44 Richard Phillips
Conclusion
Before the bull market of the 1990s washed away any concerns with corporate America
and its competitive advantage, this is precisely where the capabilities debate stood.
After more than a decade of ‘right-sizing’ efforts coupled with inorganic routes to
growth through mergers and acquisitions, capability theorists provided a voice for a
common concern with where the investment in future skills and in new competitive
capabilities would be coming from. As strategy guru Michael Porter (1992: 26) had
reiterated, ‘[m]any American firms invest too little in those assets and capabilities most
required for competitiveness (such as employee training), while wasting capital on
investments with limited financial or social rewards (such as unrelated acquisitions).’
Although much restructuring had happened, little had changed in the basic concerns
raised a decade earlier by authors like Hayes and Abernathy (1980). Why were American
businesses only making short-term adjustments by cutting costs and by turning to the
government for temporary relief? Why were they more interested in buying companies
than in selling new products to consumers? Where was the sign of a commitment to
innovation that prevailing wisdom suggests is so central to competitive success? These
questions were asked by those looking back at the events of the 1970s. They were
asked by those looking back at the events of the 1980s. They were forgotten with the
dot com bubble (mid-1990s–2001), and forgotten when we attributed the dot com
bubble to, well, just the dot coms. But they have come back again. These questions
are alive and well in many of the concerns with present-day capitalism. The difference
is that today, with the legacy of the 2008 financial crisis still in the foreground of our
concerns with the economy, we blame the bankers and long for a time when industrial
activities will become more important than financial services.
But why do we never ask ourselves the basic question behind all these attempts to
theorize the firm – why don’t they play by our rules? What was GM doing when it
acquired Fisher Body? Why is it that what we thought was the secret to success of an
industrial firm was not the secret as practised? Why would industrial firms become
internal capital markets? Why was it more profitable to diversify into things in which
you had little expertise, rather than plough more investment into the things you know
and like – production, industry, jobs, etc? Why, if diversified conglomerates that think
like capital market investors are so bad at allocating resources, were they not only the
dominant form of large firm in the US for much of the twentieth century, but are the
dominant form of large firm in the developing world today as well (Hogenboom and
Jilberto 2006). And while the supposedly superior firms from the advanced countries
still dominate patterns of FDI, it should be noted that it is not firms from the developed
world that are expanding, it is the multinationals from the emerging economies. Why
are they growing? – they are diversified conglomerates after all! The fact of the matter
is that these explorers of contemporary capitalism – industrial corporations and their
financial counterparts in the capital markets – have looked for returns outside the
product market and outside their own areas of expertise, each in their own different
ways. In both cases, this leads them into trouble – the crisis of industrial capitalism in
the 1970s, and the crisis of financial capitalism today – but they both, nonetheless,
continue to do so and show no signs of changing. Is this simply greed? And the solution?
– yet another theory of ends systematically disregarded by those in control of the
means. What do they know that we do not? Perhaps we should make an effort to find
out.
Part of the difficulty in seeing the firm through its own eyes is that no theory of the
firm has yet been developed which allows us to track the firm and its activities over
time to understand the processes in contemporary capitalism to which firms are
responding. That is because all theories of the firm have to date been normative
theories in spite of the fact that all reflect upon history in some capacity. Theorists
have looked upon history not simply with rose-tinted glasses, but through the lens of
their own projectors, replaying holiday videos about what it should have been like
given their amorphous typological ways of describing the firm. In doing so, they all
forget, or ignore, the fact that firms are means constructed around their own view of
what the ends are.
While many theories provide useful tools for trying to discriminate what this view
might be, a consistent application of those frames and their associated techniques to
the history of firm has not yet been done. And without this, we are starved of arguably
our greatest tool for gaining insights into the dynamics of contemporary capitalism –
the evolution of its most central institution.
This suggests a new project is in order. As some capability theorists recognize, we
need theory to make sense of history, but we also need history to make sense of theory
(Lazonick 2002). In so far as the firm is not an isolated beast, but one subject to systemic
pressures and herd-like movements shaped through interactions with other institutional
authorities, the project of theorizing the firm through new historical methods is one
that should not be left to those in economics departments and management schools.
It is a project that will only progress when all those concerned with capitalist institutions,
including students of IPE, feel that the time is right actually to start seeing the firm
for what it is, a constructed set of means seeking out particular ends and trying the
best it can to find ways around whatever constraints it comes across in the process.
That is why this beast does not follow the rules we project onto it. It is trying to come
up with its own.
4 Labour shapes the global
political economy
Robert O’Brien
Work and workers are central to the functioning of the global political economy.
However, they are not a very significant element of study in the academic field of
international political economy (IPE). This chapter situates labour centrally in the study
of IPE and highlights the implications of doing so.1
Let us begin by considering why we might want to make labour central to the study
of IPE. Three possibilities arise. The first is that one finds labour interesting and has
a curiosity about its role. Curiosity is an explanation for many intellectual endeavours.
While it is certainly a valid reason for studying a subject, it is not a persuasive explanation
for calling the field to pay more attention to a particular subject. A second reason is
that as individuals we may have political sympathies with labourers and their
organizations. We may want to conduct research on labour because we hope to provide
interpretations that may assist labour activists and advance a more egalitarian vision
of society. This is a powerful motivation, but again not a justification for others to pay
attention to our subject matter. A third reason we might spend time on labour is that
we have a pre-existing theoretical commitment to labour as a strategic actor. Those
working out of a Marxist or neo-Marxist framework may prioritize workers as part of
a pre-existing theoretical commitment which views class struggle as the motor of
history. Again, that is fine for the circle of labour enthusiasts, but unlikely to advance
the subject matter in our large and diverse field.
The only reason for studying labour that is likely to win converts is that it can be
demonstrated that labour is central to the functioning and evolution of the global
political economy. This chapter argues that there are good reasons why the role of
work and workers (broadly understood) should be of interest even for those scholars
who do not put the relations of production at the centre of their analysis. Workers are
significant not because of a prior theoretical commitment to the relations of production,
but because they exercise influence in the global political economy and are shaping
the structure of global order. Workers should be studied both for their influence on
other aspects of IPE and in their own right because they are, collectively, a strategic
actor.
In this chapter, labour refers primarily to workers rather than work itself.2 When
referring to workers, it means groups of people who rely upon their own labour to
provide themselves with the resources necessary for existence. This category goes beyond
wage labour to include informal-sector workers, peasants and subsistence farmers. It
also goes beyond physical labour to include people in the information or entertainment
industries who may rely more heavily on knowledge skills, but are still in a subservient
relationship with employers. An example would be service workers in call centres.
Labour shapes the global political economy 47
Unions are a form of organization which represents elements of labour, but they are
only one form. Most labourers are not represented by unions, yet they still play a key
role in the functioning of the global political economy (Harrod 1987). The action of
labour as a broad and diverse social force in unionized and non-unionized forms is
the subject of this chapter.
The argument in this chapter unfolds in three parts. First, the present place of labour
in IPE is charted. Recalling that work and workers were central to classical political
economy, the first section considers the field of global political economy (GPE) to see
what role is allocated to the study of labour. Second, the integral role that labour plays
in existing IPE structures is outlined. Taking the traditional categories of finance,
production and governance, the significance of labour for each of these structures is
outlined. Third, the different themes that emerge when labour is integrated into an
IPE analysis are highlighted. Viewing IPE from a labour vantage point opens up a
new ontology, raises issues of identity, and reveals different issues and ideas than an
IPE divorced from the study of labour.
Labour in GPE
When Adam Smith ([1776] 1983) wrote his classic text, The Wealth of Nations, he devoted
the initial three chapters to the division of labour and the wealth that is generated
from it. The division of labour was seen to be central to the creation of wealth. David
Ricardo ([1817] 1992) also viewed labour and the price of labour as being central to
political economy. Comparative advantage and gains from trade were attributable to
different nations’ labour productivity. In domestic politics, Ricardo was a fierce critic
of the privileges of landlords, a supporter of keeping wages at subsistence levels and a
champion of commercial interests. Karl Marx and his followers (Marx and Engels
[1848] 1977) viewed class struggle as the motor of history. Although writing in different
decades and from various philosophical positions, each of these classical political
economists recognized the central importance of work and labour for understanding
the functioning of the economic and political system. In contrast, contemporary IPE
places far less emphasis on work and labour.
From the early 1970s until the mid-1990s, there was very little work done on labour
in IPE. Several factors help to account for this neglect. First, the study of workers
suffered from the same neglect as the study of other groups of people in IPE. Although
there was some initial interest in transnational relations (Keohane and Nye 1973), most
of the leading IPE scholars of the 1970s and 1980s continued to focus upon states.
Disputes raged about the conditions under which states co-operated, but the focus was
clearly upon states (Keohane 1984).
Second, the study of labour issues may have been harmed by guilt of association.
Interest in labour issues is often associated with Marxist analysis. Even within the
Marxist tradition, many international relations (IR) studies have focused upon the role
of elites rather than workers (Gill 1990; van der Pijl 1998). There has been much more
interest in the activities of the transnational ruling class (Sklair 1997) than those of
other classes.
A third explanation may lie in the fact that during the years when IPE was emerging
as a distinct field of study, the role and influence of workers’ organizations were largely
unproblematic. International political economy emerged as a response to increasing
turbulence in the international economic system in the 1970s (Strange 1984). Chaos
48 Robert O’Brien
in the monetary system, upheaval in the oil regime, and trade frictions were the subjects
of interest. Despite the crisis of governability described in national political science
literature (Rose 1981), workers were not one of the factors causing problems in the
field of IPE. Indeed, as Cox (1977) noted, US workers were a key element in system
maintenance.
While labour was not visible in IPE, there was work being done outside IR/IPE
circles. Feminist scholars were working to highlight the role of women workers and
care givers in the global economy (Mies 1986; Enloe 1989). The 1970s and 1980s also
saw several labour studies specialists engaged in developing what they termed the ‘new’
international labour studies or ‘NILS’ (Munck 1988; Cohen 1991). The field of NILS
aspired to accomplish several things. First, it sought to go beyond industrial relations
or trade unions studies to take in a wide variety of labour. Second, it sought to eclipse
the technical approach of International Labour Organization (ILO)-funded labour
studies. Third, its goal was to move beyond the study of advanced industrialized countries
to explore and learn from the experience of countries of the South (Boyd et al. 1987).
This work built upon a long tradition of examining labour and international relations
that was not visible in IPE. Key topics included: comparative industrial relations
(Doeringer et al. 1981; Adams 1991), studies of the international trade union movement
(Price 1945; Lorwin 1953; Busch 1983; Van Holthoon and Van der Linden 1988),
labour and World War One (Larson 1974; Horne 1991), labour and the Cold War,
trade union imperialism (Harrod 1972), the new international division of labour (Frobel
et al. 1980). Since the turn of the century, this work has been taken up with renewed
vigour under the theme of ‘global labour’ by sociologists affiliated with Research
Committee 44 of the International Sociological Association and is featured in the Global
Labour Journal.
In a mid-1990s survey (Denemark and O’Brien 1997) of IPE at over 200 UK and
US universities, not a single respondent offered a course dedicated to labour issues.
Only one of the leading IPE textbooks devotes a chapter to labour (O’Brien and
Williams 2010). Labour does appear in IPE journals, usually as one variable amongst
many others influencing the global economy. A review of five key IR/IPE journals
between 1997 and 2006 (International Studies Quarterly, International Organization, Review of
International Studies, Review of International Political Economy, New Political Economy) finds that
2.4 per cent of articles (32 of 1, 325) have a primary focus upon work or workers in
their studies (author’s calculations). Is greater attention warranted and what would be
the implications of increased attention?
Labour shaping IPE

A great deal of IPE is focused upon issues of trade, finance, production and governance
(Frieden and Martin 2003; Walter and Sen 2009). Labour is crucial to understanding
how these structures or fields operate. In this brief section we will consider labour’s
significance to finance, production and governance.
Finance
The activity of global credit markets and the international monetary system appears
to be an elite activity, influenced by a relatively small number of financial firms and
key states. However, financial arrangements depend upon labour groups accepting the
established rules of the game. At times of stress and crisis, labour reaction becomes
crucial in determining the evolution of financial affairs.
The financial crisis of 2008 which had its origins in the US credit market continues
to play itself out around the world. While labour was not instrumental in creating the
crisis, it is playing a central role in its development. Fearing a general financial collapse,
governments in the United States and Western Europe offered financial support and
guarantees to private finance from the beginning of the crisis. These states went further
and essentially socialized the debt of private firms through a series of publicly funded
bailouts. The result is that the private financial crisis became a public debt crisis
threatening the balance sheets of a number of states. Several of these states have, in
turn, been forced to implement austerity measures to maintain the faith of private
markets in their public finances. The politics of implementing structural adjustment
varies across the Organisation of Economic Co-operation and Development (OECD)
countries, but labour plays a central role in determining whether stability will be restored
and how the costs will be distributed.
The labour response to the financial crisis in advanced industrialized states has often
been incoherent and timid. Faced with irresponsible financial dealings which threatened
the economies of OECD states and a renewed attack on social policies, labour has generally
failed to advance an alternative agenda. Labour’s most significant role in the recent crisis
may be similar to the impact of riots that took place in response to structural adjustment
programmes sponsored by the International Monetary Fund (IMF) in developing countries
in the 1980s. A labour-based lashing out against austerity policies imposed by national
and global elites can have the consequence of making financial stabilization policies
unviable. Rejection of the prescription of continued austerity in several countries may
undo all the crisis management designed by state and financial elites.
The most prominent example of this development at the time of writing (2012) is
the fate of the euro which appeared to rest upon the ability of the left-leaning government
of Greece to convince its population to accept continuous rounds of austerity. In late
2009, investors began to lose confidence that Greece would be able to repay the
substantial sums of money it had borrowed to finance its budget deficits. This forced
Greece to turn to the IMF and the European Union (EU) for loans because the price
of borrowing from private lenders had become prohibitive. The EU and IMF agreed
to loan packages totalling 110 billion euros (US$152.6 billion) in the spring of 2010
and another 109 billion euros (US$150.2 billion) in the summer of 2011. However,
the loans from the IMF and European partners came with demands that Greece
undertake austerity measures to balance its books. These austerity measures ensured
that the Greek economy shrank, making it even more unlikely that Greece would be
able to raise sufficient funds to pay back its loans. Being a member of the euro meant
that Greece did not have a currency to devalue (to boost exports), nor was it able to
lower interest rates which were set by the European Central Bank (ECB). Defaulting
on its debt was not viewed as a viable solution by other European states because many
of their private sector banks had been eager creditors to the Greek government. A
clash of interest was created between northern European states demanding that Greece
engage in successive rounds of austerity in exchange for loans financed by their tax
payers, and Greek workers facing massive cuts to their living standards and resentful
at the influence of foreign banks and creditors.
Greek popular resistance in 2010 and 2011 to government cuts and privatizations
made it less likely that austerity measures would or could be implemented. Cuts proposed
50 Robert O’Brien
in September 2011 included firing 100,000 public sector workers; immediate cuts to
the pensions of farmers, sailors and telecommunications workers; and the creation of
a reserve labour pool of 50,000 state employees working for reduced wages (Smith
2011). Greeks engaged in a series of actions which included peaceful and violent protests,
demonstrations and a general strike. As a result, the likelihood that Greece would
default on its government debt and that it would have to leave the Euro increased.
Similar conflicts between state elites wishing to rein in spending and maintain
membership in the common currency played out in different ways in Italy and Spain.
This experience illustrates how key elements of the international financial and
monetary system are influenced by a combination of technical elements governing
exchange rates, the power of private capital flows, the action of states with access to
credit-making instruments, and the response of labour groups to elite plans and
restructuring.
Production
Production on a global scale, whether it be the activities of multinational corporations
(MNCs), flows of transnational investment or creation of commodity chains is a leading
subject of investigation in IPE. Labour activity is a crucial factor in influencing the
flow of investment and the impact on local communities of transnational corporations
and commodity chains. This is not an argument that labour is the only factor influencing
global production, only that in many circumstances it is a significant factor.
Labour influences MNC activity from within the firm through internal industrial
relations and outside the firm through shaping the business and political environment.
Internally, a well-organized labour force raises the cost of labour by bargaining for
increased wages and benefits. In some cases, this will lead to firms pursuing economic
strategies which can accommodate higher labour costs through higher value- added
production. In other cases, corporations and labour play a global game of hide and
seek with investors shifting production away from areas populated by organized labour.
By relocating production, firms use a ‘spatial fix’ to solve their labour problem. However,
the mobility of capital offers only a temporary solution since labour militancy tends to
follow corporate relocation and the conflict between labour and capital continues
unabated. Beverly Silver’s (2003) study of the auto industry provides a good example
of this global contest. She traces the transfer of production and labour militancy from
the US in the 1930s to Western Europe in the 1960s and 1970s to Brazil and South
Korea in the 1980s and 1990s. The workers involved in these waves of militancy come
from different countries, but the nature of their work (assembly line in large factories)
facilitates their mobilization. Although corporations attempt to institute new technology
and relocate production in an effort to escape labour militancy, the respite from labour
unrest is only temporary.
In addition to organizing within firms, workers have contemplated building a system
of multinational collective bargaining (MNCB). Such a step would bring organized
labour closer to the social democratic form of industrial relations because it would
legitimate its role in the economy. The aim is to establish a form of global industrial
relations where unions are able to bargain with multinational companies unhindered
by geographic dispersal. These initiatives have been led by international union federations
that bring together workers in particular industries. An example of one of these Global
Union Federations (GUF) is the International Metalworkers’ Federation (IMF). One
step is to put all the collective agreements of a particular firm into a single database
so that union negotiators will be aware of arrangements at sister plants. Another initiative
is to host World Congresses of workers from the same company, such as Nissan. A
third initiative has been to reach international framework agreements with multinational
corporations which provide for basic workers’ rights in all subsidiaries (Stevis 2010).
Although groups of workers continue to press for MNCB, progress is limited. In its
most fertile ground, Western Europe, progress has been extremely slow (Ebbinghaus
and Visser 1997). Despite high levels of economic integration, geographic proximity
and an overreaching institutional structure in the European Community (EC) and EU,
the obstacles are immense. Unions remain weak and dominated by national structures;
employer organizations and firms are reluctant to engage in such activity; and the EU
institutions lack the structure and the desire to become active in the industrial relations
domain. Given such difficulty in an area of possible economic and political convergence,
the possibilities in more diverse arenas appear remote.
Looking outside the corporation, workers and people concerned about the conditions
of work have attempted to shape corporate activity through a series of market- based
campaigns. The large amount of activity by labour and consumer activists can be
grouped under the category of ethical trade. In its broadest sense, ethical trade
encompasses two elements (Blowfield 1999). The first element is a concern with how
companies make their product. This involves putting pressure on companies to ensure
that the production process respects key human rights and environmental standards.
Examples include companies that adopt codes of conduct guaranteeing respect for
workers’ rights or banning child labour. The second element is the fair trade movement
which seeks to increase the financial return to poor producers as a method of improving
sustainable development. Major fair trade initiatives have taken place in relation to
products such as coffee and chocolate.
In response to the demand for more ethical trade, many corporations have
implemented codes of conduct governing their operations, and a number of labelling
schemes have been created to signal to consumers that products have been made in
particular ways or that profits flow back to Third World producers. The results of this
activity have been mixed. Many corporations have changed their rhetoric about socially
and environmentally responsible production and have joined public schemes to improve
behaviour, such as the United Nations’ (UN) Global Compact. On the other hand,
there have been doubts about whether transnational corporations (TNCs) actually
adhere to guidelines or only use them as a public relations exercise. Moreover, many
businesses are invulnerable to consumer campaigns because they are subcontractors
or do not rely on brand names for sales. They have little incentive to participate in
ethical trade. The proliferation of codes of conduct and labelling schemes has led to
an uneven set of guidelines and regulations creating some expense for industry and
confusion for consumers. Doubts have also been raised about the degree to which
ethical trade actually benefits producers in the South or is just designed to satisfy the
conscience of consumers in the North.
Ethical trade is an evolving and growing aspect of global political economy. Existing
mechanisms have many shortcomings and numerous difficult issues remain to be
resolved. Nevertheless, workers and consumers have had considerable success in forcing
many corporations to at least acknowledge a set of social and environmental norms
that had previously been ignored. It is no longer legitimate for major corporations to
argue that their only business is business, and that the social and environmental aspects
52 Robert O’Brien
of production are not their responsibility. While practice falls short of desired outcomes,
this nevertheless represents a significant change in the global order.
Governance
Labour groups often influence state policy, which in turn shapes global order. However,
the nature of labour organizations and their influence upon the state vary widely across
the globe. While trade unions are independent in some countries, in others they are
dominated by the state or are agents of political parties. In countries where labour is
directly controlled by the state or a political party (the majority of states), the influence
of unions upon policy will be limited. However, the threat of labour unrest, as in China,
can still inform the decisions of state policy makers. In states where labour organizations
are autonomous and where they have a sufficient membership density or occupy key
industries, they can be expected to influence state policy. These modified state policies
can then influence international relations.
Several attempts have been made to link the nature of the post-1945 global economy
to the strength of domestic labour groups in key states. John Ruggie (1999) argues that
the post-war era of embedded liberalism reflected a compromise between those social
forces seeking liberalization of economic activity and those groups desiring protection
for domestic welfare. Thus, the trade and monetary regimes from the 1950s until the
1970s liberalized economic activity, but within limits set by national coalitions defending
full employment. Andrew Martin (1994) argues that the eventual undermining of this
system is due to the weakness of US labour compared to the social democratic or
corporatist states of Western Europe. Since the 1970s, successive US governments
pursued trade liberalization and capital mobility in a form which ran against the interests
of US labour and the welfare state. In this view, the degree of compatibility between
international economic order and Keynesian welfare states is partially a function of
the relative strength of labour in the most powerful states.
The experience of the United States can be used as an example of how labour
activity can shape international order. Labour was a key supporter of the global
expansion of US capitalism during the height of embedded liberalism because unionized
workers participated in the politics of productivity (Maier 1977). This arrangement
involved subsuming class conflict by ensuring that growth and productivity gains were
distributed between corporate profits and the unionized workforce. It was a method
of neutralizing labour opposition by integrating unionized workers into a division of
economic spoils. For its part, US labour supported the extension of US capitalism by
marginalizing radical workers’ organizations in Latin America, Asia and Western
Europe. However, as international competition increased for the US workforce,
organized labour shifted from offering strong support for a global economy to being
a growing obstacle to further liberalization and internationalization. Co-operation with
state elites was further undermined as neo-liberal governments in the United States
and Britain, accompanied by a business offensive against workers, led to the ejection
of labour from the governing coalition.
A turning point for US labour and its view of international economic relations was
the North American Free Trade Agreement in 1994 (Rupert 1995b). US organized
labour reacted differently to this liberalizing agreement than to earlier initiatives (e.g.
the General Agreement on Trade and Tariffs [GATT]) in four ways. First, it
acknowledged that the unfettered expansion of US-based MNCs was not in the interest
of US workers. This was in contrast to previous policies which supported the expansion
of American capitalism to other parts of the world. Second, labour rejected the political
leadership of the Democratic party and opposed the initiative of a sitting Democratic
president (Bill Clinton). Third, it sought out other social movement allies such as
environmentalists in order to build a broad-based political coalition capable of slowing
the neo-liberal agenda. Fourth, labour worked with autonomous unions (rather than
those tied to right-wing governments) in other countries. In dealing with Mexico, the
American Federation of Labor and Congress of Industrial Organizations (AFL–CIO)
was forced to cultivate relations with the emerging independent Mexican unions rather
than rely on the Mexican government-sponsored Confederacíon de Trabajadores
Mexicanos (CTM) [Confederation of Mexican Workers] union. The CTM had proved
adequate for US workers’ interests in the Cold War when the fight was against
Communism, but allies in the fight against transnational exploitation would have to
be found in unions controlled by their own members.
While large corporations retain a stranglehold on the US political system through
the financing of election campaigns, changes in the position of US labour have weakened
the social base for an open liberal economic system. Efforts by labour to protect itself
in the face of an increasingly competitive economy and a state less committed to
economic redistribution may raise obstacles to US leadership of the global economy.
For example, labour opposition to NAFTA forced the negotiating parties to include a
side accord on labour rights in the agreement.
Another significant example of labour’s role in shaping global order through
influencing state power is provided by Brazil. In October 2002, the labour-backed
Partido dos Trabalhadores (PT) [Workers’ Party] won the presidential election and
began to challenge the previous administration’s acceptance of neo-liberal economic
policies. One element of this challenge was forcefully to attack rich countries’ trade
policies by demanding the end of agricultural subsidies before agreeing to further trade
liberalization. This stance resulted in the shelving of the Free Trade Agreement of the
Americas (FTAA) and deadlock at the World Trade Organization’s (WTO) Doha
Round negotiations. Brazil has taken the lead in reviving a Third World coalition in
trade matters by forming alliances with other developing countries. Brazil’s former
trade union official and now former president, Lula da Silva, initiated intensified
economic relations with China in an attempt to balance US influence. Increasing
attention to the emerging global governance role of a group of key developing countries
known as the BRIC (Brazil, Russia, India and China) is significant because labour
plays a key role in Brazil while labour adjustment issues are crucial for India and
China.
Workers’ organizations have also played a significant role in changing state policy
and elements of international order in states where their activities were often curbed.
Two excellent examples are Poland and South Africa. The collapse of the Soviet Empire
and the end of the Cold War had several important causes including the exhaustion
of the Soviet economic model and intense competition from Western states and
economies. However, the activities of workers’ organizations (e.g. Solidarity in Poland)
in the early 1980s opened the first cracks in the Soviet system of control which would
eventually lead to a wider disintegration of East European Communist states in 1989.
In South Africa, workers’ groups, in alliance with other social activists and the African
National Congress (ANC), waged a long and ultimately successful campaign to overturn
the apartheid system of racial oppression. The labour movement was central to ‘creating
54 Robert O’Brien
the conditions for transition, in shaping its character and indeed in legitimating the
process itself’ (Adler and Webster 1995). Labour played a significant role in both of
these democratization processes and, as a result, changed the political economy of their
regions and the broader international system.
Agricultural workers have also had an influence on state policy. Perhaps the most
dramatic case has been the peasant and aboriginal rebellion in the southern Mexican
state of Chiapas (Reding 1994). Although the rebellion draws upon a historical legacy
of oppression, it was clearly linked to steps taken by the Mexican government to
liberalize agricultural land holdings in 1993 in the run-up to the NAFTA. Local concerns
were linked to broader developments in IPE. The Zapatista rebels were quick to exploit
modern technology to broadcast their cause worldwide and began the task of forging
links with similarly minded groups in other parts of the world (www.ezln.org.mx). The
rebellion soon moved from a local protest to challenging the power structures of the
Mexican state, its economic policies and insertion into the global economy. The potential
for other peasant- based challenges to state policy exists in a large number of developing
states such as China, India, Indonesia and the Philippines.
Themes
Placing labour more centrally into the mainstream of studying IPE opens up a number
of stimulating and productive avenues of investigation. These include: deploying an
ontology which includes social forces; examining structures of segmentation and
oppression such as gender and racism; investigating issues of survival such as food
security; and contemplating a diversity of political economic thought rather than a
dominant consensus.
Taking workers seriously, by definition, recognizes the agency of people in collectivities
other than the state or the corporation. Groups of people connected by the work that
they do or their concern about the working conditions of others can act to challenge
political authority and shape markets. This does not deny the agency of institutions
such as the state or the firm, but argues that these agents must also engage with the
politics of labour and labourers.
The international system rests upon a series of national and transnational social
systems. Global regulation includes states and their agreements, but those agreements
require domestic support, or at least acquiescence. One of the implications of this view
is that international politics and IPE are more complicated than is often depicted
because they must sink roots into domestic redistributive politics. This can be illustrated
by looking at the US–Chinese relationship. At one level, this relationship comprises
two large states competing for power and wealth as viewed through traditional IPE
perspectives. China exports vast amounts of manufactured goods to the United States,
and the US relies on the Chinese to purchase US treasury securities to finance the
American budget deficit. The United States condemns a series of Chinese activities
which artificially maintain its massive trade surplus such as overvalued currency, domestic
protectionism and intellectual property piracy. The Chinese counter that US
competitiveness problems are self-inflicted and that budget deficits are a result of
domestic mismanagement.
While the debates about currency manipulation and protectionism are relevant, an
alternative interpretation is that each state faces a massive labour adjustment problem
as it triesy to co-ordinate policy with the other. The labour problem which China faces
is a pressing need to provide employment and development to millions of its restive
(both geographically and politically) workers. China relies heavily on export markets
to provide employment to its population. Since the financial crisis of 2008, the state
has tried to boost domestic consumption, it remains highly dependent upon cheap
exports, especially to the US. Social unrest has led the state to experiment with social
policy and revise labour legislation, but concerns remain about unemployment and
social dislocation that might result from reduced exports. In the US, the state requires
Chinese finance because of its inability to deal with domestic class conflict. Tax cuts
for its most wealthy citizens have drained revenue sources, while expenditure on wars
in Iraq and Afghanistan, combined with continued spending upon some limited
redistributive programmes such as social security and Medicare, have led to record
deficits. For their part, workers have become dependent upon debt and cheap imports
from Asia to maintain consumption in the face of stagnant wages and increasing
inequality. Attempts to reduce entitlement spending encounter fierce opposition from
poorer sections of society, while efforts to raise taxes are frustrated by a right-wing
populist ‘Tea Party’ movement. Both states need to restructure their domestic political
economies, but the labour market implications and the political conflict generated by
attempting such restructuring are challenging.
Of course, examining the category of ‘labour’ reveals that workers themselves are
segmented by a number of structures including gender, race, class and nationality.
They struggle against, and conform to, these divisions, often finding themselves in
contradictory sets of relations, both engaging in and opposing various forms of
exploitation. One can think of the working professional woman in the United States
reliant upon the labour of her immigrant nanny so that she can break the glass ceiling
in her chosen profession. Perhaps the conflict is between a developing country public
sector worker whose job is being privatized on World Bank advice and the peasant
worker who has not seen great evidence of public sector efficiency in her community.
Alternatively, Brazilian and German auto industry workers might engage in conces-
sionary bargaining with their employers, fearing that corporate investment may bypass
them when the decision is taken where to locate manufacture of the new car model.
The degree to which workers can co-operate across state boundaries to improve
their conditions of existence is the subject of a lively debate. In the optimistic camp
are those analysts who see a ‘new internationalism’ of post-Cold War labour solidarity.
This activity has a transnational focus and takes a campaigning, broad-based social
movement unionism and coalition-building approach (Waterman 1998: 45–78; Munck
2002: 135–73). This form of labour internationalism goes beyond unions to include
non-governmental organizations (NGOs), and its form of organization is characterized
more by networks than by bureaucratic or representative structures. The ‘new’ labour
internationalism, which is composed of committed activists in a decentralized network
structure, fosters open debate, pursues mobilization and campaign orientation, builds
social movement and NGO coalitions, and is composed of predominantly Southern
African, Asian and Latino workers (Webster et al. 2008: 193).
An opposing view is deeply skeptical of internationalism, especially between
workers in the South and the North. The optimists are criticized for having a Pollyanna
view of the world. Burawoy (2010) argues that there is little possibility of a global
countermovement to capital. Academics working on internationalism desperately
hunt for examples which confirm their wishful political thinking while the obstacles
to contesting the increasing marketization of money, labour and nature go largely
56 Robert O’Brien
unanalyzed. A more ‘realistic’ view is one which dismisses internationalist impulses as
an expression of desire rather than existing accomplishments (Silver 2003).
This raises the question of whether the increased movement of capital across state
borders and state regulation to facilitate capital mobility have tipped the balance
against relatively immobile labour. Are workers doomed to futile struggle in national
formations while capital travels the world pitting one location against another? Has
globalization irrevocably strengthened the structural power of capital? The answer is
not straightforward, but there are some reasons to doubt such a capital-centric logic.
First, there are limits to capital mobility. Some assets are not mobile or not easily made
mobile (such as the mining industry). Second, there are times when states will restrict
capital mobility or reassert their power as in the case of financial or economic crisis.
This opens up the possibility of labour-friendly restrictions on capital. Third, simply
because workers are not a (generally) mobile entity does not mean they are unable to
act across state borders. Workers’ geographies are variable, stretching from the local
to the global, depending upon need and circumstance (Herod 2002). While workers
are rooted in the local, they simultaneously act in national, international and
transnational spaces.
In addition to being segmented by nationality, workers are gendered and experience
the world through diverse sets of gender relations. At the most basic level, we can see
that women workers have less access to education and health services, economic
opportunities and political participation than their male counterparts. Men and women
are affected in different ways by changes in production, trade and financial flows. A
gendered division of labour ensures that crises in the world economy are in great measure
absorbed by poor and working-class women. This means that there will be some issues
that are more pressing for female than for male workers (O’Brien and Williams 2010:
298–306). One crucial issue is the feminization of poverty. Around the world the face
of poverty tends to be female. A second issue is the globalization of reproductive work.
The export of nannies, nurses and sex workers to service the demands of richer areas
of the world has an impact on women in both developed and developing countries. A
third issue is the impact of structural adjustment on women. From the debt crises of
the 1980s to the credit crisis of 2008, the reduction in government services places a
proportionately heavier burden on women as they lose access to vital public services.
One of the insights of a gender analysis is the extensive implications of feminization
as devalorization – this means that the characteristics often associated with femininity
are valued less than those associated with masculinity. Femininity is associated with
caring rather than controlling, submissiveness rather than aggression, feeling rather
than thinking, weakness rather than strength, home life rather than public life. With
feminine attributes valued less than masculine attributes, anything that is feminized is
then devalued. For example, labour markets are said to be increasingly feminized. This
means more than just an increased number of women working in the labour market.
It means that working conditions for the whole labour market are taking on the attributes
of what was thought to be appropriate for female work – casual, informal, insecure,
part-time and low-waged employment. The implications of devaluing the feminine are
widespread, because a whole series of groups, not just particular women, can be
feminized. The characteristics of femininity can be applied to whole races, groups of
men, immigrants, refugees or other groups that are kept in a subordinate position.
Thus feminists argue that denigrating the feminine can serve to support a whole series
of hierarchies, not just those between men and women (Peterson 2003).
There can also be a racial and ethnic division of labour. In these cases, groups of
people from particular ethnic backgrounds or with visible physical differences are
confined or corralled into specific forms of labour. The racial division is used to justify
the different legal status and economic exploitation of these groups of workers (Persaud
2001). The practice of slavery in the Americas was a brutal example of a racial division
of labour. However, racial divisions have also been crucial to the employment relations
of Koreans in Japan, Indonesians in Malaysia, Mexicans and Central Americans in
the US, Turks in Germany, Algerians in France, West Indians in Britain, Indians and
Chinese in many countries.
These segmentations that labourers both fight and support raise several issues
that a traditional focus upon finance or production would not. Since many workers
are engaged in life-and-death struggles for survival, issues such as access to food and
economic justice become more visible. Food security takes precedence over trade
liberalization, while redistribution trumps efficiency in the view of many workers.
Finally, an examination of the politics of the labour movement (very broadly
understood) reveals a wide diversity of political thought and action. The debate about
responses to financial crisis or trade talks goes far beyond discussions about neo-liberal
versus social democratic alternatives in labour constituencies. Visions of utopia stretching
from local ecologically sustainable communities to a planetary redistribution of resources
are both dreamed of and planned. There is far greater diversity in political economic
thought and far less consensus than one imagines when focusing upon the dominant
actors in the IPE. Integrating labour into IPE helps us to understand better the operation
of the global economy and keeps us receptive to new ideas and issues.
Labour is central to the global political economy. Workers act on a series of levels
from the local to the international and the transnational to shape the global political
economy. They do this directly by contesting or assisting the spread of global finance
and engaging corporations in struggles over profit and working conditions. Indirectly,
they also influence state policy on key issues from global environmental change to trade
policy. A complete understanding of the global political economy requires attention to
labour and labour issues. Making labour a central object of study has the additional
benefit of opening up the field to further significant issues and approaches.
Notes
1 The author is grateful for the feedback and criticism from the editor of this collection, readers
of the first edition and from participants at the Labour and Global Political Economy Workshop
held at the University of Sussex, 16 May 2007.
2 There is an extensive literature on the changing nature of work, highlighting issues such as the
informalization of work and the impact of information technologies that cannot be addressed in
this chapter.
5 Money and finance in a
globalized economy
Anastasia Nesvetailova
Introduction
Modern financial theory is incredibly diverse. It accommodates a variety of disciplinary
traditions, methodologies of investigation and general paradigms of the financial system.
For instance, if mainstream economics, covering a wide array of approaches and sub-
fields, tends to examine the mechanisms of the market realm, post-Keynesian or
heterodox economics has always tended to focus on the workings of the system of
markets or on the conditions of the financial systems more broadly. The emergent
interdisciplinary field of financialization studies focuses on the complex processes that
develop at the nexus between the financial system on the one hand; and the environment,
culture, politics and security, on the other. Is it possible then, considering the variety
of disciplinary niches in the academic studies of finance, to tease out any common
themes addressed by the different schools?
One way of approaching this rather difficult question is offered by the economic
reality itself; namely, by the financial crisis that started in the summer of 2007 and is
still continuing into its third phase in late 2011.1 Indeed, the events viewed by mainstream
economics as a series of disruptions in the mechanism of pricing the financial products
(e.g. Murphy 2008) have been seen as an historic breakdown of the very structure of
financialized capitalism characterizing the Anglo-Saxon political economies (Gamble
2009; Wade 2008). Thus one common theme pertaining to the developments in
contemporary financial theory is the question of the origins of financial instability and
crises; the second and related one is the question about the role of financial innovation
in the capitalist system more broadly.
Addressing these questions, this chapter surveys three main traditions of thought on
finance, focusing specifically on the way that mainstream economics, heterodox political
economy and financialization literature understand financial innovation and fragility.
In the limited space allowed by this volume, such a survey is unavoidably at risk of
being rather crude. Trying to avoid making too many sweeping generalizations, in
what follows, I focus on the most essential ‘building blocks’ of mainstream scholarship
on finance; critique the two major streams of heterodox scholarship on finance
(Keynesian and Minskyan perspectives); and synthesize the emergent interdisciplinary
literature on the phenomenon of financialization. As I will show, each of the three
schools of thought on finance is built around a distinct paradigm of understanding the
nature of money and the key set of relationships that constitute the contemporary
financial system. The ongoing global financial crisis offers a vivid illustration of both
the advantages and the limitations of the three traditions surveyed here.
Money and finance in a globalized economy 59
Finance, money and mainstream economics
Modern theory of finance, or orthodoxy, has grown out of the main body of economic
theory. It is predicated on the belief that in their nature, financial markets are similar
to other types of market. In this view, just like the markets for goods or services,
financial markets mediate between the supply and demand for a scarce resource –
capital, or money – through the mechanism of price. For instance, financial institutions
facilitate better economic exchange and social welfare by linking savers and borrowers
in space and time. They perform this service at a price: a commercial bank charges
an interest rate for an extended bank loan; an investment bank or an asset manager
takes a commission fee for their assistance in managing a client’s money. Like other
markets, financial markets may be subject to disequilibrating forces (market shocks or
financial crashes); price corrections (most commonly appearing as crises); or problems
of asymmetric information (lack of transparency or full knowledge about a certain
product, agent or market).
An important vision following on from this assumption is the so-called ‘bartering
veil’ view of finance and money. Namely, it is the belief that there are no specific,
internally generated (endogenous) dynamics to the financial sphere, since by responding
to a full range of information signals, the financial and monetary realm merely reflects
the underlying conditions of the ‘real’ economy, facilitating production and trade. This
assumption remains, as we will see, one of the most problematic pillars of mainstream
financial theory because it ignores the fact that the monetary and financial realms
represent different temporalities (Mehrling 2010).
Mainstream theory of finance has gone through several rounds of development. The
depression of the 1930s placed John Maynard Keynes and his vision of the financial
system at the forefront of academic economics and policy making. (But in the wake of
the crises of the 1970s, Keynesian principles of economic governance were crowded
out by the marginalist tradition in economics [Best 2004].) The 1960s marked the
dawn of the era of the neoclassical synthesis, with its view of the financial system as
an equilibrium-driven sphere of the allocation of savings to investments. The decade
of the 1970s became the heyday of the efficient market theory (EMT) of finance, now
supported by advances in fundamental sciences such as mathematics and physics, and
crucially, by the revolution in information technology (IT) and communications
technologies (Guttman 2003; Kurtzman 1993). During the financially volatile decades
of the 1980s and 1990s, the further progress of EMT was increasingly marked by
developments and specializations in the field of behavioural finance which evolves at
a nexus with social and cognitive psychology (Shiller 2003). However, notwithstanding
the recurring failures of the market (crises), the core foundations of mainstream finance
have remained the same: at the macro- (and global) level of capital allocation, financial
markets are believed to be gravitating towards long-run equilibrium. Given its centrality
in contemporary financial theory, it is worth us taking a closer look at the efficient
market theory of finance.
Efficient market theory of finance (EMT)

The key question for the efficient market theory (EMT) of finance is this: how do
financial markets allocate capital to the economy? A sub-question guiding the field of
financial economics is: how do agents in the financial markets drive markets towards
60 Anastasia Nesvetailova
efficiency? At the macro-level, standard theory views the financial system as a mediator
between savers and borrowers. In such a system, the key function of financial agents
is to price risk efficiently. Against this background, mainstream financial theory has
rested on two core premises.
The first fundamental assumption is that the function of the financial markets is to
mobilize a scarce resource – capital – in accordance with the needs of the economy.
Facilitating such allocation of capital, financial markets employ a number of tools,
reflecting the underlying economic conditions, or fundamentals, as well as a given set
of expectations about the future. For instance, the prevailing interest rate reflects the
level at which the demand and supply of capital coincide, and is the de facto price of
money; the yields that various financial instruments bring reflect the balance between
perceived risks and expected returns from holding these instruments; while market
indexes such as the Dow Jones industrial average, the FTSE 100 or the NIKKEI reflect
the average valuations of key shares by investors at a given point in time. Thus essentially,
the role of financial markets is to translate the range of future outcomes for a given
product (for instance, changes in the value of an insurance policy, a government bond
or a corporate share) into the language that is understandable to investors today. This
process of digesting and reflecting on a range of information signals through price is
commonly known as discounting, or calculating the present value of investments. Various
versions of the EMT model differ in the choice of the discount rate in the present
value, but the general efficient market model can be written up as Pt = Et P*t.2 This
equation asserts that any surprising movements in the stock market must originate in
some new information about the fundamental value P*t (Shiller 2003: 85).
The second core assumption of mainstream finance theory suggests that the agents
operating in the financial markets tend to be rational decision-making units. Financial
firms, banks and individual consumers of financial products (such as credit cards, or
insurance policies) are believed to be profit-maximizing units: they make their financial
decisions on the basis of the best available (full) information, trying to maximize their
returns while minimizing the costs and risks of their financial actions. Even speculation
– a destabilizing and harmful force according to many theoretical traditions – was
originally seen as a progressive element in the evolution of market equilibrium. As
Friedman (1953) argued, because market prices are set on the basis of economic
fundamentals, any divergence from those fundamentals creates a profitable opportunity.
Speculators then step in to buy or sell, driving prices back to the level warranted by
fundamentals (Palley 2007: 5). Generally therefore, the optimizing behaviour of economic
agents is regarded as a good model of reality for predictive purposes (Lucas 1980), and
financial markets are generally seen as the place where the model can most closely be
approximated (Dow 2011: 234–5).
Building upon these two assumptions, and capitalizing on the heavy presence of
quantitative approaches to evaluating risks and returns, since the late 1960s, financial
companies have been employing a variety of complex mathematical, statistical and
quantitative techniques to measure effectively the optimal risk profiles for the particular
institution, portfolio of assets or product. This process is known as arbitrage, defined as
a type of trading that exploits price discrepancies. At one level, according to Donald
MacKenzie (2006: 14), arbitrage is as old as the market itself: over centuries, international
trade has evolved as merchants who bought goods cheap in one place sold the same
goods dear in another. And just as risk has always been the raw material for the
financial and banking industry (Bernstein 1998), arbitrage has always been an engine
of globalization (Braudel 1992; MacKenzie 2006). Yet at the same time, being absolutely
essential for the very notion of ‘market efficiency’ on which EMT is built, the notion
of arbitrage captures a certain intellectual and disciplinary divide between orthodox
economics (which adheres to the notion of market efficiency; i.e. the belief that markets
always fully reflect available information) and the psychologically based field of
behavioural finance, which sees market participants as less than entirely rational and
subject to systematic biases, normally psychological in their nature (Dow 2011;
MacKenzie 2006).
Essentially, therefore, modern finance theory is built on the assumption that the
future is calculable (Wigan 2009: 160). This understanding is important for our reading
of the various paradigms of finance because it emphasizes the distinct ontology of
financial markets; namely, their inter-temporal aspect. Indeed, most activity in finance
is based on valuations that are bound up with expectations of price movements rather
than the experience of ‘real’ consumption and production. This observation stands at
odds with the general orthodox theorization of money and finance as a ‘bartering veil’
(or commodity money) which tends to add the sphere of money and credit onto existing
models of production and consumption as an afterthought, thus implying that develop-
ments in the sphere of finance are neutral in terms of their impact on the general
economic equilibrium. Essentially therefore, mainstream economic models treat money
as a neutral mechanism in capitalism, and build the theory by trying to show why
economic agents may desire money while preserving its neutrality (Ryan-Collins et al.
2011: 29). Yet as we know all too well, events in the financial markets and develop-
ments in the banking system do exert enormous influence on the course of the economic
cycle, often precipitating deep economic crises and recessions.
Unsurprisingly therefore, the more recent evolution of mainstream finance theory
has seen a closer engagement between finance theory and other fields of social sciences.
As Sheila Dow argues (2011), given the inter-temporality of financial markets and the
role of expectations in shaping current valuations of the future, psychology (and in
particular, cognitive psychology) has had particular purchase in the studies of finance.
At this point we encounter the intellectual gulf that separates the micro-level studies
of the financial markets and the macroeconomic analyses of the financial system. While
micro-level approaches to financial risk have become progressively engaged with a
range of possibilities of failure and market dysfunction that negate the assumptions of
rational choice economics, macro-level approaches to finance remain embedded in
atomistic visions of the financial system. One deeply problematic outcome of such
stagnation is reflected in the inability of orthodox finance theory to discern the sources
of systemic rupture. The scale of the problem can be seen at at least two levels. Recent
economic history provides a lot of examples of cases where key economic models and
policy tools used by international financial policy makers were simply inadequate for
the task of distinguishing and addressing the nature of financial and economic crises
in different institutional and political contexts. For instance, the failure of the
International Monetary Fund (IMF) policies in addressing the Asian financial crisis of
1997–8 has been well documented (e.g. Bello et al. 2000; Blustein 2003; Godement
1999; Soederberg 2005; Wade 1998). Moreover, the most recent deeply unimpressive
performance of the IMF in the early stages of the continuing global credit crunch only
alerts us to the scale to which a particular set of abstract assumptions about the
workings of the financial system can become ideologically entrenched in major
governance structures:
The IMF’s ability to correctly identify the mounting risks was hindered by a high
degree of groupthink, intellectual capture, a general mindset that a major financial
crisis in large advanced economies was unlikely, and inadequate analytical approaches.
Weak internal governance, lack of incentives to work across units and raise contrarian
views, and a review process that did not ‘connect the dots’ or ensure follow-up also
played an important role, while political constraints may have also had some impact.
(IEO 2011: 1)
At the same time, however, the origins of the analytical and policy failures are conceptual
and relate to the way economic orthodoxy conceives of finance and money as such.
In this regard, a major problematic assumption of the orthodox theory of money is
the assumption of money neutrality: money is assumed merely to represent the value
of other ‘real’ commodities (such as goods or labour). Reflecting this, orthodox financial
theory views ‘money’ as, mainly, debts to banks. In the course of the business cycle,
so the theory goes, money is constantly being created and destroyed. Assuming such
a ‘normal’ functioning of the economy, the model allows no space for the presence of
the state, since it offers no satisfactory explanation for the existence of what is called
‘fiat’ money – that is, money backed only by the authority of the state or a sovereign
(Ryan-Collins et al. 2011: 31).
However, in a capitalist economy, ‘money’ is never simply a bartering veil; it is,
rather, a system of financial relationships that mask the ultimate ownership of wealth.
In fact, and contrary to every assumption of the economic orthodoxy, historical accounts
show that banking (in the form of recorded lists of credits and debts) operated already
in Babylon and ancient Egypt, thus preceding the idea of commodity money (Davies
2002, cited in Ryan-Collins et al. 2011: 31). Similarly, the history of early modern
England shows that credit in the form of ‘social communication and circulating judgment
about the value of other members of communities’ preceded the emergence of the
concept of modern ‘money’ or even capital, having shaped the marketplace (Muldrew
1998: 2).
These and other historical accounts of the emergence of modern money and finance
(e.g. de Goede 2005) show that the major factor shaping the course of the economic
cycle at any point of capitalist evolution is the expected profits that induce debt creation
and the realized profits that lead to the validation of debt. Therefore, in contrast to
abstract economics, in the analyses of a financially advanced capitalism, ‘money’
necessarily needs to be understood as a product of financial interrelations. Indeed, all
key economic processes in capitalism – resource allocation (and indeed, waste),
production, marketing, commerce, distribution of profits, industrial reorganization –
are tightly integrated with the available modes of raising finance. The neoclassical
synthesis and the EMT of finance – which both ignore the ‘financing veil’ aspects of
money and persist in viewing it only as a ‘bartering veil’ – cannot explain why instability
is a normal functioning occurrence in a capitalist economy. Hence, as Hyman Minsky
put it, ‘neoclassical economic theory is a defective instrument to be used in formulation
of policies that aim at controlling instability’ (1982: 72–3).
Finance and heterodox political economy

Heterodox scholarship has argued repeatedly and meticulously that the standard
vision of the economy as populated by rational profit-maximizing individuals is mere
abstraction, and hence is inadequate for explaining reality. Fundamentally, heterodox
scholars (these include students of a wide range of social sciences) believe that financial
markets are different to other types of market since essentially these are markets that
trade not in corporeal products, but rather in possibilities or promises. Beyond these
assumptions, heterodoxy tends to splinter (see Lavoie 2009; Toporowski 2006).
Indeed, the financial system, intermediating across spaces and time, is a bridge
between the present and the future; it is an uncertain bridge, since the future itself is
unknown. The price mechanism of financial markets includes the pricing of risk attached
to the future value of assets (this can include a range of changes to this value, including
the risk of default). Modern standard economics has tended to believe that sophisticated
statistical techniques provide market actors with sufficient equipment to calculate such
future risks; whereas heterodoxy has always been sceptical about the possibility to
discern and calculate uncertainty and has warned about the systemic effects of risk
taking, stressing the scope for miscalculation, exuberance, speculations and even sheer
fraud. If mainstream economics tends to believe that the financial markets are self-
correcting and thus should ideally be left to their own devices, heterodoxy has taken
the opposite view. The key conclusion from the heterodox views of finance is that the
financial system must be regulated, coaxed into performing its tasks, rather than assuming
that it will do it by the simple virtue of its independent operation. The following sections
engage more closely with two major figures who have shaped the heterodox tradition
of theorizing finance in capitalism.
In the development of economic theory in the twentieth century, the scholarship of
John Maynard Keynes marks a revolutionary turn. His vision, often known as the
‘macroeconomics of effective (or aggregate) demand’ became an alternative to micro-
level economics of the individual and his/her preferences. A major part of Keynes’s
political economy was his theory of finance and investment. Being aware of the in-
built volatility and speculative nature of the financial markets, Keynes believed in a
strong, pro-active governmental policy of regulation and control over financial markets,
investment flows and international monetary affairs.
Keynes’s The General Theory of Employment, Interest and Money (1936) is a portrait of a
monetary economy with sophisticated financial institutions. It rejects the orthodox view
of money as a ‘bartering veil’ and argues that in capitalism, money is not just a vehicle
that makes the double coincidence of wants unnecessary for trading to take place.
Instead, for Keynes and his followers, money is a special type of bond that emerges
as positions in capital assets are financed. Consequently, in an economy with a
sophisticated financial system, the ‘financing veil’ necessarily encompasses many more
financial instruments than any narrow conception of money would include (Minsky
1982: 61, 62). In this instance, Keynes pointed out that the price of existing assets,
both real and financial, as well as the cash payment constraints imposed by the liability
structures of the holders of capital assets, may lead to an inappropriate amount or type
of investment: ‘[s]peculation, the activities identified with Wall Street, make[s] business
cycles, including the occasional deep depression cycles, rather than equilibrium seeking
and sustaining behaviour, the normal result of economic processes’ (Minsky 1991; see
also Minsky 1975).
A basic premise of Keynes’s theory of finance – also known as the theory of liquidity
preference – is that, contrary to mainstream economics which holds that savings
determine investment, in reality, the opposite is true: investment determines savings.
In this context, the primary function of financial markets is to provide liquidity for
asset holders. Accordingly, when bullish sentiments about the uncertain future dominate
the financial markets, rising market prices encourage savers to provide the funding for
new investment projects that (i) far exceed their current incomes; and (ii) induce
exuberant expectations of future returns. The result of these expectations is an investment
(or credit) boom. When at some point these euphoric expectations become doubtful,
bearish sentiment comes to the fore and the credit boom turns into a bust (Davidson
2001: 21, 23; 1992).
In light of the lingering financial crisis that started with the collapse of the credit
boom in American mortgage markets in 2007 and, at the time of writing (late 2011),
has entered into its new phase – a crisis of European sovereign debt – it is unsurprising
that the work of Keynes continues to exercise tremendous influence on critical research
in finance. Keynes’s myriad sympathizers and followers stretch far beyond the academic
boundaries of heterodox economics. Students of IPE, in particular, have been at the
forefront of critical and socially aware research in finance: it was Susan Strange (1986)
who used Keynes’s notion of ‘casino capitalism’ as the title of one of her most important
monographs on global finance.
Yet ironically, although Keynes has pioneered heterodox research in the psychology
of financial markets, it is hard to find a comprehensive formulation of financial crisis
theory in Keynes’s own works. He produced a revolution in general economic theory,
offering a new vision of the economic system and policy – a theory of macroeconomic
demand management. It would probably be fair to say that it was Keynes’s followers
such as Hyman Minsky, Michael Kalecki, Charles Kindleberger and many others3
rather than the man himself, who have advanced what is now called the (post)-Keynesian
theory of financial fragility and crisis. Following Keynes, heterodox scholars inquire
into the conceptual understanding of the role of money and finance in macroeconomic
stability, focusing specifically on the nature of financial relationships that characterize
contemporary capitalism. It is here that we turn to the work of Hyman Minsky (1919–96),
the scholar who, in the words of one of his students (Wray 2009), would probably be
remembered as one of the greatest economists of the twenty-first century.
Although Hyman Minsky is usually considered to be a follower of Keynes, and more
broadly, institutional political economy, he identified himself as a scholar of financial
Keynesianism. Minsky’s political economy is a framework for understanding the
evolution of a capitalist system with a sophisticated chain of financial institutions and
relationships. The fundamental point of his scholarship was that in a capitalist economy
with advanced financial institutions and linkages, financial instability is an inherent
feature. Very briefly – and thus inevitably, crudely – Minsky’s Financial Instability
Hypothesis (FIH) can be summarized as a cyclical vision of endogenously driven fragility
in a system with sophisticated financial institutions, or what is now often referred to
as an ‘advanced financialized economy’
Notwithstanding the specifics of the historical and institutional context of such a
system, Minsky argued that its inherent conflict centres on the shifts in the financial
system and the state of the real economy (the latter includes economic stability generally,
and full employment). This basic conflict is centred on the process of financial innovation
and the ability of private financial firms to raise and emit debt as their major form of
financing: ‘in a capitalist economy that is hospitable to financial innovation, full
employment with stable prices cannot be sustained, for within any full-employment
situation there are endogenous disequilibrating forces at work that assure the disrup-
tion of tranquillity’ (Minsky [1986] 2008: 199). Thus, in Minsky’s pessimistic vision,
the evolution of the financial structure is both endogenous and institutionally shaped,
and the tendency towards instability is a normal condition of capitalist economies.
Stability in this context is always provisional, and only occurs by way of institutional
building and governmental intervention (Burlamaqui 2008: 28), or what Minsky
understood as a two-fold support of ‘Big Bank’ and ‘Big Government’.
At the heart of Minsky’s explanation for financial instability is a distinctive
epistemology, which accords with the distinctive ontology of an open system (Chick
and Dow 2005). For Minsky, ‘understanding money means understanding a vital process
shaping social evolution whose future course remains open-ended and contingent’
(Burlamaqui 2000: 9). Since financial markets serve as a bridge between current
valuations and expectations of future earnings, and thus carry forward the accumulated
contractual obligations of all past investment decisions, they become the conduits
through which disappointed expectations transmit instability to the economy as a whole
(Burlamaqui 2000: 23, 30).
Specifically, and instructively in the context of the continuing global financial crisis
and a possible recurrence of a global depression, Minsky’s FIH offers a way to
conceptualize the process by which the banking system is seeking to bypass official (the
central bank’s) measures and regulations to control liquidity. A central pillar of Minsky’s
vision of capitalism and its crises is the process of financial innovation in a system with
open access to credit channels. The ability to ‘invent money’ (even temporarily) by
relying on debt triggers a chain of transformations and leads conservative financial
units (hedge financed units, where existing obligations and debt commitments are
consistently lower than the incoming profit flows) to become more risky (speculative,
where not all profits flow can cover existing obligations) and, ultimately, enter into a
Ponzi mode of financing, where one can only repay old debt by borrowing anew. This
chain of debt-driven developments makes the financial system increasingly fragile,
prompting the monetary authorities to intervene in order to prevent a structural
economic collapse. As the process of private financial expansion continues, Minsky
forewarned, ‘innovations, particularly in finance, assure that problems of instability will
continue to crop up; the result will be equivalent but not identical bouts of instability
to those that are so evident in history’ ([1986] 2008: 287).
Minsky liked to joke that there are as many types of capitalism as ‘Heinz has pickles’.
In other words, because capitalism is a diverse and constantly changing system, the
resulting instability does not conform to any fixed model; the timing of the financial
distress and crisis is almost impossible to identify in advance. The build-up process
culminating in financial fragility is not deterministic: different cycles are propelled by
different innovations with different characteristics, and by different successive generations
of decision makers in financial markets (limiting market memory). Moreover, as Dow
argues, the timing of cycles can vary according to a number of of factors, such as the
point at which conventional judgement is recognized to be challenged (Dow 2011:
238). Any policy response to financial instability, Minsky argued, should involve both
monetary and fiscal measures, since on its own, ‘[m]onetary policy is of very limited
effectiveness both in constraining inflation and in counteracting a depression’ (1982:
173). Most controversially, Minsky showed that the mechanism that spreads fragility
and crisis throughout the system centres on the complex chain of liquidity-stretching
financial innovations that appear to enhance liquidity but, in fact, by replacing state-
backed money with privately created financial instruments, make the financial system
progressively illiquid (Nesvetailova 2010).
It is tragic that due to his critical understanding of the workings of ‘Wall Street’
capitalism, Minsky remained for most of his own lifetime on the margins of the economic
profession, standing aside from the big intellectual armies of mainstream economics
(Strange 1998). His FIH was criticized by mainstream economists for the lack of technical
rigour and predictive capacity, for being too descriptive rather than theoretical. James
Tobin, for instance, criticized Minsky’s focus on endogenous fragility and the inevitable
trade-off between financial innovation and economic stability (Burlamaqui 2000). An
answer to this criticism comes from the post-Keynesian theory of political economy.
It suggests that while risks are accessible, discernible and may allow for learning by
those modelling them, uncertainty as such is not: it is simply impossible to account for
things that we do not know about. Reflecting uncertainty, expectations about the future
tend to have little objective foundation, and mistakes are inevitable because rational
expectations are, simply, impossible (Mehrling 1999, cited in Burlamaqui 2000: 13).
At the same time, more radically minded scholars may criticize Minsky for over-
stressing the financial dynamics of the system rather than developments in the real
economy, such as the labour market. Yet recent scholarship on financial fragility has
actually found that it is the dynamics of the so-called real economic units (the non-
financial corporations) that Minsky’s FIH captures most accurately. Building upon
Toporowski’s theory of capital market inflation (2000), Bellofiore and Halevi observed
that during the latest debt-driven boom of 2000–7:
[N]on-financial companies . . . were ‘forced’ into debt, initially, because of the

capital asset inflation process on the rise and because of the behaviour of financial
intermediaries; later, because of the downside effects on the same non financial
companies’ cash inflows resulting from the breakdown in capital asset inflation.
(Bellofiore and Halevi 2010: 80)
In this instance, the foresight of one of the students of Minsky, Perry Mehrling, is
remarkable: back in 2001, he noted that the key debate in finance was no longer between
Keynesians and monetarists, but between Minsky and central bankers on the one side,
and modern finance theorists on the other. Indeed, the post-2007 debate on financial
crisis and governance demonstrates that Minsky’s approach to the study of finan-
cial innovation has challenged the dominance of EMT. Minsky’s conceptualization of
financial capitalism as an open and endogenously evolving system has opened up an
important analytical niche for both scholars and regulators trying to capture the nature
of systemic risk in finance today, and come to terms with the role played by financial
innovations such as credit derivatives in the overall stability of financialized capitalism.
The extent to which such potential is realized, however, remains an open question.
Financialization
There is little elegance to the term ‘financialization’. Intuitively, one can detect that
‘financialization’ denotes a process associated with, or led by, finance. Yet the precise
content and contours of this phenomenon remain rather vague. Is financialization, for
instance, distinct from the notion of a rise of financial capitalism? And is financializa-
tion not the same force as, say, finance-led globalization? The etymology of the term
‘financialization’ reflects this confusion: although the word has been used as an academic
concept only for about 20 years, there are apparently up to 50 definitions of the concept
itself. Indeed, while studies of the phenomenon of financialization are growing and
have attracted scholars from a range of disciplines as diverse as economics, political
economy, human geography, sociology and political science, the actual meaning of the
term ‘financialization’ itself remains one of the key points of contention. As Stockhammer
(2004: 720–1) argued, while there is no agreed definition of financialization, the term
is used broadly to capture and analyze a range of transformations within the financial
sector as well as in the relation between finance and other areas of human activity.
The manner in which these transformations are analyzed can broadly be divided
into two groups: the historical accounts of the rise of financial (or finance-led) capitalism;
and the more contemporary studies of the sociology of this process. The key question
for the historical studies of financialization and its antecedents concerns the effects of
the growing power of the financial industry over the rest of the economy. The key
question for sociological accounts of financialization is how, and to what effect, are
various realms of human activity absorbed by financial dynamics and become new
elements of the financial system. The two schools of thought tend to agree that the
process of financialization is an important determinant of capitalism in the twenty-first
century. Their reasons for arguing that, however, remain quite distinct.
The historical school discusses the rise of finance to a position of power and dominance
in the second half of the twentieth century. Krippner (2005: 174) defines financialization,
for instance, as ‘a pattern of accumulation in which profits accrue primarily through
financial channels rather than through trade and commodity production’ (cited in
French et al. 2011). Kevin Phillips (1993, 1994) and Giovanni Arrighi (1994) employed
the term to describe ‘a prolonged split between the divergent real and financial economies’
and a defining moment of international hegemonic transition (Arrighi 1994: 82). This
moment, in turn, marks a shift in gravity of economic activity from production (and
even from much of the growing service sector) to finance (Foster 2010). The historical
school of financialization also accommodates a normative critique of this process. As
Palley (2007: 4), for instance, argues, ‘the era of financialization has witnessed a
disconnection of wages from productivity growth, raising serious concerns regarding
wage stagnation and widening income and wealth inequality.’
An alternative contemporary approach to the study of financialization prioritizes
micro-level drivers of this process, examining the actors, agents, narratives and concrete
manifestations of financialization. Such micro-level studies of financialization tend to
understand it as ‘the engagement of non-financial businesses in financial markets.
These financial activities are interpreted as reflecting a shift in the firm’s objectives
and a rising influence of shareholder interests in the firm’ (Stockhammer 2004: 721).
In these interpretations, financialization does not mark the gulf, or disjuncture, between
the sphere of production and the sphere of circulation, but signifies instead a progres-
sive development in the evolution of capitalism. The process of financialization is seen
to be tightening the linkages between the ‘real’ and the ‘financial’ realms, by pooling
more and more assets into the financial system. For instance, financialization has been
employed in a narrow sense to describe the processes and particular effects of the
growing power of financial values and technologies on corporations, individuals and
households. As scholars argue, the rise of the discourse of shareholder value and a
burgeoning economy of financial metrics to measure it, underwritten by the expectations
of institutional investors for constant asset price appreciation, have led to the radical
realignment of the interests of corporations and of corporate managers in the US and
the UK since the 1990s (Froud et al. 2000, 2001, 2006, cited in French et al. 2011).
Here it is notable that while historical accounts of financialization pursue the traditional
political–economic concerns with distributive justice in capitalism (Aglietta 2000; Boyer
2000; Dore 2000), micro-level analyses of financialization resonate with the way conven-
tional economics conceives of the function of the financial markets (Froud et al. 2006:
67). Indeed, in conventional economic theory, the widening of the scope of the financial
markets and the range of financial assets increases efficiency by expanding the states
of nature spanned by financial instruments. Theoretically, this enables markets to price
future economic outcomes more effectively, improves the ex ante allocation of resources
across future contingent economic conditions, and helps agents to assemble portfolios
that provide better returns and risk coverage (Palley 2007: 5). Reflecting these distinct
ontologies, methodologically, macro-level approaches and historical accounts of
financialization often problematize the consequences of the structural change in the
nature of capitalism in the second half of the twentieth century; while micro-level
approaches to financialization accommodate quantitative techniques of measuring the
effects of financialization and testing hypotheses empirically (Stockhammer 2004: 721).
Is there any common ground shared by the structural and contemporary schools of
financialization? On the one hand, aside from semantics, there is little that unites the
two approaches. While structural and historical accounts of financialization conceive
of it broadly as a shift that intensifies the gulf between the financial markets and the
rest of the economy and society, micro-level studies of the phenomenon point to the
exact opposite effects of the operation of the financial system, emphasizing the growing
embeddedness of daily life in the global financial system. On the other hand, both
schools of thought on financialization tend to view this process in epochal terms.
‘Financialization’ has been used to describe an economy-wide shift, while at the same
time it has accounted for processes associated with the conjunctional application of
specific financial values and technologies (Montgomerie 2006). Indeed, whatever content
scholars may be inserting into the significance of the rise of finance to the position of
power in contemporary capitalism, they tend to draw a line between the pre-
financialization era (most commonly identified as the decades of the 1950s and 1960s
– the so-called age of Fordism–Keynesianism) and the era of rapid financialization,
usually associated with the post-Bretton Woods economic and financial revolution (or
post-Fordism) (Jorda et al. 2011). Similarly, the scholarship on financialization, however
diverse, is based on a view that the contemporary dynamics of capitalism are evolving
at the nexus of several realms of power, yet are tilted increasingly towards the realm
of the financial – the financial system, and the rest of the economy (political, social,
cultural or security domains).
Understanding financial innovation

It is very difficult to find a common denominator to the three distinct academic traditions
of thought on finance outlined above, for several reasons. First, the mainstream economic
approaches to finance and financial development have themselves evolved over the
past few decades, to arrive at some conclusions that do contradict some of the assumptions
of the orthodoxy. For instance, rational expectations theory (Flood and Garber 1980)
has acknowledged that market participants can rationally participate in bubbles if they
have expectations of rising prices. The noise trading literature initiated by De Long
et al. (1990) argues that risk-neutral speculators who trade purely on noise can generate
market inefficiency if other traders are risk-averse. Hirshleifer (1971) argued that financial
markets can be socially wasteful if their activity is the result of divergent subjectively
held beliefs, making it more akin to betting at a racecourse than productive investment.
Crotty (1990) and Palley (2001) have criticized the logic of q-theory,4 arguing that it
erroneously conflates the behaviours and expectations of managers with those of
shareholders (Palley 2007: 5–6).
Second, not only have the various disciplinary traditions overlapped in providing
explanations for particular episodes of financial volatility and crises (Crotty 2009; Pagano
and Rossi 2009), but the academic origins of some of the current policy debates on
financial governance have become rather blurred (Borio 2011; Pelaez 2009; Samman
2011). The continuing crisis of 2007– only underscores the complexity of contemporary
financial thought and the confusion that relates to its practical applications. At the
same time, it is the events currently unfolding in the global financial markets and major
economies that do provide a way to try and capture the academic and policy
controversies involved. The issue centres on the phenomenon of financial innovation,
and the conceptual manner in which the three traditions outlined above approach it.
Although it is seemingly only one of the many functions of the financial institutions
and markets, financial innovation is an important socio-political process that drives the
evolution of contemporary capitalism. The emergence of new financial institutions and
of new ways of raising capital, innovations in the way existing credit channels are being
used, and even changes in the meaning of ‘money’ through time have been integral
to the rise of the global financial markets, or the process of financialization. Yet somewhat
paradoxically, financial innovation is under-theorized: there is no book offering a
survey of theories of financial innovation. At the same time, in academic and policy
debate, the concept of financial innovation can be deeply divisive, highlighting the
disciplinary boundaries of contemporary scholarship on finance.
In mainstream economics, financial innovation is a functional reality. Its purpose is
to facilitate individual financial agents’ search for a perfect financial market – namely,
a market that would operate on the basis of full information, where the price mechanism
reflects the true balance of costs and rewards, and where risks are optimized to near
zero by the magical hand of scientific finance and the operation of arbitrage. In this
vision, the roots of financial innovation lie in the competitive spirit of financial agents:
competing for new markets and clients, financial institutions need to be devising new
credit channels, as well as new usages and clients for existing financial products. Seen
in this framework, financial innovation is a progressive process, driven by the desire
to minimize costs and increase returns (by, for instance, avoiding costs associated with
regulations or communication). Indeed, derivative financial products were initially
devised for the purposes of insurance and protection against price fluctuations, while
offshore financial havens are said to be used for the purposes of tax efficiency and
optimization.
Financial innovation is also at the very core of the mechanism by which financial
agents price risk and hence build efficient price trends. By combining assets with
various risk profiles, they manage complex financial portfolios over time; by ‘slicing
and dicing’ risk, or devising securitized structures of new financial assets, financial
institutions optimize the allocation of risk across the economy. In its turn, the very
process of securitization (raising finance by converting an illiquid asset into a tradeable
financial security) is believed to complete the circle of economic exchange more broadly:
having an economic asset, such as a piece of real estate or a probability that a firm or
a state may default on its obligations, represented as a financial security, widens the
ownership of this asset, thereby diversifying the risks associated with it, and thus makes
the economic system more robust and resilient to stress and crises. Academically, this
set of processes is referred to as a theory of market completion: responding to a full
range of risk signals and pricing in the elements of risk on a scientific basis, financial
agents complete the market, progressively eliminating the ambiguities that may distort the
equilibrium in the long run. The notion of market completion therefore assumes that
a full range of possible future contingent states of the world can be encompassed in a
financial contract and actively managed by financial agents (Wigan 2009).
For much of the past few decades, therefore, mainstream finance theory has evolved
around a paradigm of growth-enhancing financial innovation. To heterodox scholars,
in contrast, the three decades of capital market liberalization, punctuated by severe
economic recessions and financial crises in the emerging markets, only suggest that the
globalization of finance, far from driving the global financial system towards efficiency,
amplifies the structural problems of the world economy (e.g. Bello et al. 2000; Bezemer
2001; Kregel 2001; Nesvetailova 2007; Soederberg 2005; Wolfson 2002). The rapid
expansion of the markets for financial derivatives has also been viewed very critically
by heterodox scholars (Bryan and Rafferty 2006; McKenzie 2011; Wigan 2009)
Instructively in this instance, both historical and contemporary approaches to
financialization stress that the central dynamic of the financialization process lies with
the advance of financial innovation, broadly conceived, including the opening up of
new markets for capital, the liberalization of the banking systems and the progress of
financial engineering; these were supported, in turn, by advances in the IT industry,
financial theory and, crucially, the political regimes in the Anglo-Saxon world. According
to Blackburn, the systemic power of financial engineering has been an organic component
of the rise of the financial industry, to the extent that financialization ‘can most simply
be defined as the growing and systemic power of finance and financial engineering’
(2006: 39). Underpinning most visions of financialization as an epochal shift in the
nature of capitalism is the assumption (implicit or explicit) that all products of human
activity, as well as risk (broadly conceived) or probability of change generally, are
priceable and hence tradeable assets. The key force that makes the pricing possible,
in turn, is the functioning of the financial markets and financial institutions which –
by undertaking various techniques of identifying, parcelling, marketing and relocating
risks – perform the mechanics of financialization. The growing literature on the
performativity of economics and finance analyzes the details and politics of this process
(Langley 2010; MacKenzie 2011).
It is important to note that while financial innovation sets the field and agenda for
much of the scholarship on financialization, most studies in this group tend to focus
on the derivative (indirect) effects of financial innovation: they explore its impacts on
society, the political structure, economic growth, culture and even security (Aitken
2011). Rarely do the studies of financialization engage with the inner workings of
processes of financial innovation inside the financial system, although the ongoing
financial crisis has spurred attempts to engage more closely with the social portraits
and typologies of financial innovators (Polillo 2011; Tett 2009) and the social composition
of its consumer classes (Lysandrou 2011; Montgomerie 2009). Notwithstanding these
notable exceptions, to date, the literature on financialization has offered a limited scope
for understanding the system dynamics of such a transformation that pertains to the
core of the capitalist system. In fact, the body of scholarship on financialization is rather
incoherent, so that conceptually, as Montgomerie argues, ‘financialization is . . . an
aspiration, rather than a coherent system defining contemporary capitalism’. This broad
framework, in turn, combines quantitative assessments of new patterns of accumulation
with qualitative accounts of finance as socio-cultural change (Montgomerie 2008: 234).
Thus in our discussion of financial innovation, the studies of financialization can be
considered as a group of interdisciplinary accounts of the way the financial system,
through reshaping socio-cultural realms, subsumes more and more layers of the daily
life of capitalism. Existing theories of financialization, in turn, can be understood as
attempts to conceptualize the evolution of financial innovation not within, but beyond
the very system of financial agents and markets. Indeed, while working from the
assumption of the growing power and presence of financial interests in capitalist
dynamics, most studies of financialization examine the social consequences, institutional
dynamics, cultural topography and the socio-political content of this process. At the
same time, the ongoing crisis challenges students of the political economy of finance
to engage with the phenomenon of financial innovation in a more systematic manner,
and it is this task that the remainder of this chapter aims to address.
It is heterodox political economy that offers a distinct and very specific perspective
on financial innovation, understood both as a process underpinning the new institutional
framework of the international banking industry, and also as an accelerated emergence
of new forms of credit instruments. As post-Keynesian and other scholars argue, market
arbitrage in the global financial system is not equilibrating prices, but rather is driving
the financial system into the shadows. As the ongoing financial crisis illustrates, financial
innovation, particularly in the form of securitization, far from contributing to complete
information about risk profiles and prices of new financial systems, has become a front
for borderline financial practices and outright fraud, the sole purpose of which was
self-enrichment of financial institutions and banks.
What is the best way to understand these controversies in the context of the
contemporary financial system? Here, again, one turns to the legacy of Hyman Minsky
and his vision of financial capitalism. Almost instantly, the global credit crunch was
named a Minskyan crisis, a crisis of Ponzi finance or a ‘Minsky moment’ for the world
financial system. But what do these labels mean for the students of financial innovation
and Minsky’s theory of finance? Two elements of Minsky’s framework have been
recurring in the analyses of the global financial meltdown of 2007–. First is his notion
of the paradox of stability (‘stability is always destabilizing’). Indeed, most emergent
theorizations of the credit crunch focus on the cyclical factors that have facilitated the
build-up of risky financial practices, chiefly based on the faith in a new economic era
free of booms and busts and expectations of continuing rises in real estate prices (e.g.
Brunnermeir 2009).
The other element of Minsky’s theory that has emerged in the analyses of the global
credit crunch, perhaps much more prominently than during any other financial malaise
of the past few decades, is the notion of Ponzi finance. The name of Carlo Ponzi, the
original architect of a pyramid scheme who operated in the 1920s in the USA and
who was immortalized by Minsky in his FIH, has a two-fold significance in the context
of the global credit crunch. First of all, and pertaining to the actual intention to deceive
in Ponzi’s own machinations, Ponzi finance describes the actual fraud that appears to
have been particularly widespread in the mortgage financing industry in the 2000s.
Aside from the fact that the financial boom of the 2000s allowed crooks like Bernie
Madoff or Allen Stanford to thrive, scholars note that the conditions of many subprime
mortgages – the way these financial products were pushed onto borrowers, as well as
the complex financial techniques used in securitization that allowed firms like Goldman
Sachs actually to bet against their own clients – suggest that the financial euphoria of
2000–7 was somehow particularly conducive to the spread of criminal and fraudulent
practices in finance that had gone unnoticed until after the crisis. In fact, some studies
suggest that the increased incidence of fraud in the financial system may be read as a
reliable indicator of an inflating asset bubble (Financial Crisis Inquiry Commission
2011).
Second and somewhat more disturbingly, the notion of Ponzi finance is now
increasingly used to describe not just the individual malpractices of financial innovation
used by agents and companies, but the very architecture of the contemporary financial
system. The excessive reliance on debt, the use of leverage in the largely unregulated
financial space, and the global expansion of trade in highly complex financial derivatives
such as over-the-counter (OTC) traded products suggest to many observers that at its
very core, global financial capitalism is none other than a gigantic Ponzi pyramid of
debt (Dorn 2009; Hartford 2011; McKenzie 2011).
But notwithstanding these metaphors, what specifically does the political economy
approach of Hyman Minsky, a framework developed in the 1970s and 1980s to analyze
the financial conditions of US capitalism, offer to students of the financial system of
the twenty-first century? I believe it is Minsky’s unique and systematic vision of financial
innovation in shaping the nature of economic cycles. As he argued (Minsky [1986]
2008: 172), ‘instability is determined by mechanisms within the system, not outside it;
our economy is not unstable because it is shocked by oil, wars, or monetary surprises,
but because of its nature.’ Thus, the forces that mainstream models of finance depict
as exogenous shocks destabilizing the system are explained by Minsky as inherent,
endogenous features of the evolution of modern capitalism (Fazzari 1999: 10). Most
crucially, Minsky’s vision of a financially advanced capitalism offers us a way to
understand the process of financial innovation and its consequences in capitalism,
assumed to be an open and evolving system. This approach helps us avoid the traps
of methodological individualism of the orthodoxy that unavoidably assumed that the
financial market (and indeed, any other type of market) represents a closed system of
causalities and relationships. The limitations and traps of individual-based theorizing
commonly recurring in mainstream theories were recently depicted succinctly by Marc
Lavoie (2009) and Vercelli (2009).
Table 5.1 Holism: some crisis-related macro paradoxes
Paradox of thrift (Keynes) Higher saving rates lead to reduced output

Paradox of costs (Kalecki) Higher real wages lead to higher profit rates
Paradox of public deficits (Kalecki) Government deficits raise private profits
Paradox of debt (Steindl) Efforts to de-leverage might lead to higher
leverage ratios
Paradox of tranquillity (Minsky) Stability is destabilizing
Paradox of liquidity (Nesvetailova) New ways to create liquidity end up transforming
liquid assets into illiquid ones
Paradox of risk (Wojnilower) The availability of individual risk cover leads to
more risk overall
Source: Lavoie (2011: 13).
The seven paradoxes of reasoning identified by Lavoie (see Table 5.1 opposite), while
instructive individually, also send an important message about the construction of
thought in modern finance theory. Conceiving of the financial market as a closed
system of calculable relations, and viewing financial innovation as a key force shaping
and measuring those relationships, modern finance theory is unable to comprehend
the continuing presence of financial fragility and destabilizing forces in financial
capitalism. Indeed, according to Lavoie, the analytical and methodological divide
between micro- and macro-level studies of finance has produced an intellectual dead
end. The financial innovations designed to reduce risk at the microeconomic level by
spreading it over a larger number of financial institutions – as is the case with
securitization, collateralized debt obligations, credit default swaps and the whole gamut
of other types of financial derivative – end up creating a larger amount of macroeconomic
or systemic risk. At the same time, the extensive use of mathematical models to quantify
risk, yielding the illusion of precise and objective assessments, encouraged banks and
other financial institutions to pursue more risky strategies and to use more leverage
(Lavoie 2009).
The closed-system mode of theorizing of the contemporary facets of financial
innovation leads us to ponder the role of financial orthodoxy in the political economy
of the contemporary financial system. According to Wigan, modern finance theory
‘attempts to reformulate the object of finance to bare essentials in terms of financialised
accumulation. The object of ownership becomes refined to fluctuations in isolated
aspects of an asset’s value in and of themselves’ (2009: 162). At the same time, however,
the resurgence of Keynesian and post-Keynesian thought in the current debates on
finance, as well as the partial rehabilitation of the name of Hyman Minsky, demonstrate
that the complexity of the modern political economy and the unprecedented power of
finance within it, have called students of finance to abandon the closed-system manner
of thinking about financial markets and engage much more closely with the political,
social and cultural facets of the contemporary financial system.
Conclusion
This survey of the distinct conceptual frameworks of finance developed by mainstream
economics, heterodox political economy and financialization studies has highlighted
the traps, limitations and the potential for synthesis offered by each of the three traditions.
The continuing financial crisis has revealed, yet again, some fundamental limitations
of the orthodoxy, being as much a failure of mainstream economic visions of finance
as it has been the failure of the financial markets (Hodgson 2009; Lawson 2009). It is
indeed remarkable, in this instance, that in one of his speeches (2009) about the lessons
of the credit crisis, Stephen Green, then CEO of HSBC, cited Susan Strange and her
Casino Capitalism (1986). Importantly, therefore, the global crisis has created both a
need and a niche for alternative theories of finance and financial regulation to engage
with the mainstream on an equal footing. But addressing this challenge and continuing
the conversation with contemporary academia and policy makers further require serious
effort and a level of competence. It is important, therefore, for today’s students of IPE
to develop skills and knowledge that will enable them to engage seriously and
systematically with the developments in modern finance theory, while continuing the
tradition of critical understanding of the politics of finance in the global age in which
IPE has excelled.
Notes
1 The continuing global financial crisis was triggered by the collapse of the subprime mortgage
market in the USA and began as an international liquidity crisis in August 2007. By autumn
2008, amplified by the bankruptcy of Lehman Brothers and several other banks, the crisis had
entered into its second phase – an international banking crisis, or the credit crunch. At the time
of writing (winter 2011), the crisis has transformed into a crisis of sovereign debt of the countries
of the eurozone. Reflecting on the evolving nature of the crisis, in this chapter, I will refer to
the financial meltdown as the ‘crisis of 2007–’.
2 Where Et refers to the mathematical expectation conditional on public information available at
time t.
3 It is impossible to list the names of all the scholars continuing, often critically, the tradition of
Keynes’s political economy. For a good sense of the available perspectives, students may refer
to the work of Victoria Chick, James Crotty, Paul Davidson, Sheila Dow, Gary Dymski, Marc
Lavoie, Malcolm Sawyer, Jan Toporowski, and the work of the Levy Economics Institute of Bard
College. A brief and helpful survey of the evolution of economy thought is offered by Ray
Canterbery (2011).
4 Also called general equilibrium theory or ‘q’ theory, it was proposed by the US Nobel Laureate
economist James Tobin. A theory of investment behaviour where ‘q’ represents the ratio of the
market value of a firm’s existing shares to the replacement cost of the firm’s physical assets, it
states that if q (representing equilibrium) is greater than one (q > 1), additional investment in the
firm would make sense because the profits generated would exceed the cost of the firm’s assets.
If q is less than one (q < 1), the firm would be better off selling its assets instead of trying to put
them to use. The ideal state is assumed to be where q is approximately equal to one, denoting
that the firm is in equilibrium.
6 Globalization
A project in crisis
Philip McMichael
Introduction
The globalization project was simultaneously a project of crisis management, combined
with a neo-liberal blueprint for continuing development through private means. Like
the development project before it, the globalization project was an attempt to construct
a stable hegemonic ordering of the world, via US-led market rule. Whereas the vision
of the mid-twentieth century development project sought to appropriate anti-colonial
movements and socialism, the globalization project has undermined that former project’s
policies of welfarism and developmentalism, portraying such public intervention as
undermining market efficiencies, and therefore economic growth. Market rule was
instituted via the imposition of conditions of structural adjustment and the elaboration
of measures to ‘open’ economies for transnational enterprise and resource access, and
to instrumentalize states as crisis managers. In this sense, states were not eliminated;
rather, they faced pressures to restructure institutionally to secure global credit, and
circuits of money and commodities, legitimized by ‘consumer citizens’. As the declining
hegemon, it was in the interest of the United States to secure these circuits, the most
important of which was financial flows into the US to sustain the power of its financiers
as well as a consumer credit boom (Arrighi 1994; Nesvetailova and Palan 2010).
The globalization project has been governed by the fetishism of the money commodity.
The post-Bretton Woods monetary relations of integration, securitization and
transnational banking privileged financial management in national and international
policy circles in order to preserve the value of money and the power of its managers.
Preserving money means sacrificing social goals, and we have now seen how the burden
of structural adjustment has travelled northwards from the global South in the new
century. The generalization of austerity, triggered by the collapse of a US housing
boom stimulated by financial deregulation in the late 1990s, means that Northern states
such as the US, Britain, Greece, Italy, and Spain have adopted similar policies of deep
cuts in public spending as the state (and the majority of its citizens) serve the market.
This project of neo-liberal globalization is now approaching what Arrighi (1994)
would call a ‘terminal crisis’. The crisis of confidence in the globalization project
permeates the new century, beginning with the 1997 Asian financial crisis, now infecting
the North. Malaysia’s defiance of liberalization policy, protecting it from the crisis,
symbolized the general retreat from the International Monetary Fund (IMF), heightening
its ‘arrears crisis’ (Woods 2006: 165). Between 2005 and 2008, Latin American states
dramatically reduced their dependence on IMF funding, with outstanding loans falling
from 80 per cent to 1 per cent of the IMF’s loan portfolio.1 These actions represent
opposition in the global South to the universalist claims and dictates of neo-liberal
76 Philip McMichael
globalization, and – as rejections of the destabilizing and undemocratic consequences
of neo-liberal market rule – they have anticipated the impact of neo-liberalism in the
North. The migration of financial crisis to the global North by 2008 has turned a
smoldering legitimacy crisis (in the South) into a full-fledged crisis.
Interpreting the crisis

While the globalization project still shapes development initiatives and policies, it appears
that its claim and ability to represent and compel the most rational development path
is eroding. Having fashioned a development agenda via structural adjustment policies,
the arrival of such policies in the global North in the twenty-first century raises a key
question: is this a signal crisis of the globalization project and the beginning of a
transition towards a new global political–economic project?
To answer these questions, it is important to situate the economic crisis facing the
global North. Northern debt crisis recycles the 1980s debt regime, by which Southern
governments were forced by international financial institutions to privatize their public
assets in order to stabilize the financial sector. This was the end of the so-called
‘development state’, as debt disciplines imposed a neo-liberal model of privatization
on the global South. The anti-state syndrome spread to the North, where during the
1990s, corporate tax reduction in the name of promoting productive investment eroded
public finance without growth – leaving (all but Scandinavian) states living beyond
their means (Stancil 2010). When the debt crisis hit the global North in the first decade
of the twenty-first century, privatization and new financial disciplines reduced Northern
public services. Spending cuts exacerbated already weakened economies following two
decades of offshoring of industry. The decline in stable employment has reduced tax
bases and means of livelihood for significant numbers of Northerners.
By 2010, global unemployment was running at around 200 million, in addition to
1.4 billion working poor. Roughly half of the world’s workforce is casual labour, which
also means that around 90 per cent of the global workforce is poor, vulnerable or
unemployed. The European Union (EU) designates about 50 million as ‘vulnerable’
workers, and 72 million as working poor. In 2009, the approximately 9 per cent
unemployment rate in the so-called ‘Developed Economies and the EU’ was higher
than in any other global region, including Central and South-Eastern Europe, and
Latin America and the Caribbean (George 2010: 100–1).
Three related processes are at work: first, policy-driven hollowing-out of Northern
economies; second, financialization and the slow-down of productive activity; and
third, the relocation of goods and services production to parts of the global South. A
significant social consequence is a distinctive bifurcation between a global consumer
class and a large casual and unemployed labour force across both world regions. The
security of the global middle class will increasingly depend on containment of socially
deprived and excluded populations and access to their labour and habitats as resources.
In addition to this, there is likely to be continuing global instability as the wealthy
withdraw allegiance to their nation-state and social rebellions simmer with growing
shortages (of jobs, food and public resources). In this sense, the globalization project
is in permanent legitimacy crisis, and is now more about containment and security
rather than prosperity rhetoric.
While a global middle class has emerged, centred in the BRICS (Brazil, Russia,
India, China, and South Africa), there is nevertheless a rising trend in global inequality
Globalization: a project in crisis 77
(outside of China). The geography of this inequality has shifted. Whereas 20 years ago,
93 per cent of poor people lived in low-income countries, 75 percent of the world’s
poorest now live in middle-income countries, such as the BRICS, Nigeria, Pakistan
and Indonesia (Hale 2011; Institute of Development Studies 2010). Sundaram claims
that over ‘80% of the world’s population lives in countries where income differentials
are widening’ (2010: 38). This kind of shift expresses a deepening of global circuits of
affluence that reinforce inequality of access and/or actively exclude populations within
nations from a horizontal (transnational) dynamic integrating a global consumer class
(Halperin 2005).
Under neo-liberal conditions, such middle classes, given their horizontal affiliation,
may be less inclined to redistribute new-found wealth to their lagging fellow citizens,
socially excluded via neo-liberal norms. Over the past 25 years of privatization, public
assistance has dwindled, as social policies have been divorced from development strategy,
with the poor excluded materially and discursively from the global marketplace. For
Cameron and Palan (2004), the concept of ‘social exclusion’ is a discursive strategy of
pathologizing the poor as embodying deficiencies that assign personal (rather than
social) responsibility for their condition. This is where micro-credit enters, seeking to
fill the void left by shrinking states (Roy 2010).
Economic restructuring compounds austerity policies. The information revolution
has enabled the service sector (e.g. transport, telecommunications and computer services,
construction, financial services, wholesale and retail distribution, hotel and catering,
insurance, real estate, health and education, professional, marketing and other business
support) to overtake manufacturing and agriculture, contributing two-thirds of
world gross domestic product (GDP) by 2003 (Hoogvelt 2006: 163). Information-based
services have been transformed by digitization, fragmenting and relocating office
functions to computers or offshore call centres, fashioning a new form of global
economy that, for Castells, develops ‘the capacity to work as a unit in real time on a
planetary scale’ (quoted in Hoogvelt 2006: 163). As Hoogvelt points out, the existence
and dynamic of this kind of economic networking in real time allows instantaneous
adjustment to competitive relations, such that this twenty-first century ‘global economy
is highly dynamic, highly exclusionary, and highly unstable in its boundaries’. In
consequence:
[G]lobalisation has rearranged the architecture of world order. Economic, social

and power relations have been recast to resemble not a pyramid of rich nations (at
the top) and poor nations (at the bottom) but instead a three-tier structure of circles.
(Hoogvelt 2006: 163)
For Hoogvelt, these circles traverse national and regional boundaries, including all
elites in the core. For rich countries, the circle proportions are 40–30–30, while for
poor countries, they are 20–30–50 (in Sub-Saharan Africa, the relative proportions are
roughly10–20–70). She notes:
We may count in the core some 20% of the world population who are deemed
‘bankable’ and therefore able to borrow funds. They are encircled by a fluid, larger
social layer of between 20% and 30% of the world population (workers and their
families) who labour in insecure forms of employment . . . The third, and largest,
circle comprises those who are already effectively excluded from the global system.
78 Philip McMichael
This does not mean that they are not affected by the global system; on the contrary,
they carry more than their fair share of its burdens, of environmental degradation
and resource depletion, of war and conflict, of forcible dispossession. But what it
means is that they are expendable.
(Hoogvelt 2006: 164)
Mike Davis represents this outcome in the following way: with ‘high-tech border
enforcement blocking large-scale migration to the rich countries, only the slum remains
as a fully-franchised solution to the problem of warehousing this century’s surplus
humanity’ (2006: 200–1).
Legitimacy crisis
By the end of the twentieth (‘development’) century, it was clear that global development
was not working. In 2000, World Bank president James Wolfensohn said, ‘We have
yet to solve old problems – above all that of the yawning gulf between the haves and
the have-nots of the world.’ The United Nations (UN) responded to this legitimacy
crisis in 2000 with the Millennium Development Goals (MDGs), making a commitment
to halving world hunger by 2015, in addition to halting the spread of HIV/AIDS,
addressing gender inequality and providing universal primary education. In 2010, the
Millennium Development Goals Report acknowledged that despite gains in reducing
malnutrition in the 1990s, since 2000 such progress had stalled. The 817 million
undernourished in 1990–2 were predicted to exceed 1 billion in 2010, following the
food and financial crises of 2008 (UNDESA 2010: 11).
Despite a general reduction in the proportion of the world’s population living in
absolute poverty (the ‘China effect’),2 there has been a widely observed expansion of
global inequalities between and within countries: ‘the world’s rich benefited
disproportionately from global growth over the 1990s and the per capita consumption
of the poor increased at only half the average global rate’ (Payne and Phillips 2010:
161). Here, the legitimacy crisis deepens because of the refusal, or inability, of the
development agencies (as in the MDGs) to address global inequality, to refocus on how
neo-liberal development aids the rich more than the poor, or at their expense. Thus
‘the object of concern is not global inequality but global poverty, the instrument of
analysis is economic data processing, and the bottom-line remedy is freeing up market
forces, now with a human face’ (Pieterse 2002: 1033). This accounts for the fixation
on the so-called ‘bottom billion’ – reproducing a linear rather than a relational conception
of development’s co-ordinates of poverty and wealth. The current focus is on the global
poor rather than poor nations as the development target. This is how micro-credit
gained currency, targeting the poor with the instruments of the rich.
Micro-finance performs three tasks at once: providing credit to the poor as an
entrepreneurial ‘leg up’, deepening market relations, and enlarging financial opportunity
in the form of legitimacy repair. Originating in non-profit organizations such as the
Grameen Bank, micro-finance has, in Ananya Roy’s terms, evolved as ‘poverty capital’,
with commercial banks, investment vehicles and money markets now embracing it
(2010). In the words of Israel’s central banker, Stanley Fischer (formerly IMF deputy
managing director), micro-finance provides ‘bankers with a profitable business
opportunity’ and ‘poor people a stake in the economic future of their countries’ (quoted
in Roy 2010: 31). These poor are the so-called ‘bottom billion’ – the 650 million-odd
clients at over 3,000 institutions spreading across the world, where the average loan is
US$250, and interest rates often exceed 20 per cent (Bunting 2010b).
Micro-finance expresses the neo-liberal philosophy of devolving responsibility for
development to the individual, as self-maximizer (see Cameron and Palan 2004). In
echoing the ‘bad state/good market’ axiom, it reproduces the ideology of the
globalization project. Using the non-governmental organization (NGO) community for
dispensing and monitoring credit and its repayment, micro-finance simultaneously
empowers and disciplines its recipients – an ideal form of development as rule (financial
opportunity by financial dependency). Where it valorizes the poor as consumers of
credit, it also realizes founder Muhammad Yunus’s questionable claim (2011) that
‘credit is a fundamental human right’. Classifying informal practices as ‘poverty’ (for
reduction via ‘empowerment debt’) disempowers informal cultural networks, as Elyachar
has shown for Cairo (2005), enabling the development establishment to renew its
legitimacy through performing development on a ‘human scale’.
However, renewal has been short-lived, as the Arab spring, which began with revolt
by working-class youth, has demonstrated. Over half of the 350 million Arabs are
under 30, with dim job prospects, and youth unemployment as high as 80 per cent in
some areas. Such conditions nurtured a simmering crisis of the globalization project
across the region, coming to a head in the Arab spring of the 2010s (Abderrahim 2011;
Guardian reporters 2011).
Bread protests recurred in Egypt during the era of the globalization project, as the
government encouraged export crops instead of wheat, and diverted subsidies towards
feed crops and the production of animal protein to provision wealthy consumers –
pushing food prices up by 50 per cent by the end of the 2000s (Mitchell 1991). In the
years preceding the Arab spring, more than half of bank aid targeted financial and
private sector development, with education, health and other social services averaging
only 6.5 per cent. Egyptian scholar Noha El Shoky (2011: n.p.) remarked: ‘IMF and
Bank loans promoting neoliberalism allowed for the concentration of both political and
economic power in the hands of a few, who systematically marginalized, oppressed
and tortured Egyptians until they revolted.’
Social inclusion via employment was the central demand of the Arab citizenry. But
unemployment is symptomatic of a deeper failing – the disregard of Arab governments
for the social contract, and the complicity of the Western powers, particularly the
United States, in the long-term security of these regimes, given their proximity to oil
and Israel. Persistent authoritarianism within an imperial shell resulted in predatory
states, with continuing emergency laws and persistent human rights violations to control
deeply unequal societies. The unfolding of the Arab spring, then, as an expression of
the crisis of neo-liberal austerity, is overdetermined by its location in the vortex of
geopolitical security of the global economy.
Geopolitical transitions
The institutional crisis of the globalization project was imminent through the 1990s.
Austerity stalked the global South, the revenues of the international financial institutions
declined, the Asian financial crisis destabilized the world economy and discontent grew
in the South with the asymmetry of the World Trade Organization (WTO) regime.
As fall-out from the Asian financial crisis of 1997, the Group of 20 (G-20) formed,
combining the original members of the G-8 with significant states from the global
80 Philip McMichael
South, including Argentina, Brazil, China, India, Indonesia, Mexico, Saudi Arabia,
South Africa, South Korea, and Turkey (accounting for about 90 per cent of the global
economy). The G-20 as a bloc assumed significance as its key southern states, Brazil,
India and China, led an effective opposition to northern attempts to retain their unequal
economic power via WTO protocols in the Doha Development Round, which first
met in 2001, then moved on to Cancun in 2003 where it was stillborn. The straw that
broke the camel’s back was the undemocratic procedure of the North, its aggressive
attempts to dominate southern markets, and the hypocrisy of continuing farm subsidies
in the North while the WTO outlawed them in the South.
The G-20’s appearance signalled a turning point in the balance of global forces.
Not only did the politics of the WTO precipitate a solidarity group from the global
South, but that solidarity group imprinted their economic rise and recognition in the
G-20. Their leading edge, the so-called BRIC countries (Brazil, Russia, India, China)
contribute more than 50 per cent to world economic growth, and account for about
15 per cent of the world’s economy (Rozhnov 2010). In 2010, China surpassed Japan
as the world’s second largest economic power (although the US produces two-and-a-
half times more).
These new realities of power are emergent and increasingly polycentric. The rising
‘middle-income countries’ (MICs) reflect a new economic dynamism. The centre of
world economic gravity may be shifting to the MICs, but their interests do not necessarily
converge. For example, rising commodity prices benefit Russia (oil, wheat, minerals)
and Brazil (soy, oil, sugar, orange juice), but not India and China. Nevertheless, the
first BRIC summit, held in Russia in 2009, raised the question of replacing the US
dollar as the world’s principal trading currency, as well as reforming the international
financial institutions to reflect the new balance of economic forces. In April 2011, South
Africa joined the club, rounding out the acronym appropriately – BRICS – and bringing
to the table its influence in Africa and the race to corner mineral and land resources.
The new bloc of rising MICs expresses a geopolitical shift of growing significance.
While US corporations still dominate, the Financial Times records a decline from 57
per cent of its top 500 corporations in the late 1990s to 36 per cent in 2008, with
Chinese corporations in second place (Therborn 2011: 51). Further, the two leading
finance and business services centres ‘are still on the two shores of the North Atlantic,
but in the second tier, six of the seven nodes are on the western side of the Pacific’
(Therborn 2011: 137). Therborn remarks: ‘looking backwards from 2010, globalisation
does not look so much an extension of US capitalism as a delimitation of it, by the
rise of China and India’ (2011: 52–63). And Goldman Sachs’ 2003 Dreaming with BRICs:
The Path to 2050 predicted that by 2050 China would be the world’s largest economy,
followed by the United States and then India. It also predicted that China would
overtake Japan as the world’s second largest economy by 2015, which occurred in
2011 (cited in Jha 2010: 11).
In China, despite – and perhaps because of – its authoritarian socialist government,
an economic revolution with global economic and ecological implications is underway.
Trade deficit data indicate that the majority of investment is regional, coming from
Japan and the ‘East Asian tigers’ (or newly industrializing countries [NICs]), as they
have disaggregated manufacturing and shifted labour-intensive production to China
(Jha 2010: 33). China has been the final assembly station in TNC commodity chains,
which account for 60 per cent of products manufactured in China (Bobin 2006: 17).
In this respect, China’s transformation has been a part of the globalization project, as
its economic opening coincided with late-1980s deregulation of capital flows, targeting
export-processing zones consolidated by China’s entry into the WTO in 2000.
While China is responsible for 70 per cent of the world’s toys, 60 per cent of its
bicycles, 50 per cent of its shoes and 33 per cent of its luggage, it also manufactures
over 55 per cent of the world’s laptop computers, 50 per cent of its microwave ovens,
33 per cent of its television sets, 25 per cent of its dishwashers, and 20 per cent of its
refrigerators and its microprocessors (Jha 2010: 39). China has upgraded from low-
value to high-value products, led by electronics and information technology goods;
however, it still assembles components designed and made elsewhere, or uses copied
designs (Bulard 2006: 6). But this model is in transition, as China faces a labour shortage,
and wages are rising. The reasons are complex, and include escalating labour disputes
(170,000 alone in the first half of 2009) enabled by a new Labor Contract Law (2008),
new lower-cost production sites in Vietnam, Bangladesh, and India, Chinese government
investment in its hinterland as a policy shift in redistributing wealth regionally, and
the legacy of China’s historic ‘one child’ policy (Lee 2009). Such competition has
encouraged China to outsource low-value manufacturing to Africa, via industrial parks
jointly funded by the World Bank – over 100 of Ghana’s 340 Chinese investment
projects are in manufacturing, reflecting a Chinese desire to improve its image beyond
that of resource grabbing (Branigan 2009: 17).
Meanwhile, India is shifting from producing global services to manufacturing domestic
products – an interesting twist (or reversal) of the globalization project. Indian education
is unable to meet the demand for skilled software operatives, inflating wages by 30–40
per cent a year and eroding Indian hi-tech cost advantages. Accordingly, policy makers
have shifted gear, focusing more on the domestic market of middle-class consumers,
requiring expanding employment of lower-skilled labour. Coinciding with this, ‘global
manufacturers are already looking ahead to a serious demographic squeeze facing
China . . . India will have 116 million workers [aged 20 to 24 by 2020] to China’s 94
million.’ While Indian infrastructure is still undeveloped (China invests seven times as
much on roads, ports, electricity, and so on), the central government is pursuing an
aggressive industrial park programme in the ‘global/satellite cities’ of Delhi, Mumbai,
Kolkata, Hyderabad and Chennai (Bradsher 2006).
Transnational corporations like Renault-Nissan (joining forces with Mahindra &
Mahindra of India), Ford, GM, Motorola, Hyundai and Posco of South Korea, and
Mittal Steel of the Netherlands are transforming India from a service to a manufacturing
centre: manufactured exports to the United States are rising faster in percentage terms
than those from China, and over two-thirds of foreign investment in the mid-2000s
entered manufacturing (Bradsher 2006). The Wall Street Journal reported in July 2009
that Chennai’s production of 1.5 million cars would surpass auto production by any
US state, and claimed that: ‘The kind of manufacturing being done in Chennai is what
India needs to bridge the gap between its agricultural workforce, which makes up 60%
of its population, and high-end services industries, such as outsourcing, that employ
relatively few.’ Hyundai’s US$2 billion investment in Chennai was attracted by the
cheap factory-floor labour as well as the abundance of Indian engineers (to manage
robotic technology) supplied by the state’s technical institutes as they shift their training
from computer programmers and engineers to auto production skills – a decisive shift
away from its recent IT/software profile (Bellman 2010: B1).
As a regional duo, China and India have constituted a counter-trend of sorts to the
globalization project. While they position their labour forces in world markets, they
82 Philip McMichael
have not fully embraced neo-liberal principles. They retain capital and investment
controls. China’s currency is not freely convertible – the government still controls at
least half of its industrial assets, and invests heavily in infrastructure, setting the pace
for India (Saul 2005: 205). The Chinese government responded to the 2008 economic
meltdown by pumping over 4 trillion yuan (US$586 billion) into infrastructural and
industrial projects to manage the crisis (Jha 2010: 357).
In the mid-2000s, the newly elected Indian Congress Party government refocused
on an inclusive nationalism, rendered through a populist lens usually targeting small
farmers displaced by highways, factories, mining, logging and agro-industrial estates.
Unlike China, Indian democracy promotes such appeals, concretized, for example, in
a national experiment to facilitate channelling of public largesse to the poor via ‘social
audits’. Much of that money funds a Congress Party programme to provide rural
people with 100 days of work at minimum wages on local village infrastructure projects
(Polgreen 2009: A6, A9).
The nationalist turn in China and India is a social and ecological imperative. Both
countries have huge agrarian populations and recurring rural unrest. In 2010, the
Indian Supreme Court expressed concern about development (via land acquisition)
and its politically destabilizing effects (given the longstanding Naxalite Maoist insurgency
centred in mineral-rich forests in 200 of India’s 588 districts). The Bench observed:
‘the whole issue of development appears to be so simple, logical and commonsensical.
And yet, to millions of Indians, development is a dreadful and hateful word that is
aimed at denying them even the source of their sustenance’ (Venkatesan 2007). In
China, land seizures by the government, in the name of development, generate a rising
tide of rural resistance. This is exacerbated by fiscal decentralization, which incentivizes
local government collusion with developers against the lawful rights of villagers (Lee
2008: 15). In 2007, the government sought to head off rural unrest by repealing
agricultural taxation and local fees, providing minimal rural health insurance, and
increasing compensation for loss of land (Jha 2010: 54).
In the face of these fundamental questions of stabilizing socio-economic transformation
on such a large scale, Chinese and Indian forms of development echo recent Latin
American initiatives to bring markets under social control. Given a stagnant global
economy and mounting socio-ecological crisis, consolidation of forms of the development
state is likely. In some quarters, this is referred to as a growing ‘Beijing Consensus’
(Arrighi 2007; Huang 2011).
Northern debt crisis

The severe financial downturn (near meltdown) in 2008 was a signal crisis of the era
of financialization.3 During the 2000s, the profits of the United States’ financial sector
routinely surpassed manufacturing profits by two or three times, and the British financial
sector’s annual profit rates reached a new average of 20 per cent of turnover (George
2010: 34). Contributing to this shift was financial deregulation in the late 1990s, by
which commercial banks were allowed to develop financial instruments. Economic
power shifted to financiers, justified in turn by neo-liberal claims for the greater allocative
efficiency of the unrestrained market.
A prominent derivative financial instrument created was a security anchored in
mortgage debt, then packaged and repackaged as the debt was sold and resold
by financiers recycling risk. Mortgage debt ballooned, enabled by loosening credit –
in other words, over-consumption was untethered from its material underpinnings.
Supply soon outstripped demand, housing prices fell, and subprime mortgages led to
rising mortgage rates and a foreclosure crisis in the US. The consequent drop in
mortgage-backed securities exposed financial institutions to huge debt/equity ratios
and a general market crisis, cascading across the global North. Government oversight
of the financial sector was absent, and only returned to bail out (some of) the deeply
troubled banks to avoid complete economic collapse – with the consequence of rising
sovereign debt and austerity measures. Taxpayer anger has taken the form of rolling
strikes and prolonged demonstrations against cutbacks in social-democratic Europe,
while anger has been directed at the state itself in the United States, where private
initiative is the political cultural norm.
The Northern debt crisis crystallizes several trends, both short- and long-term. The
globalization project involved a long-term counter-mobilization by capital against the
restraints of the welfare state (complementing corporate tax breaks). As northern
manufacturing was outsourced to lower-wage regions of the world, organized labour’s
real wages fell behind rising labour productivity, redistributing wealth upwards. The
G-7 countries, for example, experienced a 6 per cent drop in the wage share of national
income between 1982 and 2005 – parallel to global trends (Mitchell 2011: 12).
Offshoring of jobs reduced the tax base in the North at the same time as cheaper
imports, matched with easy credit, seduced consumers into rising debt levels. Neo-
liberal development theory maintains that flexible labour markets (via dis-organization
of labour) are more attractive to investors in a competitive global economy. But the
more flexible labour markets have been the site of the greatest unemployment, exposing
the mismatch between economic orthodoxy and the financial realities. Unemployment
has been highest in countries like the United States and Spain, with institutionalized
flexible labour markets. By contrast, in ‘Germany and Norway, with strong trade
unions and long traditions of collective bargaining, the unemployment rate barely
budged’ (Elliot 2010: 18).
While the IMF initially recommended government deficits to cure unemployment
in 2010, policies instituted since (and embraced) under austerity plans in Europe,
and in the United States, have favoured the market. That is, policy responses have
uniformly focused on reducing government spending in the name of debt reduction.
The argument for public austerity is market-based, with neo-liberalism claiming that
retreat of the state will bring in the private sector to fill the gap, which has not
happened significantly – a consequence of financialization. As a result, a growing
proportion of the working population, ‘whose jobs are insecure, who have limited
access to secure housing, and who juggle jobs and child-rearing in a frantic effort to
keep up’, represent, in Guy Standing’s terms, a new ‘precariat’. He estimates that
40 per cent of the UK population now belongs to the precariat, a more significant
designation than the ‘middle class’, and increasingly evident in a politics of frustration,
expressed in the Tea Party movement in the US, and in rising ethnic tensions elsewhere
(cited in Bunting 2010a: 21).
Unlike the profile of the Third World debt crisis of the 1980s, the Northern debt
crisis morphed from unsustainable private debt, encouraged by deregulation, into ‘an
alleged sovereign debt crisis’ (Mitchell 2011: 11). This is represented as a crisis of the
state, rather than one of unregulated capitalism. In Europe, the so-called sovereign
debt crisis is exacerbated by membership of the European Union (EU). States are
required to use the euro, a currency they do not issue, which forces them to borrow
84 Philip McMichael
to cover their deficits. The financial crisis exposed the vulnerability of the weaker states
(Portugal, Ireland, Greece and Spain), subjecting them to austere loan conditions
imposed by the European Central Bank (ECB) and the IMF to preserve the union and
the value of the euro, and the viability of the eurozone.
Austerity policies have been widely viewed as brought on by excessive lending by
the eurozone banks. Huge citizen protests in Greece in May and June 2011, turning
the main square of Athens into a semi-permanent encampment, produced comparisons
with the Arab spring. This time, political regimes were not the target so much as the
politics of the debt regime itself, and its privileging of the banks:
Aided by the rating agencies, the announcements of the insolvency or financial

fragility of the Eurozone’s deficit members – Greece, Portugal, Ireland, Spain and
Italy – enabled [the big European banks] to amass enormous profits based on
(highly inflated) debt-bond interest rates. . .
(López and Rodríguez 2011: 24)
The politics of the debt regime invokes the spectre of sovereign debt – which represents
a final attempt by neo-liberal or corporate interests to dismantle completely the welfare
state in its various forms. In the United States, broad recognition of the recklessness
of the financial institutions in exposing the nation to economic collapse did not result
in convictions, but rather in bailouts and subsequent bipartisan agreement to engage
in massive deficit cutting, affecting social services of all kinds. Bailout of the financial
sector is a prime source of sovereign debt. An additional interpretation is that this is
now a permanent state of crisis, and is evidence that capitalism thrives on deregula-
tion and risk, destined to be borne by citizens. Here liberal democracy is the arena
for struggle over regulatory powers and austerity choices, but corporate and financial
interests remain insulated from ultimate political sanction (by constitutional law, lobbying,
or simply system maintenance pressures on politicians).
Finally, the depth, and terms, of the financial crisis suggest a double edge. The
legitimacy claims of the globalization project for universal prosperity are clearly
contradicted by the universal reach of austerity politics. In question now is whether
this version of globalization is sustainable. Not only does austerity bring social unrest,
as we have seen, but also rising food prices, energy shortages and climate change all
conspire to compound the crisis of global development.
Food crisis
Food riots cascading across the world in 2007–8 (from Italy through Indonesia to
Mexico and beyond) bore witness to rising basic food prices. As prices rose again
even further during 2010–11, riots reappeared in Mozambique, India, Serbia, Pakistan
and the Middle East and North African (MENA) states. Food riots represent a
protest against neo-liberal policies, insofar as these policies dismantle public capacity
(specifically food reserves), and deepen food dependency across the global South through
liberalization of trade in foodstuffs.
Rising prices signal the intensification of energy and food demand under conditions
of peak oil by a class of 1 billion new consumers in 20 MICs ‘with an aggregate
spending capacity, in purchasing power parity terms, to match that of the U.S.’
(Myers and Kent 2003). The symbols of their affluence are car ownership and meat
consumption. These commodities combine, via rising demand for biofuels and feed
crops (corn and soy), to exacerbate food price inflation – their mutual competition for
land has the perverse effect of rendering each crop more lucrative, displacing land
used for food crops. Financial speculation compounds the problem. The financial crisis
contributed to speculation in commodity futures, encouraging investors to shift their
funds into agricultural commodities and oil, driving up the price of food and farm
inputs (McMichael 2009; Shattuck 2008).
The age of cheap food is widely regarded as over, with ‘agflation’ bringing the world
to a ‘post-food-surplus era’ (Vidal 2007). Further, the Intergovernmental Panel on
Climate Change (IPCC) predicts that climate changes will increase hunger by between
40 and 170 million people (Evans 2009: 96). The food crisis intensifies pressures on
social reproduction to such an extent that urban rebellions threaten public order (as
we have seen with the Arab spring).
Central to the corporate food regime is a relationship whereby the South exports
high-value foods at the expense of its own local food supplies, requiring imports of
cheap staple foods, which destabilize local food producers of the South, and reduce
their ability to produce more when prices rise (McMichael 2009; Patnaik 2008).
Structural adjustment removed support for smallholders (credit, subsidies, government-
administered food marketing systems) in the name of market efficiency, and privatized
or sold grain reserves traditionally maintained for emergencies. Inequalities of food
access deepen the more that agricultural output is treated as a commodity either in
the form of luxury agro-exports, or livestock feed (70 per cent of agricultural land) for
relatively affluent consumers of meat, or fuel, or simply an attractive object of financial
speculation.
Ecological crisis
According to a 2008 assessment of the environmental impact of economic globalization
since 1961, the global North has generated 42 per cent of global environmental
degradation while paying only 3 per cent of the resulting costs (Davis 2010: 39). The
asymmetry is unsurprising, but has much to do with the paralysis of climate-change
negotiations. In addition, it draws attention to the undermining of natural ecosystems
across the world. Conventional views attribute this to population growth and colonization
of the earth, with rapidly diminishing wild spaces (wetlands, forests, grasslands, etc) to
sustain biodiversity. Conservation is the normalized response. But the problem is
deeper than this. In a critical evaluation of conservation, Shahid Naeem observes:
The more we relegate wild species to parks, zoos, gardens and seed banks, and
the more we place domestic species [e.g. cattle, commercial plants] in their stead,
the more homogenized the world becomes . . . As the average number of species
found in each square of Earth’s surface declines, so too will its biomass, its
biogeochemistry and its contribution to a stable, life-supporting biosphere . . . almost
all aspects of human well-being and prosperity trace back to biodiversity for their
foundation.
(Naeem 2009: 64–7)
Eco-system depletion of course includes climatic stress resulting from greenhouse gas
(GHG) emissions. A Guardian editorial on 31 August 2010 offered a dismal outlook:
86 Philip McMichael
If all nations stopped burning fossil fuels immediately, the planet’s oceans would
still go on warming, sea levels would continue to rise, windstorms and floods would
kill tens of thousands in the tropics. To have prevented the very modest levels of
warming the world has seen so far, governments should have taken decisive action
30 years ago. But in 1980 nobody appreciated how swiftly climate might change.
(Guardian editorial 2010: n.p.)
The Economist has called the possibility of irreversible global climate change ‘a potential
time bomb capable of wreaking global havoc’ (Roberts and Parks 2007: 9). A key
obstacle to reversing the trend towards irreversibility is the competitive relations of the
state system, stemming from uneven development. For example, while University College
London researchers and the British Meteorological Office have reported that ‘the
Amazonian forest is currently near its critical resiliency threshold’ (Monbiot 2006: 9),
Brazil’s president Lula da Silva claimed the right to exploit the forest for Brazilian
development, reminding the global North of its own path of development: ‘The wealthy
countries are very smart, approving protocols, holding big speeches on the need to
avoid deforestation, but they already deforested everything’ (quoted in Yardley 2007:
A9). Such statements combine sovereignty with a strategy of leverage, Brazil having
received a global fund to contain rainforest destruction, which remains ineffectual in
the face of pressure from Amazonian ranchers and loggers. Meanwhile, the Chinese
Foreign Ministry considers that wealthier countries should take the lead in reducing
greenhouse gas emissions. Following President George H. W. Bush’s declaration in Rio
(1992) that the American lifestyle was not negotiable, the Chinese have refused mandatory
emissions limits in order to preserve their economic growth (Yardley 2007: A9).
China and the US together produce 30 per cent of global output and 40 per cent
of GHG from fossil fuels. While China is now the largest emitter of annual flows of
GHG, its per capita emissions are considerably less than those of the US, the world’s
largest emitter of cumulative stocks of GHG. Thus China, distinguishing between luxury
and sustenance emissions, points to Article 3.1 of the United Nations Framework
Convention on Climate Change (UNFCCC) charter, which states: ‘The developed
country Parties should take the lead in combating climate change and the adverse
effects thereof.’ China insists that the US adopt a national emissions reduction plan,
such as cap and trade. Additionally, the Chinese point out that 25 per cent of their
emissions are from consumer products for the West, arguing for quantification of
emissions based on consumption, rather than production, data (Green-Weiskel 2011).
Measurement disputes are proxies for avoidance of responsibility. But the original
responsibility lies with a market ontology that consistently externalizes ecological
relations, as if they were not integral to capital accumulation. This was acknowledged
in Nicholas Stern’s pronouncement in the Stern Review (2006: 3 [exec. summary])
that climate change was ‘the greatest market failure the world has ever seen’.
Conclusion
Is the globalization project finished? By definition, it could never be completed, but it
is certainly in a profound crisis. The series of crises outlined here are not uniformly
co-ordinated so much as they express the uneven and combined development of the
global political economy. The political distance between the European protests (economic
sovereignty) and the Arab uprising (popular sovereignty) is as striking as is their combined
revolt against neo-liberalism’s impact (however distinctive to their region). While some
crises are specific to the globalization project (the financial crisis, political rebellions,
and institutional paralysis), other crises are long-term and structural, such as the food
and of course the climate crisis – registering an era of fossil fuel dependence.
Institutionally, the WTO is in a state of paralysis. International Monetary Fund
policy appears to depend now on economic revival in Europe, where the crisis of the
eurozone has required the IMF to tailor its structural adjustment dictates to a region
where individual states have surrendered the currency autonomy necessary to self-
management of the crisis, and core states partner with the financial sector to administer
austerity measures. Meanwhile ‘market rule’ has lost its legitimacy not only because
of the evident rent-seeking behaviour of financial markets, but also because of the new
era of global enclosure underway, voiding ‘free market’ multilateralism. Here, sovereign
funds complement direct private investment in offshore land grabbing for food and
fuel supplies – precipitated by the combined effects of food and energy crises, and
enabled by financial speculation in land and agricultural commodities (McMichael
2010, 2012).
All of this suggests that the project of neo-liberal globalization has run its course.
States, firms, citizens and redundant populations face an uncertain future, governed
by forms of neo-mercantilism in the immediate future. The politics of security is likely
to predominate, as states confront (unevenly) escalating crises of currency, global
warming, food provisioning, energy supplies, unemployment and political and
environmental refugees. Given the destabilizing impacts of global warming, the neo-
liberal globalization project is, arguably, yielding to a ‘sustainability project’ with quite
contradictory elements –- ranging from an environmental/resource security/climate
regime to a plethora of environmental and social justice movements networking across
locales. The challenge here for political economy will be how to incorporate an ecological
lens to account for the rising environmental and social ‘distributional conflicts’ of a
century in which market ‘externals’ come into permanent view.
Notes
1 http://en.wikipedia.org/wiki/Bank_of_the_South (retrieved 27 April 2012).
2 The ‘China effect’ refers to the fact that since the Green Revolution, poverty reduction in Asia
is disproportionately due to China’s progress in per capita food production (a 2.6-fold increase)
and its land reform programme, providing access to food via the ‘household responsibility’ system
beginning in 1978 that enabled peasant families to lease land long-term (World Bank 2009: 78).
3 By ‘financialization’, I refer to the preference for liquidity in the hands of profit-seeking capitalists,
in an era in which neo-liberal deregulation of the finance industry (as a characteristic strategy
of a declining hegemon – in this case, the US) has enabled a proliferation of increasingly speculative
derivatives trading.
Part II
Theoretical innovation and
contemporary debates
7 Game theory
International trade, conflict and
co-operation
Lisa Carlson and Raymond Dacey
Rational choice analysis is one of several theories used to explore questions in

International Political Economy (IPE). This chapter is intended to provide the reader
with a broad introduction to the rational choice approach and identifies some of the
ways in which the theory has contributed to our understanding of issues involving
international trade, international co-operation and international conflict.1
International trade theory operates on the premise that free trade leading to higher
real personal incomes is desirable for individual countries and the world as a whole.
From this presumption, we predict that a great deal of free economic exchange would
occur, and yet, we observe that conflict over trade has been endemic in the international
system for hundreds of years (Conybeare 1987: iv). Thus, one important question to
be addressed is why states fail to pursue the optimal course of action by imposing tariffs
on their trading partners’ goods and services (Frey 1997: 232; Milner 1999). Therefore,
the question becomes: what are the conditions under which the imposition of tariffs
leads to a trade war or leads to the removal of trade barriers altogether? Additionally,
how is co-operation in the trade game first established, and then maintained? How do
leaders balance the domestic and international aspects of the international trade game?
Rational choice analysis, and game theory in particular, has attempted to answer
the foregoing questions via several perspectives:
1. free and fair trade is a public good;

2 trade is a Prisoner’s Dilemma game, and only under certain conditions is it a public
good;
3 co-operation is established and maintained via a global leader, i.e. a hegemon;
4 co-operation can fail when a state is concerned with relative gains;
5 co-operation can fail when a state employs economic instruments to achieve various
kinds of political objectives; i.e. economic sanctions; and
6 trade is best understood as the result of the interaction between domestic and
international political games.
Before we discuss how rational choice analysis has addressed the foregoing issues, a
brief discussion of decision and game theory is in order.
Decision theory and game theory

Rational choice analysis grows out of a single theory – decision theory.2 Decision theory
provides a prescriptive analysis of the process of human cognitive decision making
92 Lisa Carlson and Raymond Dacey
based upon an unfolding of decision problems. The theory assumes two actors are
involved in the decision problem. The first actor is a cognitive and rational human
decision maker who is endowed with a set of actions [A] under her control. The second
actor is a non-cognitive, metaphorical actor called Nature who randomly selects from
a set of states of nature [S] beyond the control of the decision maker. A decision
problem is represented as a pair [S, A] composed of a set S of states of nature and a
set A of acts.
It is assumed that the decision maker can infer the outcome of every act in each
state of nature. A decision maker faces a decision problem under certainty if, and only
if, there is a unique outcome associated with each act. If the decision maker knows
there is a set of outcomes associated with each act and knows the probabilities of the
outcomes in each set, the decision problem is properly characterized by risk. Each
act–state pair determines an outcome. The decision maker resolves the decision problem
by selecting the act that leads to the most preferred outcome.
Game theory is an extension of decision theory in that it presumes a minimum of
two cognitive, rational decision makers.3 Game theory is a mathematical theory of
strategic interactions in which ‘the decisions of two or more individuals jointly determine
the outcome of a situation’ (Morrow 1994: 1). Thus, an individual makes a decision
by taking into consideration the decisions that other individuals are expected to make.
In game theory, the players, actions and outcomes are collectively referred to as the
rules of the game and the modeller’s objective is to use the rules of the game to determine
the equilibrium (Rasmusen 1989: 22).
Non-co-operative game theory, in which binding agreements are not possible, is a
useful way to model strategic interactions between actors in situations of conflicting
objectives. Because the international trade game involves two or more rational, strategic
actors, game theory – not decision theory – is the proper theory to model interstate
interactions. As Frey (1997) notes, one of the strengths claimed for the theory is its
parsimony. Those characteristics of game theory provide modellers with the tools
necessary to gain insight into complex political problems. Moreover, because game
theory is based on a rigorous and well-specified theory of human behaviour, the theory
produces empirically relevant hypotheses that can explain and predict co-operation
and conflict within a single logical structure (Kratochwil and Ruggie 1986).4
Games
‘A theory is supposed to reduce a potentially infinite complexity to a perceivable
structure’ (Rapoport et al. 1976: 7). Towards that end, game theorists have developed
various games for the purpose of analyzing different strategic bargaining situations in
the international system. The most common 2 2 games are shown in Figure 7.1.
The structure of a 2 2 game in normal form is completely contained in the
information provided by the payoff matrix (Rapoport et al. 1976: 7), and one game
is distinguished from another on the basis of the actors’ preference orderings of the
payoffs. According to Conybeare (1987: 31–6), the games of Prisoner’s Dilemma (PD),
Stag Hunt, and Chicken can be derived from the pure theory of trade and therefore
play an important role in understanding the conditions under which free trade or trade
wars take place. In general, ‘these games have attracted a great deal of attention precisely
because cooperation is necessary to the realization of mutual benefits but it is by no
means automatic’ (Oye 1996: 81).
Game theory 93
Prisoner’s Dilemma Chicken Stag Hunt
j j j
C D C D C D
C 3, 3 1, 4 C 3, 3 2, 4 C 4, 4 1, 3
i i i
D 4, 1 2, 2 D 4, 2 1, 1 D 3, 1 2, 2
Harmony Deadlock Bully
j j j
C D C D C D
C 4, 4 3, 2 C 2, 2 1, 4 C 3, 3 1, 4
i i i
D 2, 3 1, 1 D 4, 1 3, 3 D 4, 2 2, 1
Figure 7.1 Games

Key: i, j = nation-state actors; C = Co-operate (do not impose a tariff); D = Defect (impose a tariff); 1, 2, 3, 4 =
payoffs for players i and j. Player i’s (j’s) payoff is listed first (second) in each cell. Preference orderings for i and
j: 4 > 3 > 2 > 1.
Perspectives on International Political Economy
International free trade is a public good

Some argue that the establishment and maintenance of free trade are made more
difficult by the fact that free trade is an international public good (see Kindleberger
1973, 1981; Strange 1979). Economists distinguish between public and private goods
on the basis of rivalry and excludability. Rivalry exists if two individuals cannot consume
a good at the same time. Excludability exists if those who do not pay for a good or
service can be excluded from consuming the good or service. International trade has
the properties of a pure public good if the benefits of co-operation are non-rivalled
and the benefits of defection are non-excludable (Sandmo 1989).
The problems associated with the provision of a public good are well known. Since
the benefits of any action that an individual nation takes to provide a public good also
go to others, individuals acting independently do not have an incentive to provide
optimal amounts of such goods. Furthermore, when the group interested in the public
good is very large, and the share of benefit that goes to any one individual is very
small, usually no individual will have an incentive to ‘purchase’ any of the good (Olson
1965). The lack of an incentive to pay for the provision of the public good is known
as the ‘free-rider’ problem. Free riding exists because an individual will receive the
public good even if she does not pay for it. And since the contribution of any one
individual is so small, no one will notice the free rider and so the possible costs associated
with being detected and punished can be avoided (Abrams 1980). The key point is
that in large groups (such as the nation-state trading system), public goods will not be
provided voluntarily unless some form of coercion or special incentive is provided to
induce individuals to bear their share of the costs. If coercion fails to induce co-operation,
then we have a Prisoner’s Dilemma game.
International trade is a Prisoner’s Dilemma game

Many consider the basic international trade game to be an instance of Prisoner’s
Dilemma (Conybeare 1984; Krugman and Obstfeld 1991).5 The Prisoner’s Dilemma
(PD) game is based on the following set of assumptions. There are two actors who are
unitary rational state actors that each seek to maximize national income. Each state
has one of two acts available to them: to co-operate (C) or to defect (D). To co-operate
means not to impose a tariff (contribute to the public good) and to defect means to
impose a tariff (refuse to contribute to the public good). The game is non-co-operative
(binding agreements are prohibited), and each player selects one act and the players
choose their acts simultaneously (they select an act without observing the act chosen
by the opponent). If both players choose to co-operate, then the game is one of free
trade. If both players choose to defect, then the game is one of protected trade. If one
player chooses to co-operate, and the other player chooses to defect, then the player
who co-operates is unilaterally exploited.
The outcome that both players most prefer is to exploit the co-operating opponent.
The second best outcome for both is free trade, and the third best outcome is protected
trade. The least preferred outcome for both players is to co-operate and be exploited.
The foregoing preference ordering is consistent with the presumption of international
trade theory that nations are better off under free trade (CC) than under mutual tariffs
(DD). However, what is good for the world is not necessarily the best outcome for an
individual nation (Conybeare 1987: 23). If one nation can raise its tariffs while its
trading partner does not raise tariffs, then the nation that raises its tariffs can shift the
terms of trade in its favour. This shift in the terms of trade can make the exploitative
actor better off than under free trade (Morrow 1994: 263).
The predicted outcome in the one-shot PD game is protected trade (DD). The reason
this holds is that a player is always made better off by defecting, irrespective of whether
the opponent chooses to co-operate or defect (a dominant strategy), and neither player
can improve their position by switching strategies and moving to a new outcome (a
Nash equilibrium). What makes the PD game interesting is that while DD is an
equilibrium outcome, neither player has an incentive to alter their behaviour and the
DD outcome is not Pareto optimal. Furthermore, there is another outcome, CC, which
both players prefer to DD (Abrams 1980: 307). Thus, the PD game has been considered
the archetypical example of the disjuncture between individual and group rationality
(Snidal 1985b: 926). The problem is that both sides would be made better off pursuing
free trade had each not behaved in their own best interest.
The simple PD game version of the public goods game neatly accounts for why co-
operation can fail even though it is in states’ mutual best interests not to pursue protected
trade. But note the difficulty that is generated with this particular formulation of the
problem. Whereas the pure theory of international trade predicts that states will always
Game theory 95
pursue free trade, the one-shot PD game predicts that states will always pursue protected
trade. Neither extreme is maintained under empirical scrutiny. Clearly, there are
conditions under which states will or will not opt for free or protected trade. The
questions thus become: what factors account for the gap between the game’s prediction
and the empirical world?; and how can we construct a proper model that accounts for
both conflict and co-operation in trade?
Global leadership and hegemony

One answer suggests that a very powerful nation, called a leader or a hegemon, must
exist in order for states to escape the public goods dilemma. Since the provision of the
public good is deemed so valuable to the hegemon, the hegemon will bear the full cost
of providing the public good in order to maintain a system of fair trade, and thereby
induce international political stability (Kindleberger 1973, 1981). This view, which Lake
(1993) calls leadership theory, assumes that a benevolent leader with free-trade
preferences is a necessary condition to overcome the free-rider problem in order to
induce stability in the system.
A variation on this theme, known as Hegemony Theory (Lake 1993), relies on the
interaction of states’ national trade policy preferences to explain patterns of open or
closed trade in the system. In Lake’s (1988) version, it is assumed that a hegemon’s
preference ordering is not consistent with the PD game, but with the game called
Harmony. In Harmony, the hegemon’s most preferred outcome is free trade. The
second most preferred outcome is to co-operate and be exploited. The third most
preferred outcome is to exploit the co-operating opponent. The least preferred outcome
is protected trade. Note that the hegemon’s most preferred outcome changes from
unilateral exploitation to mutual co-operation. In the PD game, to be exploited (CD)
represents an actor’s least preferred outcome; whereas in the Harmony game, to be
exploited is the hegemon’s second most preferred outcome. In the Harmony game
version of the international trade game, the hegemon is playing against other states
whose preferences over outcomes in the game are determined by their economic position
in the system. Non-hegemonic actors’ preferences may be consistent with the games
of Harmony, Prisoner’s Dilemma, or Deadlock.
Note that each of the actors in each of the games has a dominant strategy. Harmony
actors always co-operate and Prisoner’s Dilemma or Deadlock players always
defect; i.e. choose protectionism. Obviously, universal free trade is the outcome when
the hegemon is playing against actors with a Harmony preference configuration.
Explaining free trade in this case is trivial. The equilibrium outcome that results when
a hegemon plays against PD or Deadlock players is not universal free trade since some
actors are exploiting the hegemon’s co-operative behaviour. Since the absence of
universal free trade is an equilibrium for the latter two cases, the question becomes:
how does a hegemon induce players to switch their strategy from defection to
co-operation?
One answer is that the hegemon must impose costs on defectors or offer positive
side- payments to induce the switch (Conybeare 1984; Lake 1988: 50–1).6 Both of
these actions might change the payoffs associated with defection in such a way that
co-operation now becomes the optimal act for PD and/or Deadlock players. In effect,
the hegemon is using its power to change the preference orderings of the actors in
order to change the game itself. If successful, then free trade is established.
These theories have come under serious attack on both theoretical and empirical
grounds (Gowa 1989a). One important criticism claims that a hegemon is neither a
necessary nor a sufficient condition for establishing and maintaining international free
trade (Conybeare 1984; Keohane 1984). First, the notion that free trade is a public
good has been called into question. Conybeare (1984: 11–12), for instance, argues that
free trade is both excludable and rivalled. If free trade is not a public good, then the
rest of the system has no need for a hegemon to provide it. However, public goods
problems can develop in games involving many players since it becomes more difficult
to detect, exclude and punish defectors.7
Second, some contend that the attribution of free trade preferences to a hegemon
violates the principles of standard international trade theory (Gowa 1989a: 31). In
other words, there is no justification for assuming that a hegemon always prefers free
trade (a dominant strategy to co-operate).8 Dacey (1994, 1996) establishes that the
hegemonic trade negotiation game is an instance of the game known as Bully. The
Bully game is referred to as Called Bluff in Snyder and Diesing (1977).
Bully is a game composed of PD preferences for the bully (the hegemon) and Chicken
preferences for the conciliatory player. Under Bully, the hegemon receives its best
outcome and the conciliatory player is guaranteed its second worst. The prediction
derived from the Bully game is consistent with the claim that if a nation were a hegemon,
then it would use its power to establish terms of trade favourable to itself. Therefore,
a hegemon would not engage rationally in free trade. Conybeare (1984: 11) claims,
‘The first policy for the hegemon is predation for the purpose of extracting or extorting
monopolistic rents from the rest of the world.’
While predation may be a hegemon’s first preference, it is also recognized that
maintaining an open trading system may be made more difficult if other countries can
credibly threaten to impose tariffs of their own. Under this scenario, the Bully game
evolves into two-sided Prisoner’s Dilemma when the conciliatory nation reverses the
order of its worst and second worst payoffs. Imposing a tariff may lead to retaliation
followed by counter-retaliation until a new tariff equilibrium is established, making
countries worse off than they would have been if they had pursued free trade (Conybeare
1984: 10).9
If we accept the view that international free trade is generally not a public good,
but states’ preferences are consistent with a PD game structure, then why would we
ever observe free trade in the system if a hegemon is neither necessary nor sufficient
to promote co-operation? To find an answer derived endogenously from the PD game
itself, we must re-conceptualize how the game is played. If we assume that the PD
game is played repeatedly and indefinitely (as trade games actually unfold in the
empirical world), then there may exist conditions under which mutual co-operation is
rational (Axelrod 1981, 1984; McGinnis 1986: 142; Morrow 1994; Taylor 1976). The
reasoning is as follows.
What makes it possible for co-operation to emerge is the fact that the players might
meet again. Simply put, the future can cast a shadow back upon the present and
thereby affect states’ behaviour in the current situation (Axelrod 1984: 12; Axelrod
and Keohane 1986; Powell 1993; Oye 1996). A high probability of future play, however,
is a necessary but not sufficient condition for co-operation to emerge. The reason is
that future payoffs are discounted and thereby valued less than present payoffs. Thus,
the value of the discount parameter must be such that the future looms large enough
Game theory 97
in the calculation of total payoffs to overwhelm a state’s temptation to defect on the
present play (Axelrod 1984: 10; Oye 1996: 88).
Even a highly valued future does not determine the most successful strategy to employ
in iterated play of a PD game. A successful strategy also depends on the strategy
employed by others in the game (Gowa 1986: 170). For example, if a player’s strategy
is All D (defect on every move), then the opponent’s optimal strategy is also All D.
Likewise, if a player’s strategy is All C (co-operate on every move), then the opponent’s
optimal strategy is also All D. As Morrow (1994: 264–6) points out, the strategies All
C and All D are independent of the history of the game. However, an iterated
environment provides states with an opportunity to condition their moves in the game
on the opponent’s behaviour and this may improve the prospects for co-operation (Oye
1996: 88).
One well-known reciprocal strategy is tit-for-tat. A tit-for-tat player co-operates on
the first round of the game and then does whatever the other player did in the previous
round (Axelrod 1984: 13). For example, if a player co-operates in round one, a tit-for-
tat player reciprocates that co-operation in round two. If a player defects in the second
round, a tit-for-tat player reciprocates that defection in round three, and so on. The
tit-for-tat strategy is important in that it offers insights into how free trade can be
established and maintained in the international system.
The tit-for-tat strategy indicates that tariff reductions can be supported by the threat
of reciprocal punishments. A tit-for-tat strategy is based on immediate punishment in
the next round of play should the opponent defect in the current round of play. Thus,
mutual low tariffs can be enforced when both sides place sufficiently high value on
trade in the future relative to the gains from cheating in the present. The tit-for-tat
strategy is more likely to lead to co-operation when the values that players place on
future payoffs increase, the reward from cheating decreases, the punishment gets more
painful, and the cost of restoring co-operation increases (Morrow 1994: 266).
Co-operation can emerge under the conditions identified above, but the effectiveness
of strategies of reciprocity in sustaining co-operation hinges on other factors as well.
First, it is assumed that states can reliably distinguish between co-operation and defection
so that states can respond in kind (Oye 1996: 89). Suppose the following. Prior to the
commencement of the trade game, State 1 places a 10 per cent tariff on State 2’s wool
exports to State 1, and State 2 places a 10 per cent tariff on State 1’s beef exports to
State 2. In round one of the game, both sides maintain their 10 per cent tariffs. In
round two, State 1 increases its tariff on State 2 from 10 per cent to 11 per cent. The
question for State 2 is whether to consider that 1 per cent increase a defection or not.
If State 1’s act is deemed a defection, then State 2 must decide whether to ignore it,
reciprocate or escalate the level of defection. The ability to discriminate between acts
is an important one since states may find themselves committed to non-co-operative
policies that were generated by misperceptions, making both sides worse off.
Another complicating factor involves the tit-for-tat player’s willingness to punish the
opponent’s defection. In the iterated version of the PD game, this is not at issue since
players simply implement their strategies automatically. In the empirical setting, however,
a state may prefer not to retaliate because the punishment might, for instance, harm
domestic interests deemed important to the state. This possibility raises the issue of the
credibility of retaliation. If a player believes that a tit-for-tat opponent faces domestic
constraints and is unwilling to follow through with punishment, then a player may
impose a tariff hoping to shift the terms of trade in its favour.
Conybeare (1985, 1987) argues that PD games, played by large states in the system,
may develop ‘norms’ of co-operation, but this co-operation is very fragile and may
collapse easily. Examples of iterated games, in which both sides maintained their
strategies of non-co-operation, include the Hanse trade wars from the 1300s to the
1700s and the Chicken War between the United States and the European Economic
Community (EEC) in the 1960s (Conybeare 1987). Conybeare (1987) then goes on to
cite a myriad factors that account for the failure of co-operation to emerge even under
iterated conditions.10
The key themes and insights that emerge from these studies are that co-operation
primarily depends on the number of players, the iterations of the game, and the
preference orderings of the players (Oye 1986). Co-operation is more likely to occur
when the trade game is played by two small states or played by a small and a large
state (Conybeare 1987). Again, co-operation can emerge among large states but it may
be more difficult to induce and maintain.
The failure of cooperation: absolute versus relative gains

The foregoing models presume that states are primarily concerned with absolute gains
and are indifferent to the gains made by others. While this assumption seems reasonable,
it has become an extremely contentious issue in the field of international relations. On
the one hand, neo-liberal institutional theorists pursue their understanding of topics
related to International Political Economy by accepting the assumption that states are
primarily concerned with absolute gains (Gilpin 1981; Keohane 1984). On the other
side of the debate, neo-realists or structural realists assert that states are forced to be
concerned with relative, not absolute, gains. As a consequence, a state’s trade policy
must also take other factors into consideration, including the effect on a state’s power
(Gowa 1986; Grieco 1988a, 1988b; Waltz 1979).
For the structural realists, one of the main defects of both the public goods approach
and the Prisoner’s Dilemma game approach in explaining the likelihood of free or
protectionist interstate trade is the failure to recognize that economic exchange does
not occur in a political vacuum (Gowa 1989b: 1246; Gowa and Mansfield 1993). From
the structural realist perspective, the political environment in which states operate is
characterized by anarchy. This means that the system lacks a central authority that
can enforce agreements among states and where the threat of force is omnipresent
(Powell 1993: 126). Anarchy thus implies that the system is one of self-help and one
that generates state insecurity.
Given this environment, if states remove their trade barriers, they will not only affect
the economic welfare of their trading partners but their own economic and national
security as well. The reason is that gains from trade result in increased efficiency with
which domestic resources can be employed, and this in turn can free resources for
military use, thereby increasing a country’s potential military power. As a consequence,
states will be less concerned with increases in absolute income than with the relative
power effects of trade. The reason is that each state assumes that other states will seek
to exploit them in order to enhance their own power (Gowa 1989b: 1247).
The primary issue with the standard Prisoner’s Dilemma formulation of the problem
of international trade is that this game neglects a crucial aspect of trade in anarchy –
the production of security externalities. The model advanced by Gowa and Mansfield
(1993) to reflect this argument is a simple extension of the traditional Prisoner’s Dilemma
Game theory 99
game. The actors’ PD game payoffs are modified with the inclusion of a parameter
which captures the marginal social costs from trade. Gowa and Mansfield (1993) claim
that trading with an adversary produces a negative security externality and trading
with an ally produces a positive security externality. These externalities make the
enforcement of trade agreements easier when externalities are positive, since they
increase the long-run value of trade. Trade agreements are harder to enforce when
externalities are negative, since they decrease the long-run value of trade. Thus, security
externalities inhibit free trade because of states’ concerns with relative gains.
The systemic theory of relative gains, however, has also been called into serious
question (Powell 1991, 1993). For instance, Morrow (1997) demonstrates that a concern
for relative gains should not block trade even between rivals because the gains from
trade cannot be turned into a military advantage quickly. Security externalities exist,
but they are unlikely to be large enough to lead adversaries to suspend trade, since
additional allocations to a state’s military are likely to be smaller than the gain from
trade (Morrow 1997: 31, 33).
The assumption that states care about relative gains leads neo-realists to be pessimistic
about the prospects of co-operation in a repeated Prisoner’s Dilemma game. However,
if the foregoing argument is correct, then the relative gains approach offers an inadequate
explanation of protected trade in the international system. On the one hand, the neo-
realist prediction often relies on inappropriate interpersonal comparison of utility,
thereby making the prediction vis-à-vis co-operation suspect. One the other hand, there
is evidence that ‘the security externality may exist in theory, [but] it is likely to be
inconsequential in practice’ (Bueno de Mesquita 2003: 395).
The failure of co-operation: economic sanctions

We have seen that a variety of explanations have been offered to account for why
states fail to establish or maintain free trade. Not surprisingly, economists focus on the
contributions of rent-seeking groups which pressure politicians to restrict trade in some
sector of the economy. Contrariwise, political scientists, and neo-realists in particular,
emphasize the national security priorities of the state. Since 2000, progress has been
made in our understanding of the explicit linkage between economics and politics via
formal game-theoretic models and empirical research, specifically in the area of economic
sanctions. The instrumental view of economic sanctions holds that leaders employ
economic instruments as tools of coercive diplomacy to achieve policy objectives in
target states.
Just as ‘economists have puzzled over why states (periodically) employ some form of
protectionist measures’ (Milner 1999: 92), scholars of economic sanctions have puzzled
over why sanctions are becoming increasingly prevalent when many empirical studies
show that sanctions rarely succeed in achieving their intended policy objectives (e.g.
Haass 1997; Hufbauer et al. 1990). Researchers employing formal game-theoretic models
have moved this puzzling conversation forward by identifying the conditions under
which sanctions are initiated and when sanctions succeed or fail.
The sanctions game is usually modelled as sequential play where there is a strict
order of play (Drezner 1998; Eaton and Engers 1992; Krustev 2010; Lacy and Niou
2004; Smith 1996; Tsebelis 1990a). There are many variations of the game; however,
the basic structure resembles the traditional deterrence game (Carlson and Dacey
2006; Morrow 1994; Zagare and Kilgour 1993, 2000) and is as follows. The potential
sender of sanctions begins play by choosing whether to make a demand or issue a
threat vis-à-vis a target state. The target then chooses whether to acquiesce to the
demand or to resist the demand. If the target resists the demand, then the sender
chooses whether or not to follow through on the threat and impose sanctions. If both
players have complete information – i.e. the players know everything about the game
– then sanctions will never be imposed (Lacy and Niou 2004). Thus, one or both of
the players must be uncertain about various aspects of the game in order for sanctions
to be imposed.
Results derived from formal models show that sanctions are more likely when the
sender expects future conflict with the target (Drezner 1998). Additionally, the success
of sanctions depends on: the size of the demand (Krustev 2010; Tsebelis 1990a); the
salience of the issue to the target (Morgan and Schwebach 1997); the involvement of
international institutions (Bapat and Morgan 2009); and the political institutions of the
target (Lektzian and Souva 2007). Perhaps most importantly, sanctions can succeed at
the threat stage, but typically fail if the threat is actually carried out (Drezner 2003;
Lacy and Niou 2004). The findings regarding the threat of sanctions have serious
implications for empirical research on the effectiveness of economic sanctions. Empirical
studies that examine the outcome of sanctions, once sanctions have already been
imposed, understate or obscure the impact that the threat of sanctions can have in
inducing the target’s acquiescence (Lacy and Niou 2004: 25).
Domestic and international politics

One of the difficulties with all of the foregoing game-theoretic models is the presumption
that the unitary state is the trading entity and we therefore need not give consideration
to the domestic determinants of tariffs and trade-induced conflict and co-operation.
Simply put, individuals, firms and corporations engage in trade; states do not. States
(leaders) determine the terms of trade; individuals, firms and corporations do not
(Dacey 1996).
To be sure, the unitary, rational state actor assumption has been useful in facilitating
our understanding of a variety of issues in International Relations and International
Political Economy. However, by retaining this assumption in our models, we may be
obfuscating the real dynamics that produce international trade policies. As such, scholars
are giving greater attention to the links between domestic and international politics in
order to determine how these levels interact to affect the way that states behave in the
global arena (Pahre and Papayoanou 1997: 4). The goal is to construct rigorous game-
theoretic models that specify the mechanisms that explicitly link internal influence to
external behaviour.
The assumption that facilitates our understanding of that linkage is to treat leaders,
and not states, as the key unit of analysis. Thus, ‘relations among nations are produced
by the normal pulls and tugs of domestic affairs, taking into account the domestic and
international constraints under which leaders in contending states operate’ (Bueno de
Mesquita 2006: 638). There are various ways to approach or model the interaction
between domestic and international politics. Two of these approaches, each of which
makes the government’s preferences endogenous to the game itself, are examined here.
The Grossman and Helpman approach (1994, 1995) assumes that politicians behave
in such a way as to maximize their own political welfare. The government has an
objective function that is a weighted sum of the two domestic actors (the contributions
Game theory 101
made by lobbies and the welfare of the voters), and a government selects tariffs and
subsidies in order to maximize its objective function and thereby its political welfare.
Another approach extends the Grossman and Helpman approach (1994, 1995) via
the theory of two-level games. The theory of two-level games also provides a logic for
analyzing the mechanisms that link international trade to domestic or societal influences.
The theory, introduced by Putnam (1988) and elaborated by others (Evans et al. 1993a;
Iida 1993; Mo 1994) conceptualizes the games as being played in the following way.
Two individuals, or heads of state, serve as representatives of their distinct
constituencies and are engaged in a negotiation that must be ratified by domestic bodies.
Each head of state is engaged in two bargaining games. The first game, called the
Level I game, involves the two heads of state negotiating the terms of trade (Milner
and Rosendorff 1997: 123–4). The second game, called the Level II game, involves
the heads of state negotiating with their respective domestic constituents, including the
individual citizens and the managers of the firms and corporations. At Level II, the
games begin with dissatisfaction among the domestic actors. These grievances are
brought to the attention of the heads of state. The heads of state attempt to resolve
these concerns in the Level I game. The key point is that the two levels are strongly
linked. Any solution to the Level I game must be a solution to each of the two Level
II games (Dacey 1996). An illustration of a two-level game is provided in Figure 7.2.
Putnam makes a key point as follows:
The political complexities for the players in this two-level game are staggering.
Any key player at the international table who is dissatisfied with the outcome may
upset the game board, and conversely, any leader who fails to satisfy his fellow
players at the domestic table risks being evicted from his seat.
(Putnam 1988: 434)
Leader of International Negotiation Leader of

State A Game (Level I) State B
Domestic Game Domestic Game

(Level II) (Level II)
Constituents International Constituents

of State A Business Game of State B
Figure 7.2 Two-level game

The complexities involved in this two-level game go beyond standard accounts of
negotiation (e.g. Raiffa 1982; Rubenstein 1982; Schelling 1960) and non-standard (i.e.
behavioural) accounts of negotiation (e.g. Butler 2007; Bazerman and Moore 2009,
especially chapters 9 and 10). Moreover, a government has ‘powerful incentives for
consistency between the games’ (Putnam 1988: 434). However, Tsebelis (1990b) finds
that it is not unusual for an act to be optimal in one game (e.g. the domestic game),
but to be sub-optimal in the other game (e.g. the international game). In sum, since
leaders are primarily motivated by the desire to remain in power (Bueno de Mesquita
et al. 2003; Bueno de Mesquita 2006; Sobel 2006), the government faces a complex
decision problem involved in balancing both the international and domestic aspects of
the two-level game so as to achieve political survival.
On this view, a government’s decision to pursue freer or more protectionist trade is
a function of the domestic constraints and pressures placed on the leader. The logic
of two-level games has been used to analyze the role of interest groups on trade policy
(Dacey 1996), the impact of legislatures on the conditions for the ratification and terms
of trade agreements (Milner and Rosendorff 1997; Pahre 1997), and the role of public
opinion on peace agreements (Lieberfeld 2008; Trumbore 1998), among others. As
Putnam (1988) points out, however, deriving analytic solutions to two-level games is a
difficult challenge for modellers. Nonetheless, this method seems to provide a promising
avenue for those interested in investigating how international and domestic factors
jointly determine outcomes.
Conclusion
This broad overview of the various attempts to model questions pertaining to trade
and conflict using game theory, while certainly not exhaustive, does reveal that the
approach has made important contributions to International Political Economy (IPE)
and has produced new insights into the causes of conflict and co-operation in
international trade. By focusing on the issues pertaining to collective action problems,
the complexities of security externalities/relative gains problems and economic sanctions
problems, game theory has shed new light on why co-operation can sometimes fail to
emerge even when it appears to be in states’ interests to pursue the co-operative path.
Traditional economic analyses emphasize that protectionism results from political
failure; i.e. the state adopted a policy that was not welfare maximizing for the society
or the state. Clearly, however, that very protectionism represents a success by some
group within society to enrich itself at someone else’s expense (Brawley 1998: 155).
Here, the Grossman and Helpman (1994, 1995) analyses and the logic of two-level
games provide mechanisms for examining the influence of domestic actors on state
trade policy. These game-theoretic analyses provide a structure for exploring the
interconnections between international trade and domestic politics by making
endogenous several key independent variables that affect trading relationships.
There are, however, open issues that require future consideration. For example, the
Grossman and Helpman model of domestic politics (1994) suggests a one-way influence
where the causal arrow runs from the economic sector towards the government sector.
However, in some countries, such as China, the domestic political game is also an
economic game. That is, the government-owned firms and the privately owned firms
are at odds regarding the ultimate structure of the economy. This makes the domestic
game in China vastly more complex than the domestic game in most countries.
Game theory 103
Moreover, most analyses presume that the government is a stable system of institutions
and organizations where the latter have the ability to play each of the games in a
transparent and credible way. That is, the limitations imposed on national leaders,
when playing the international game, derive from the political institutions in the
society. If domestic political changes are evident, as in Egypt, Tunisia and Libya in
2011, then these changes make it difficult for another nation to play the international
political game. How does one play against another nation when the political institutions
in that nation are in flux? There are many other open issues. However, in the end,
game theory will further advance our understanding of questions in IPE only if we
continue to develop models designed to address relevant puzzles which lead to the
derivation of interesting and empirically testable hypotheses.
Notes
1 The substantive focus of this chapter concentrates on the application of game theory to a narrow
set of questions that pertain to international trade. Therefore, this essay deliberately excludes a
great deal of the game-theoretic work in International Relations and economics that is not designed
to explore these questions specifically.
2 The foundations of modern utility theory can be found in von Neumann and Morgenstern (1947),
Marschak (1950), Savage (1954) and Luce and Raiffa (1957).
3 The foundations of modern game theory can be found in von Neumann and Morgenstern (1947),
Nash (1951) and Kuhn (1953).
4 Clearly there is not universal consensus on the value of rational choice theory as a tool to shed
light on and/or resolve interesting substantive puzzles. For a critique of rational choice theory,
see Green and Shapiro (1994).
5 Not all trade-related games, however, are Prisoner’s Dilemma games. One of the key determinants
of a state’s preferences over the outcomes of a trade game is a state’s relative size (wealth). Smaller
states that are unable to affect their terms of trade or to tolerate the imposition of tariffs are
more likely to have preferences consistent with a combination of Stag Hunt and Chicken
(Conybeare 1987). Other key variables that may prevent the development of a PD game are the
opportunities for bargaining, linking trade issues to political issues, and the availability of side-
payments (Conybeare 1987: 14).
6 All that may be required to enforce co-operation is for other actors to believe that there is a
sufficiently high probability that the hegemon will inflict punishment (see Alt et al. 1988).
7 Others have countered this claim by arguing that even if free trade is not presumed to be a
public good, the enforcement of trade rules – such as permanent normal trading status – is a
public good. Enforcement is therefore subject to the same kinds of collective action problems
outlined above (Gowa 1989a; Lake 1993: 463). On one view, the creation of international
institutions, such as the World Trade Organization (WTO), serves as a co-ordination mechanism
to avoid or mitigate collective action problems.
8 The debate is over whether hegemons are benevolent, as is sometimes claimed, or whether
hegemons simply act in their own self-interest to establish the order they prefer (Krasner 1976;
Stein 1984; Snidal 1985a; Gowa 1989b: 322). For an attempt to unify these two perspectives in
one model, see Alt et al. (1988).
9 A hegemon may also opt for free trade for purely political reasons (Conybeare 1984).
10 Some of the most important variables include: attempts to link the trade game to larger political
issues; the presence of rent-seekers with no interest in co-operation; transaction costs which make
bargaining and monitoring those agreements costly; preferences which change over the course
of the game; and decision-makers’ misperceptions over the game they are actually playing.
8 New directions for
international political
economy
Drawing from behavioural
economics
Deborah Kay Elms
International political economy (IPE) scholars study a wide range of subjects. At its
heart, however, most IPE analysis seeks explanations for decisions made by individuals
over economic issues. This chapter highlights three research trends – framing and loss
aversion, myopic time horizons, and fairness –drawn from political psychology and
behavioural economics that are even better suited for IPE scholars.1 In the interest of
clarity, I have described behavioural economics research in text form, without
incorporating the mathematical and economic models that lie beneath the concepts.
Readers are advised to examine the original articles for the more formal demonstrations
of these broader theoretical concepts.2
Political psychology and behavioural economics

concepts for IPE research
Loss aversion
If the standard assumptions about IPE behaviours drawn from classical economics
hold, individuals are not swayed by the framing of issues. Under the principle of
invariance, individuals should be indifferent between two choices with identical outcomes.
It should not matter if I win US$5 and leave the carnival with US$15 in my pocket,
or if I lost US$5 and left the carnival with US$15. The net outcome is identical.
Yet research indicates that individuals are not indifferent between these two outcomes.
The framing of the problem plays a role in shaping our responses in ways not
incorporated into most scholarship. Viewing the issue as a loss or a gain, in particular,
leads to regular and predictable responses that routinely violate our assumptions of
rationality in decision making. This central insight of prospect theory has been taken
up by some international security scholars and a few comparative politics scholars, but
has not, to my knowledge, been incorporated into IPE work to date.3
A focus on framing effects is not new. E. E. Schattschneider (1960: 69) said, ‘The
definition of the alternatives is the supreme instrument of power.’ Thomas Schelling
discussed the manipulation of risk in 1966. Many scholars in American and comparative
politics have studied agenda setting and issue definition, which is largely about how
the framing of issues and ideas affects outcomes in politics.4 Explicit framing discussions
Behavioural economics 105
are less common in IPE, although John Odell, Susan Sell and Aseem Prakash (Odell
and Sell 2003; Sell and Prakash 2004) have examined how a shift in framing is essential
to understanding the recent debates over a portion of the Trade-Related Aspects of
Intellectual Property Rights (TRIPS) in the World Trade Organization (WTO).
Individuals do not deliberately choose to allow frames to alter their decisions. Given
the cognitive processes of individuals, editing of decisions based on order of presentation
is a natural response to making choices. Framing is certainly open to manipulation by
others – if I know that you will make decisions based in part on the order in which
they are presented, I may choose to present options in a way that favours my preferred
outcome.
But a focus on the importance of framing does not go far enough.5 Recall the
example above of gaining or losing US$5 at the carnival. One standard economic
assumption, often incorporated into IPE research, is that individuals have preferences
over final outcomes, but are indifferent to changes. In other words, my preference for
an extra US$10 in my pocket remains the same regardless of whether my bank account
holds US$1 or US$100.6 Yet repeated investigation into this assumption reveals that
individuals are actually highly sensitive and acutely aware of changes (Helson 1964;
Kahneman and Tversky 1979; Rabin 1998, 2002). Preferences are not simply over
absolute outcomes. Individuals have diminishing sensitivity relative to a reference point
(Kahneman and Tversky 1979; Tversky and Kahneman 1986).7
In particular, people react differently to situations of loss than they do to those of
gains. In a position of gains (i.e. I will be better off tomorrow than I am today),
individuals are largely risk- averse. They are less likely to throw down money on the
final race at the horse track if they have been winning. The unexpected finding of the
Nobel Prize-winning work by Daniel Kahneman and Amos Tversky on prospect theory
is that people are also risk-acceptant in situations of loss (i.e. I will be worse off
tomorrow than I am today).8 They bet differently on the last race if they have been
losing all day. The value function, which had been assumed to be independent of a
Risk aversion
Gains
Losses
Risk
acceptance
Figure 8.1 A typical value function for prospect theory

106 Deborah Kay Elms
reference point, actually shows a clear difference between losses and gains, as shown
in Figure 8.1. The function is steeper in the domain of losses (lower left quadrant) than
in the domain of gains (upper right quadrant).
The value of any change is a function of both the position of the reference point
and the magnitude of the change from that reference point. The graph in Figure 8.1
shows concave utility functions in the domain of gains and convex curves in the domain
of losses. But the utility curves are not strictly concave or strictly convex. Instead, the
pattern highlights the reflection effect of the reference point.9 Individuals are less sensitive
to changes in asset position the farther they move away from the reference point in
both directions.10 It is harder to distinguish between a gain of US$100 to US$110 than
it is to notice a change of similar magnitude from US$0 to US$10. A loss from 10 to
0 is more evident than a similarly scaled loss from 110 to 100. This may seem an
obvious point to anyone who has discovered she is suddenly broke with US$0, after
losing the last US$10, but our IPE theories have largely discounted this difference.
The framing of an issue into one of gains or losses from a reference point (usually
the status quo) can make a tremendous difference in outcomes.11 Individuals who have
been losing at the horse races, for example, will frequently place large bets on the final
race of the day in a risky attempt to recoup their losses and go home victorious
(McGlothlin 1956). Economists frequently warn against sunk costs, but individuals
often stick with losing investments and even intensify their commitments in the hope
of making them ‘turn around’.
Losing bothers us. I will notice the sting of losing US$5 at the carnival far longer
and with greater intensity than I will feel happiness over winning US$5, even if I leave
the carnival at the end of the day with exactly the same amount of money in my pocket
on both days. I will probably remember – even a year later – that I lost money at this
carnival, while I might not recall going to the carnival at all if I had won. Given the
choice of taking a risky step to recoup my losses – say, betting on the number of jelly
beans in a jar as I leave the carnival – I will place a bet on the day when I have lost
money and likely avoid the bet on the day when I have won. Avoiding making the
bet on a ‘winning’ day is true (i.e. this is my behaviour) even though I could improve
on my status quo position if I continued to gamble. Experimental evidence suggests
that individuals value losses twice as much as they value gains.12
The relative riskiness of options comes from the situation, not the decision maker.
In other words, I am not arguing that risk-seeking individuals will choose more risky
strategies than risk-averse individuals. Instead I am suggesting that the situation itself
drives risk-seeking or risk- avoiding behaviours.13
The frame becomes so embedded in the choice problem that individuals cannot
separate the two. Repeated experimental evidence, in fact, has shown that even people
who have been taught about framing effects continue to respond to framing. Doctors
who have been educated about the impact of surgical techniques versus radiation on
lung cancer patients (where one study emphasizes survival rates and one highlights
deaths or morbidity rates, even though the final outcomes of living versus dying patients
are identical) will still select the option presented in terms of survival rates.14 Statisticians
skilled in understanding probabilities routinely select outcomes based on frame instead
of on straight calculations of probabilities.
Prospect theory is one of the most developed approaches in behavioural economics
today. It has also been used to study a variety of situations in international security
and comparative politics.15 For example, McDermott (1998) examined the decision
making of President Carter during the Iranian hostage crisis and of Prime Minister
Eden during the Suez crisis.16 Farnham (1992, 1997) carefully studied President
Roosevelt’s changing reactions to the unfolding events in the Munich crisis. Nincic
(1997) examined the interplay between military intervention decisions and domestic
opinions. Schaub (2004) provides an elegant argument using prospect theory to show
why deterrence is generally perceived to be ‘easier’ than compellence. This is in large
part because the adversary assesses the stakes differently in deterrence and compellence
situations and this leads to different propensities for risk. Weyland (1996, 2002) used
risk acceptance and risk aversion to explain the pace and timing of domestic economic
reforms in Latin American countries.
The importance of domain

The primary challenge faced by most of these applications, however, has been
determining domain. Without an accurate assessment of the status quo and a clear
sense of how key decision makers viewed a situation, it is impossible to determine if
the situation is one of losses or gains. For example, if A threatens to pull out of an
alliance with B, does this represent a loss or a gain? B might feel terribly vulnerable
and experience profound loss. But it is also possible that B will welcome the opportunity
to create a new alliance structure, unencumbered by A, and so views the situation as
a gain from the status quo. Given the central nature of a reference point in the theory,
it is critical to find a non-tautological definition.
This is partly why prospect theory seems an excellent match for many of the subjects
examined by IPE scholars. Since many of the issues of concern in IPE are over issues
of markets, determining the status quo and accurately locating the domain is less
problematic for researchers. It may also make the lessons of prospect theory more
salient for policy makers. If C knows that sanctions threats from D will result in a
probable loss of US$150 million, C can easily define the situation as one of loss from
the status quo. In this situation, C should take risks that would be unexpected without
an understanding of decision making drawn from prospect theory. If the scale of the
sanctions threat varies (US$150 million represents half of a state’s foreign earnings for
one year or US$150 million represents one day’s worth of imports for a particular
sector), negotiator perceptions of losses will also vary. The greater the economic impact,
with other conditions remaining the same, the greater the magnitude of the loss or
gain effects on decision making.
Defining risks in advance and without reference to outcomes is also critical. In other
words, I cannot merely argue that because E is in a loss situation, whatever decision
E makes must therefore be a risky choice. McDermott (1998) argues that risky choices
are those with a wider variation in outcomes. A bet to gain or lose US$100 is inherently
riskier than one to gain or lose US$5. Failure to define risks in advance is a problem
that has plagued many of the prospect theory applications.
People also overreact to changes in their current position (Rabin 2002: 663–4). This
is not simply because individuals remember losses far longer and with greater intensity
than gains, but also because people separate decisions from outcomes. I feel the loss
of losing a US$5 bet far more intensely than I should, because I fail to recognize the
gains I made over the day in income that swamp the temporary loss in my bet. This
insight has important consequences for IPE models of risk aversion. As Rabin and
Thaler have demonstrated, standard models of risk aversion fail to account for individual
behaviour. People are consistently risk-averse over minor stakes (Rabin 2000; Rabin
and Thaler 2001).
Because people are consistently concerned about losses, individuals also exhibit a
‘status quo bias’ in decision making (Knetsch and Sinden 1984; Knetsch 1989). This
leads people to prefer the current situation to one that might change in the future,
even if the changes are likely to incorporate more gains than losses. The propensity of
individuals to avoid situations of loss also leads to a bias in decision making in favour
of the status quo. Most people are reluctant to accept a bet that offers equal odds of
gaining and losing x dollars (Quattrone and Tversky 1988: 724). The concave utility
function in the domain of losses (see Figure 8.1) means that individuals would rather
choose their current level of wealth under the status quo (which is a certain outcome)
than any risky prospect with the same expected value.17 People value what they have
more than the comparable value of things they do not yet have.18 The advantage of
the status quo increases as the number of possible alternatives increases.19
In bargaining and negotiations, the status quo bias is particularly significant. Each
side in the negotiation may view their own concessions as losses that are more relevant
than any gains received from the other party (Bazerman 1983; Tversky and Kahneman
1986). The location of the reference point depends on how the choice problem has
been framed.
Problems with probability calculations

Under standard expected utility calculations, decision makers weight the possible
outcomes in any decision against a straightforward assessment of probabilities of that
outcome. This assessment is linear. But repeated experiments have shown that individuals
are extremely poor probability calculators. As Camerer and Ho (1994), Tversky and
Kahneman (1992), and Wu and Gonzalez (1996) note, the critical point at which
individuals shift from systematically overweighting to systematically underweighting
probability outcomes takes place between .30 and .40. This non-linear weighting of
probabilities has some significant real-world implications.
For example, individuals have an exaggerated preference for sure gains over gambles
that would result in the same outcome if the probability of winning is greater than
.30–.40. This is because the gamble appears riskier and the sure bet appears more
certain than would be the case if probabilities were linear. The endowment effect also
makes a certain payoff more attractive. This suggests that decision makers in gains
will, for example, end negotiations more rapidly than might otherwise be the case, as
they choose to take the offer on the table rather than continue to negotiate for a
possibly better offer in the future.
Recall, however, the propensity for risk acceptance in a domain of loss. Individuals
will also have an exaggerated preference for a gamble over a sure loss with a potentially
equivalent outcome if the probability of winning is also greater than .30–.40. This, as
Schaub (2004: 399) notes, is because individuals discount the potential losses of the
gamble and exaggerate the potential magnitude of the loss.20
The probability weight curve, shown in Figure 8.2 opposite (Tversky and Kahneman
1986: S264), highlights the unpredictability of events with probabilities close to 0
(extremely small) or 1 (extremely large). Highly unlikely events are ignored or treated
as impossible and highly likely events are treated as certain (Kahneman and Tversky
1979: 282–3).21 Events viewed as either impossible or certain receive greater psychological
Decision Weight: π(p) 1.0
0.5
0 0.5 1.0
Stated Probability: p
Figure 8.2 A hypothetical weighting function
Tversky and Kahneman (1986: S264).
weight than other events (McDermott 1998: 30). Individuals are more willing to pay
money to remove the last bullet from a gun in a game of Russian roulette than remove
the fifth or third bullet, even though each and every bullet removed reduces risk by
exactly the same amount (one-sixth) (Plous 1993: 99).
Low probabilities are overweighted and given more importance than a standard
rational calculus suggests should be the case. Medium-to-high probability events are
systemically underweighted.22 This bias in evaluating probabilities contributes to risk
propensities. Positive gambles are viewed as less attractive in the domain of gains, in
part because moderate and high probabilities are underweighted. Because low-
probability events are overweighted, the value of long shots and highly risky moves is
enhanced (Kahneman and Tversky 1984: 345).
Myopic time horizons

In 1985, Rajnish Mehra and Edward Prescott noted a considerable empirical puzzle:
given that over roughly a 90-year period from 1889 to 1978, equities consistently
returned a 7 per cent annual yield while the average yield on short-term debt (treasury
bonds) was less than 1 per cent, why was the premium for investing in the stock market
so high? One dollar invested in the Standard & Poor (S&P) 500 on 1 January 1926
was worth over US$1,100 by 1995; while a dollar in treasury bills yielded only US$12.87
across the same time horizons. No matter how Mehra and Prescott (1985) tried to
parse the data, the empirical results remained unchanged.
They termed the result an ‘equity premium puzzle’, and it remained intractable to
various economic models which suggested that a difference in return of no more than
four-tenths of 1 per cent ought to be possible (as opposed to the 6 per cent actually
observed), even under conditions of plausible risk aversion (Mehra and Prescott 1985:
146). There was no way they could calculate outcomes using standard expected utility-
maximizing formulas that would allow the same individuals to invest in high-risk stocks
with potentially high payoffs, yet still invest in a bond market with yields of around 1
per cent per year.
The discovery of this apparent challenge to various economic models led different
scholars to try to solve the puzzle. Siegel (1992) showed that the puzzles remained
robust, even if the time horizons were lengthened from 1802 to 1990. Thomas Rietz
(1988) proposed that individuals’ calculations of the risks associated with equity markets
(and particularly the possibility of a significant stock market crash) could account for
high equity risk premiums and low risk-free returns. But Mehra and Prescott disagreed
(1988), since Rietz’s argument called for calculations of risk significantly greater than
the stock market crash of 1929 or any other historical evidence over the period, and
had to affect only the stock market determinations and not bond markets. Philippe
Weil (1989) reformulated the puzzle to ask not why the premium for equities was so
high, but instead why the payment for risk-free rates was so low (or why would anyone
choose to hold bonds).
The most persuasive answer to these twin puzzles has been to attribute the unexpected
rates of return to myopic loss aversion (Benartzi and Thaler 1995; Thaler et al. 1997).
This concept brings together two different strands of research – one on loss aversion
(as outlined above) and another on mental accounting. Individuals with myopic loss
aversion will view the short-term losses in the equities markets very keenly, especially
if they follow the market closely, and will make decisions about market volatility that
do not accord with standard economic models of individual behaviour. They will choose
to put less in stocks and more in bonds than they otherwise would, and this pattern
will be reinforced the more frequently in time that they evaluate their options.
Mental accounting refers to the way individuals (or households) make decisions in
ways that are broadly analogous to accounting decisions made by organizations and
firms (Thaler 1985).23 The crucial elements of mental accounting for the equity premium
puzzle are that individuals group financial decisions in two ways: cross-sectionally (e.g.
stocks are evaluated differently from bonds or in a total portfolio) and inter-temporally
(with portfolios evaluated at various time intervals) (Thaler et al. 1997: 648). Investors
must make decisions about their investments that group or frame their choices over
allocation of assets along these two dimensions.
Myopic investors frame decisions about allocation very narrowly and put short-term
choices ahead of long-term planning; and will also frame decisions over outcomes
narrowly as well, meaning they will frequently evaluate losses and gains in assets. But
surely, readers will argue, individuals investing in the stock or bond market are generally
doing so with a long time horizon in mind. For example, they are investing with an
eye towards retirement in 20 or 30 years time, giving them an extremely long time
horizon. In this situation, they ought to prefer investing in the stock market, which has
a demonstrably long record of improved returns (even though it is subject to wide
variations in value over the short term with a standard deviation of 20 per cent), over
a bond market that gives back a fixed return of approximately 1 per cent per year.
In fact, argue Thaler and his colleagues, even in this situation of investing for
retirement, individuals customarily evaluate their portfolios regularly. For most investors,
this evaluation process takes place at least annually, as investors prepare income tax
returns and receive the most detailed reports of the year on investment outcomes at
the same time.24 This annual evaluation exercise brings the twin problems of mental
accounting and loss aversion to the fore. Even investors planning for retirement in 30
years are faced with a short-term evaluation period that leads most people to attempt
to maximize returns across the one-year time period between evaluations.
The more often an investor evaluates his or her portfolio, the shorter the time horizons
become.25 Over shorter time horizons, the fluctuations in the stock market will be
even more visible and investors will be more concerned about taking on additional
high-risk investments – especially, of course, if the investor has experienced a significant
loss since the last evaluation period. This desire to avoid another financial loss will
lead investors to shift money out of stocks altogether and into the guaranteed returns
offered by the bond market.26 (It is worth noting that when experimental returns are
manipulated to yield only positive returns from investments, investors shift higher
proportions of their portfolio into stocks.)27 The answer to the puzzle, then, is not
simply myopia or short time horizons, but myopia coupled with loss aversion. One
without the other is insufficient to account for the empirical results identified by Mehra
and Prescott (1985).
Concerns over fairness

Standard economic theory does not provide a space for considerations of ‘fairness’ in
the behaviour of individuals.28 One classic example is the ‘divide the dollar’ game.
One individual is given a dollar and told to propose a split of the money. The second
participant can accept or reject the offer. Standard theory assumes that both will respond
to individual incentives. The first person will propose a division that leaves her with
99 cents and the other participant with a penny. The second person will accept the
division. After all, both participants – including the person with a one penny payoff –
receive an improved outcome. Yet in repeated experiments, two interesting outcomes
take place: 1) the proposer rarely proposes a 99/1 split, but rather offers something
closer to 50/50; and 2) proposals closer to 99/1 are nearly always rejected by the
second participant.
In fact, the second player nearly always rejects splits that leave him with less than
20 per cent of the total (Camerer 2003). Even in games where the second participant
cannot accept or reject the offer (i.e. the original offer stands regardless), individuals
are quite generous. Seventy-six per cent of participants in one game offered a 50/50
split under these conditions (Thaler 1988: 198). These outcomes hold true even in
different settings. Henrich et al. (2001, 2004) examined 15 small-scale and tribal societies
and determined that fairness considerations in ultimatum games appear universal.29
Other examples of unexpected behaviours include high levels of co-operative
behaviour in one-shot Prisoner’s Dilemma games (see Chapter 8 for a description of
this game). While classical economic theory anticipates some co-operation in repeated
games, rational calculation in one-shot games should lead to defection. Instead,
researchers have found that roughly half of the players co-operate in these settings
(Camerer and Thaler 1995, 2003; Abbink et al. 2000; Berg et al. 1995).30 Examples
from the ‘real world’ include voluntary reductions in water use during droughts31 (as
well as voluntary labour of nearly every variety), donations to public television and
radio programmes, consumers who refuse to purchase goods from certain companies
(especially those practising what are perceived to be monopoly pricing),32 or managers
who pay higher wages to get greater effort out of employees.33
Considerations of fairness were not assumed to motivate individuals acting in their
own rational self-interest in the marketplace. To the extent that these ‘anomalies’
appeared in experimental results, most economists assumed that any potential fairness
concerns were isolated instances, or simply did not matter in economic life. For example,
while fairness may matter at the level of dividing a dollar, when the stakes are greater,
these concerns wash out. Unfortunately for many economists, even when the stakes
are high (up to several days or months of salary), the empirical results hold.34 Individuals
repeatedly reject apparently Pareto-improving outcomes for reasons of fairness. The
predictions of individual behaviour derived from game theory, in particular, have been
consistently inaccurate.35
In 1993, Matthew Rabin came up with a novel interpretation of these results.36
Rabin modified economic models to incorporate a new function of ‘kindness’. His
reading of the experimental literature suggested that individuals have two different
levels of behaviour. Individuals want to be nice to people who are nice in return, but
want to punish others who are unkind. Utility comes not just from material payoffs,
but is also a product of the kindness factor (how nice I am depends on how nice the
other guy is).
Incorporating this insight resulted in three key changes in a standard Prisoner’s
Dilemma game. First, the payoffs themselves are altered. Payoffs include a ‘fairness
penalty’ if the other person chooses to defect (Camerer and Thaler 2003: 162). The
outcomes (co-operate, co-operate) and (defect, defect) are both fairness equilibria since
the players will co-operate if they believe the other side will co-operate, but will also
defect if they expect the other side to play ‘meanly’ and also defect.37 Second,
incorporating fairness also changes the importance of what had been called ‘cheap
talk’ prior to the game. If players are allowed to exchange non-binding communication
before the game, outcomes are also shifted (Sally 1995). Promising to co-operate generally
leads both sides to co-operate and not defect (Roth and Murnighan 1982). The players
use the communication to determine if the other side will be kind or mean and make
their own selections accordingly (co-operate if niceness was promised, and defect if
not). Finally, it helps explain why outcomes are different when the game is described
or framed differently for players. If the game is called a ‘community game’, players
co-operate more than if it is called the ‘Wall Street game’ (Ross and Ward 1986). This
makes sense, argued Rabin, since the information about the game leads participants
to certain expectations about the behaviour of other participants. In a Wall Street
game, players assume that the other side will pursue ‘greed’, behave meanly, and
defect.
Adding fairness to the Chicken game leads to opposite outcomes entirely than standard
equilibrium outcomes suggest. The Nash equilibrium for this game is (dare, chicken).
But if fairness considerations are active, players will select (chicken, chicken) where
both sides decide to sacrifice themselves to reward kind behaviour by the other; or
(dare, dare) where each side is more concerned with punishing the other than with
extracting the maximum individual gains.
This is not to argue that fairness as a concept has never been studied. Welfare
economists have extensively examined distributional outcomes with a focus on equity.
In political science, fairness as a concept appears in work on voting systems, legal
decisions, and media coverage. Fairness has also been taken up by political theorists,
especially those following Rawls. The closest application to IPE thus far has been to
consider fairness in taxation policies. If fairness makes a difference in behaviours,
individuals are more likely to contribute taxes in systems perceived as ‘fair’ than those
that are not.
Little scholarship to date, however, has actively considered how perceptions of fairness
may affect policy outcomes.38 Fairness, in this context, means more than a rhetorical
commitment to a ‘fair’ or equitable distribution of outcomes. It must be incorporated
into decision-making behaviours – even if it is never acknowledged. For example, if
the Chicken game accurately describes the potential outcomes of a divorce proceeding,
incorporating fairness into a consideration of outcomes leads to a very different
settlement. Recall that – in the absence of fairness concerns – the equilibrium outcome
is (chicken, dare) or (dare, chicken) where one party capitulates and the other party
holds firm. If, however, both parties are motivated by fairness, the outcome could be
either (chicken, chicken) or (dare, dare). Both sides may either elect to give up some
of their material gains in the interest of resolving the divorce amicably (perhaps for
the sake of the children) or both sides may dig in and focus more on destroying the
other than securing any personal gains. The destructiveness, for example, of the 1989
film The War of the Roses does not make sense without an understanding of the motivations
of each side.
Conclusions
Many of the research avenues currently under investigation by behavioural economists
have more powerful implications for international political economy scholars as well.
The three research ideas illustrated in this chapter – framing and loss aversion, myopic
time horizons and fairness – highlight important concepts of interest to IPE researchers.
Notes
1 For a longer version of this chapter, see Elms (2008).
2 One of the best introductions to the field can be found in Camerer et al. (2003).
3 An exception is Elms (2004) on US and Japanese trade negotiations.
4 See, for example, Cobb and Elder (1972) on issue expansion and creation, Goffman (1969) and
Jervis (1970) on the use of framing in security, Stone (1989) on the movement of causal ideas
into the realm of social control, Baumgartner and Jones (1993) on agenda manipulation in
American politics, Druckman (2001) and Druckman et al. (2004) on framing effects on candidates
for elections, or Jupille (2004) on the use of framing to alter the policy arenas in play in the
European Union (EU). Mastanduno (1993) examines how the development of special negotiating
arrangements with Japan evolved. See also Kahneman and Tversky (2000), Gilovich et al. (2002),
and Kahneman et al. (1982). The focus on framing has even given rise to panels on the topic at
American Political Science Association (APSA) Annual Meetings, like the one in Washington,
DC in September 2005.
5 Kanner (2004) has developed a formal model that connects framing directly to prospect theory.
His model demonstrates how one actor in a bargaining situation can alter the frame for a second
actor and successfully alter the frame for negotiations to one of loss. Kahneman and Tversky’s
original (1979) articulation of prospect theory highlighted two phases of the choice process: framing
and editing, followed by evaluation. Berejikian (2004) is an extended application of prospect
theory and framing in international relations.
6 This is true to a point. Most economists, following Daniel Bernoulli’s work on risk measurement
from the early 1700s, assume a concavity of wealth function. As wealth increases, individuals
have diminishing marginal utility for each additional unit of wealth.
7 The slope of the utility function (see Figure 8.1, above) over wealth is flatter farther out from
the reference level. The rational model assumed that individuals are interested in states of wealth,
but Tversky and Kahneman (1986: S259) have shown that the effective carriers of values are
changes in wealth, as noted by gains and losses. The S-shaped value curve, therefore, violates a
critical assumption in expected utility theory.
8 Amos Tversky died before the Nobel Prize was awarded, but it was given to Kahneman in
recognition of the work pioneered by the two men.
9 If the reference point shifts, the value function will also shift (Kahneman and Tversky 1979:
268).
10 The value functions may break down for very small probabilities or for catastrophic losses. I note
below that propensity for risk depends on both domain and a probability assessment.
11 Thaler (1980) provided interesting evidence about the reference point. Individuals respond much
more warmly to receiving a discount for using cash than being charged a surcharge for using
credit. A discount implies a gain and a surcharge a loss. Schelling (1981) notes a similar effect
in tax policy between tax exemptions or tax premiums for childless couples.
12 The disutility of a loss of US$100 is twice the utility of gaining US$100. This experimental result
holds for small to moderate gains and losses of money. See Tversky and Kahneman (1992).
13 For more discussion of situational versus dispositional (character) attributes, see Mercer
(1996).
14 Likewise, MBA students who have been taught about the dangers of emphasizing losses, will
continue to make choices consistent with prospect theory. Individuals seem incapable of separating
out the effects of frame from their decisions. See, for example, McNeil et al. (1982); Tversky and
Kahneman (1986).
15 Mercer (2005b) provides a careful review of the applications of prospect theory in political science
research. See also Boettcher (1995), Jervis (1992), Levy (1992b), O’Neill (2001) and Wakker
(2003).
16 McDermott (1998: 15–44) also provides one of the best, clearest reviews of the theory.
17 This tendency may help explain the tendency noted in many political studies for individuals to
vote for incumbents. See Quattrone and Tversky (1988: 725–6).
18 This has also been called the ‘endowment effect’ and has been extensively studied. See, for
example, Thaler (1980) and Kahneman et al. (1991).
19 Samuelson and Zeckhauser (1988) termed this tendency the status quo bias.
20 These preferences appear to be reversed, or diminished, as the probability of winning on the
gamble falls below .30. See especially Levy (1992a: 183–4, 2000: 199).
21 The overweighting of outcomes violates the expectation rule in neoclassical economics (see Tversky
and Kahneman 1986: S265–70).
22 Events that are accompanied by highly salient representations (like graphic images of airplane
crashes or murder) are overweighted, while more common, high-probability events (car accidents
or suicide) are relatively underweighted (McDermott 1998: 31).
23 The idea of grouping decisions has been considered by a number of authors. For example, Read
et al. (1999) consider narrow and broad choice bracketing, Kahneman and Lovallo (1993) discuss
narrow and broad decision frames, and Heyman (1986) used the terms local and overall value
functions. In each article, the authors attempt to determine whether individuals make choices
differently if they consider items in relative isolation (sequentially or temporally) than if they
broaden or widen the objects under consideration. All of these studies provide evidence to support
the contention that bracketing or mental accounting matters.
24 Benartzi and Thaler (1995) consider alternative evaluation periods, but find that one-year time
horizons appear to best fit the historical evidence.
25 This observation was tested empirically in Thaler et al. (1997). It was further refined and applied
in different contexts in Gneezy and Potters (1997).
26 Benartzi and Thaler (1995) argue as well that this model fits both individual and institutional
investors. Institutional investors, like pension funds, are still managed by individuals who are
governed even more strongly by concerns about losses. The managers must create regular reports
on the returns to investments, so it appears that agency costs lead to greater myopic loss aversion
than in individuals (1995: 87–90). The same is true of foundations and university endowments,
faced with similar agency problems to pension funds and compounded by the spending rules of
most foundations and universities that allow spending only up to a certain percentage of the
value of the endowment. Any board of governors or trustees that presides over a prolonged
period of stock market losses will not be satisfied with the knowledge that over the longer term,
stocks will likely out-value bonds.
27 Thaler et al. (1997: 657).
28 Part of the challenge to incorporating fairness is that the discipline as a whole is assumed to be
value-free or not driven by norms of human behaviour. Economic agents are assumed to be law-
abiding, but not ‘fair’. If we assume that individuals are even occasionally motivated by
considerations of fairness in ways that make an impact in economic life, economists have to deal
explicitly with normative considerations of human behaviour. In fact, since Matthew Rabin
published his now famous article on the need to incorporate fairness into economics in 1993,
many economists have worked themselves into intellectual pretzels. Many have claimed that
fairness continues to be a matter that is inconsequential. Others have insisted that fairness can
be included in standard economic models. Still others have suggested that these types of value
considerations simply have no place in economics at all. For an illustration of complaints, see
Holcombe (1997) and the response by Berliant et al. (2000). Fehr and Schmidt (1999) attempt to
have it both ways, by building models that incorporate fairness behaviour on the part of some
individuals by arguing that fairness is a ‘self-centered inequity aversion’. This debate is somewhat
analogous to the arguments in political science made by some rational choice scholars. One of
the presumed strengths of rational choice theory is its non-normative base. Yet, as Mercer (2005a)
points out clearly, even assumptions about individual self-interested behaviour and utility
calculations are laden with value assumptions. It should be noted that welfare economists have
a long history of studying fairness or equity in outcomes, but have not considered how such
concerns can alter individual behaviour.
29 See also Gintis et al. (2006) or Bahry et al. (2005) and Bahry and Wilson (2006) on evidence from
Russia. This line of research is particularly important in untangling the connections between
behaviour and background. Most of the limited work done thus far on fairness has examined
co-operative behavior among undergraduate students in (largely) American universities. The
results could therefore be an artefact of cultural norms or the informal and formal institutional
settings that are common among most college undergraduates. The results of the largest study
to date, by Henrich et al. (2001), does not provide support for neoclassical, rational behaviour
models. Individual-level economic and demographic variables did not appear to play a role in
determining outcomes either.
30 Most of these authors argue they are not studying fairness, but instead are studying ‘reciprocal
behaviour’ both positive (co-operative) and negative (retaliatory).
31 There is a long list of studies which indicate that individuals co-operate with public good provisions
far in excess of the expected levels (at or near zero). Dawes and Thaler’s review (1988) of the
experimental literature highlights the fact that for most one-shot public good decisions, the
contribution of individuals ranges from 40 to 60 per cent of the socially optimal level. But
individuals do not generally respond for purely altruistic reasons either – seeking unconditionally
to help others; rather, behaviour is highly contingent. I will do my part to the extent that I see
others doing their part. If no one but me reduces water use, I will not reduce my own consumption
even during a severe drought.
32 See the experimental evidence on this point, especially in Kahneman et al. (1986a), Gorman and
Kehr (1992).
33 See Fehr et al. (1993), for experimental evidence of this point. Buyers offered substantially (by
more than 100 per cent) higher prices than the market clearing level in expectation that sellers
would provide fair quality levels. Even when repeated, the experiment revealed no tendency for
prices to converge at market clearing levels. Other evidence can be found in Blinder and Choi
(1990) or Campbell and Kamlani (1997).
34 The ultimatum game has a similar structure. A good review of this game structure can be found
in Thaler (1988). Early experimental evidence of the challenges posed to standard theory by
individuals was shown by Guth et al. (1982); Binmore et al. (1985); Kahneman et al. (1986a, 1986b);
Neelin et al. (1988); Guth and Tietz (1990). For examples of experimental evidence over high
stakes, see Hoffman et al. (1996); Roth et al. (1991); Slonim and Roth (1998); or Cameron (1999).
William Nelson (2001) makes the opposite argument – it is only at very, very large payoffs that
fairness concerns will override standard utility calculations. As an example, Bill Gates will
continue to derive high wealth levels at the end of any game, so even at very high stakes, he is
willing to sacrifice more wealth for greater fairness.
35 Ochs and Roth (1989) and Prasnikar and Roth (1992) provide helpful reviews of the debate over
evidence.
36 This article marked Rabin’s opening foray into behavioural economics and psychology, for which
he was later awarded the John Bates Clark medal in 2003 (Camerer and Thaler 2003). Rabin
was not the first economist to consider economics models incorporating fairness (although he
may prove the most influential). See, for example, Baumol (1982).
37 Pure altruism on the part of the players cannot account for both outcomes. See Rabin (1993:
1288).
38 See the discussion in Goldgeier and Tetlock (2001: 85–6).
9 New institutionalism and
International Relations
Hendrik Spruyt
Introduction
New institutionalism originated from a neoclassical economic foundation, sharing the
view that macro-level processes can be explained by micro-level decisions. It has found
fertile ground in the American approach to political science that traditionally has had
a methodological individualist bent (as with the behavioural analyses of the 1960s and
1970s), and it fit with beliefs that prevailed in society at large.
New institutionalism, however, differs from earlier methodological individualist
approaches, such as behaviouralism, in taking a more deductive approach. It prefers
a priori assumptions that generate specific hypotheses to inductive research based on
data collection and the search for statistical regularities.
New institutionalists have also explicitly taken issue with traditional neoclassical
economics. The older neoclassical paradigm was only marginally concerned with
institutions and focused instead on the efficiency of outcomes in markets. Social outcomes
were presumed efficient, provided market distortions did not occur. New institutionalism
(hereafter NI), by contrast, while sharing some key assumptions with neoclassical
economics, challenges the efficiency of social outcomes, and problematizes the nature
of institutions. It seeks to explain how institutions emerge, why they perform certain
functions, and how institutions impose particular constraints and opportunities on
individual behaviours within those institutions.
Although heavily influencing the study of American political institutions – as, for
example, in the rational choice approaches of Mayhew (2004), McCubbins and Sullivan
(1987), and Cox (1997) – this approach has also made inroads in the study of international
relations, some of which will be highlighted in this chapter. However, while it has
yielded some fruitful avenues for inquiry, the NI paradigm requires significant
modification in order to confront some serious weaknesses. Some of the most severe
criticism has come from non-American scholars, emblematic of wider divergences that
separate American scholars from their British and European counterparts (Cohen 2007).
This chapter proceeds in three parts. I first clarify the key assumptions that underlie
the research programme and discuss some of the key theoretical questions within this
paradigm. The chapter then turns to a more explicit discussion of how NI has influenced
the study of International Political Economy, and how it has influenced the comparative
study of institutions. The chapter concludes by discussing some of the critiques and
potential weaknesses of the new institutional approach, and suggests amendments to
earlier strands of new institutionalist theory.
118 Hendrik Spruyt
New institutionalism: key assumptions and core
theories
Differences with the neoclassical paradigm

Neoclassical economics is based on three core assumptions. It operates on the premise
that individuals are the primary unit of analysis. Social outcomes are reducible to, and
explained by, individual choices. It is thus methodologically individualist. It further-
more assumes that actors are rational and utility maximizing. Finally, it presupposes
that collective outcomes are efficient and optimal. They are equilibrium outcomes
(Moe 1984: 741). Arguably neoclassical economics includes several other less critical
assumptions (Winter, cited in North 1990: 19). However, focusing on this limited set
of assumptions suffices to draw out the key differences with NI.
New institutionalist theories, sometimes also called the new economics of organization,
or new institutional economics, share two assumptions with neoclassical economics.
Like neoclassical economics, the new institutionalist paradigm is methodologically
individualist. Institutions and governance structures, and even larger macro-level
processes, are essentially reducible to the calculations and behaviours of individuals.
Individuals purposefully create institutions to serve their interests, and they behave
strategically within the confines of already existing institutional structures to achieve
desired ends. It also assumes that individuals behave rationally and it is avowedly
utilitarian in scope (Eggertson 1990: chapter 1).
New institutionalism, however, differs from neoclassical economics in two important
aspects. First, while assuming that actors are rational, it realizes that individuals make
decisions under uncertainty. Influenced by behavioural theories and studies of
organizational behaviour, it challenges the notion that rationality may be modelled as
straightforwardly as classical economists suggest. Scholars of individual behaviour have
long noted that individuals, in fact, do not maximize their utility and often do not seek
full information; instead they ‘satisfice’ (Simon 1947).
Human beings and organizations not only satisfice, but they often work according
to scripts. Rather than reassessing new information, and new environmental constraints
and opportunities, organizations might simply run according to standard operating
procedures, precluding any necessarily optimal outcome (Allison 1972; Bendor and
Moe 1985).
Douglass North, one of the founding fathers of NI, similarly critiques the strong
rationality assumption of neoclassical economics. Particularly in his later work, he has
drawn attention to the many facets of individual and collective behaviour that are not
well explained by wealth- maximizing behaviour, but rather by altruism, ideology and
self-imposed constraints (North 1990: 20).
An even more significant departure from the rationality assumption has come from
behavioural economics, which in this sense targets neoclassical economic views, but
also the more rigid rational choice assumptions underpinning NI.
Contrary to this presumption [that people maximize utility and rank objects], there
is a long list of ways in which utilities depend on how objects are described or on
the way in which choices are made; these changes suggest that preferences are
‘constructed’.
(Camerer 1999: 10577)
New institutionalism and IR 119
Individuals do not make decisions as atomistic elements, but make choices based
on their beliefs about other people’s motives. Choice is socially interdependent
(Rabin 1998).
Consequently, if information is imperfect and choices are context-sensitive, then
collective outcomes cannot be assumed to be optimal in the sense that neoclassicists
would expect. Organizational studies challenge the notion of equilibrium outcomes
that prevails among neoclassicists. Traditionally, neoclassicists had neglected institutional
analysis. Neoclassical study thus led to the conclusion ‘not only that institutions are
designed to achieve efficient outcomes, but that they can be ignored in economic
analysis because they play no independent role in economic performance’ (North 1990:
16). New institutionalism, by contrast, makes institutions the centrepiece of its analysis.
Contracting and organizational structure

One of the most important strands in NI theory focuses on the interaction between
the particular type of contracting and organizational structure. The works of Ronald
Coase and Oliver Williamson have been critical in this strand of research. Subsequent
theories on incomplete contracting have built on their efforts.
Why are some transactions and contracts brought under a formal governance structure
(hierarchy), while others are not? One answer was provided by Mancur Olson (1965).
Goods that are non-exclusive and non-rival will tend to be under-provided, or not
provided at all, due to free- rider problems. In the absence of a dominant actor, or a
small group of privileged actors, collective goods provision will fail. Hierarchical
governance structures are required where such failure occurs.
But it was Ronald Coase (1960) who launched the transaction cost approach in
earnest. Neoclassical economic theory recognized that individual bargaining could lead
to efficient outcomes, even in the absence of hierarchical governance structures. For
example, if individuals suffered from pollution from a factory in their neighbourhood,
then neoclassicists would argue that producers and polluters both had incentives to
bargain towards the most efficient solution to the problem. Leaving aside questions of
morality and norms, either the producer could offer side- payments to the victim, or
the victim could pay the polluter to diminish the negative externalities of his behaviour.
Either way, the most efficient solution would emerge. In order to achieve such an
outcome, however, neoclassical economics assumes that transaction and information
costs are low and that property rights can be clearly assigned. Transaction costs, such
as the costs of preparing, negotiating and concluding agreements, transportation and
meeting costs, and so on were thus ignored. But in fact they are seldom negligible.
Information barriers usually exist, collective action is difficult to mobilize and transaction
costs may be high (e.g. hiring lawyers, the time spent in brokering a deal). Formal
institutional structures are thus necessary to reduce such information and transaction
barriers and to achieve more efficient outcomes.
Coase’s transaction cost approach laid the basis for Oliver Williamson’s work.
Williamson focused in particular on the degree of vertical integration in certain industries.
Why do some relations between producers become hierarchical? That is, why are
various producers incorporated within the decision making of an integrated firm,
whereas others retain greater independence among producing units? The answer, argues
Williamson, lies in the frequency with which producers interact, and in the asset-
specific nature of the transaction. Goods are asset- specific if the cost of their alternative
120 Hendrik Spruyt
deployment is high. Such goods cannot easily be deployed in another relationship and
the opportunity for hold-up increases (Williamson 1975, 1985, 1986; Ouchi 1991).
Thus, when transactions are frequent and assets are specific, the individual firms
involved in the transactions will demand greater formal governance structures. Given
the intention of actors to continue the business relation, incidental redress through
litigation will not suffice.
Organizational structure as a determinant of individual

behaviour
A second major strand in NI treats institutions as independent variables that explain
individuals’ choices and policy outcomes. Within this strand, scholars have sought to
demonstrate how different electoral systems affect the behaviour of candidates and
parties in variant ways. Such systems affect not only the calculations of candidates for
office, but also those of voters who seek to maximize the payoffs for voting. For
example, electoral systems with low electoral thresholds, multiple members per district,
and proportional representation will tend to generate multiple-party systems (Lijphart
1994; Taagepera and Shugart 1989). In such systems candidates may have more
incentives to cater to narrow interest groups than in two-party systems (Laver 1997).
Voters, conversely, know that voting for such special-interest candidates will not diminish
their chances to see their votes translated into policy outcomes, since they know that
the candidates of small parties may well gain a seat. One can thus compare and contrast
the various strategic incentives in two-party and multi-party systems, strategic constraints
and opportunities in presidential systems and parliamentarian types, and so on. Such
scholarship thus brings rational choice arguments and the traditional comparative
analysis of electoral systems together (Cox 1997).
Other scholars have focused on how organizational structure influences policy
implementation and the loyalty of lower ranks. Particularly when the preferences of
lower- ranking individuals differ from those of the higher echelons, shirking, moral
hazard and adverse selection may result (Moe 1984).
Shirking occurs because the benefits of collective performance do not correspond to
the level of individual input. Workers may contribute little to a firm’s overall performance
and yet be amply rewarded. The converse, of course, may occur as well. In such a
situation, the rational individual will tend to underperform, given the lack of
commensurate reward.
Shirking is thus a subset of the general problem of principal–agent relations. Given
that principals (the hierarchy in the organization) can only imperfectly monitor the
agent, the agent will be induced to engage in behaviours that may be counterproductive
to the best interest of the principal. Such a situation may particularly arise when the
agent possesses privileged information or expertise, or when monitoring is costly or
impossible (Jensen and Meckling 1976; Miller 1992; Pratt and Zeckhauser 1985; Stiglitz
1987).
Adverse selection may occur because institutional incentives tend to attract individuals
who are not necessarily best suited for a given task. For example, certain organizations
(police forces) might reward individuals for high-risk behaviour (the number of high-
profile arrests they make). Yet at the same time, this reward structure might lead
individuals who tend to be more confrontational than the general population to join
law-enforcement agencies.
Finally, moral hazard occurs when organizational contracting redirects individual
behaviour in a perverse direction following the conclusion of a contract. Insurance
may thus precipitate the very behaviours that the insurer would like to minimize in
the insured. Banks, for example, when insured by a federal government (the American
case) or by international lending authorities (the International Monetary Fund [IMF]),
may engage in higher risk taking than would otherwise be the case.
Institutions as dependent variables

Conversely, rather than see institutions as constraining and perhaps even determining
agent choice, organizational structure can also be seen as the outcome of individual
choices. The particular features of the institution are then explained by the deliberate
choices by agents to create institutions that best serve their interests. Particularly
prominent among scholars of American politics has been the assumption that individuals
have a particular interest in maximizing their chances at retaining office (Mayhew
2004).
For example, if one assumes that elected officials seek to maximize their chances at
re-election, while at the same time using their resources efficiently, they will create
institutional routines that best achieve such objectives. Committee design in the American
Congress, or the use of fire-alarm systems to control bureaucratic output rather than
prospective oversight over such organizations, can be explained by instrumental choices
of legislators (McCubbins and Sullivan 1987).
A recent addition to the political science literature has come from incomplete
contracting theory. Incomplete contracting occurs when actors cannot possibly foresee
all contingencies in the future (Hart and Moore 1990). Given the lack of knowledge
and uncertainty, the actors involved will seek institutional safeguards against hold-up,
reneging, and a shift in bargaining leverage to the opposing side. Given that writing
a complete contract ex ante is impossible, the contracting parties will have to decide on
how to divide the rights to future benefits. Who will get the residual rights, the rights
not covered by the details of the initial contract? Moreover, actors will have to decide
how future disagreements will be handled. Given that the future is uncertain, which
institutional mechanisms might be created to adjudicate upcoming disputes?
New institutionalism and International Relations

These three approaches in NI have transferred to the study of international relations.
The study of organizational structure has focused on the emergence of regimes as well
as informal and formal hierarchy in international systems. At the same time, the study
of institutions, either as causal factors or outcomes, has influenced the study of such
diverse topics as civil–military relations, economic policy, territorial integrity, regional
integration and overseas basing.
Contracting and organizational structure

Collective action theory clarifies why the international system sometimes demonstrates
relative order and adherence to particular rules of behaviour; while at other times,
violations and conflictual behaviour prevail. It has particularly made inroads in the
study of economic regimes.
122 Hendrik Spruyt
Starting from the standard liberal premise that low barriers to trade and open markets
are beneficial to all participants, liberal trade regimes must be understood as collective
goods (at least for the members of such liberal associations). Liberal trade creates
incentives to utilize comparative advantages and minimize efficiency losses. As with all
collective goods, however, individual incentives may lead actors to free ride and thus
under-supply the collective good.
In game-theoretic terms, a liberal trade regime presents a multiple-player Prisoner’s
Dilemma game (see Chapter 8 for a description of this game). While all would benefit
from co-operating to create, maintain and adhere to a liberal trade regime, any state
might be tempted to defect unilaterally. Even if this is irrational from a purely liberal
perspective (by pursuing protection, the government raises prices for consumers and
protects inefficient domestic producers), a government might do so for political reasons,
such as catering to a powerful interest group, or to protect local jobs. When others are
motivated by similar calculations, the end result will be mutual defection and a sub-
optimal outcome for all will result (Hardin 1982; Oye 1986).
The solution to the problem thus lies in the presence of one dominant actor, the
leading economy of the world (however measured), to create such a liberal trade
regime. Great Britain played such a role in the nineteenth century, while the United
States did so in the wake of World War II. Thus, according to the key proponent of
Hegemonic Stability Theory (HST), Charles Kindleberger, the lack of British economic
strength in the inter-war period, combined with American isolationism, led to economic
closure and contributed to the Great Depression (Kindleberger 1973). Small groups of
leading economies might play a similar role as a dominant hegemon, but only under
particular conditions (Lake 1988).
New institutionalists have taken issue with some of the causal claims of HST. They
have done so partially because HST seemed ill suited to explain regime persistence
following relative American decline, evinced by the abandonment of the Gold Standard.
In addition, HST was vulnerable to other critiques. For example, were liberal regimes
really analogous to collective goods? Was the British nineteenth-century regime indeed
similar to the American General Agreement on Trade and Tariffs (GATT) and Bretton
Woods system?
Influenced by Coase’s argument on transaction and information costs, Robert
Keohane (1984) argued that international regimes did not require a leading state.
Hegemons were not necessary to create such a regime, nor did regimes require a
hegemon for their maintenance. Hegemony was neither a necessary nor a sufficient
condition. Instead, regimes served to reduce information and transaction barriers to
efficient interaction. Once established, regimes could thus continue to function as before,
even with hegemonic decline. The liberal trade and financial regimes, sparked by US
hegemony, thus continued even while the American share of international trade and
finance diminished. Private actors rather than states could create international institutions
to diminish transaction and information barriers even in lieu of state action. The oil
regime, in Keohane’s view, was one example where a patchwork of measures and rules
was largely instigated by private actors. Contracting theory, not the distribution of
power in the international system, explains how regimes function.
Extending this transaction cost approach, Beth and Robert Yarborough (1987, 1992),
explained the nature of international regimes by another set of variables: the frequency
of transactions and the asset-specificity of international trade. Using Williamson’s insights,
they argued that frequency of transactions and high levels of asset-specificity instigated
formal institutional hierarchy. British trade in the nineteenth century was largely non-
asset-specific. Consequently, there was little need for formal governance, and hence
active hegemonic management of the system was low. Few opportunities existed for
hold-up and defection. Conversely, post-war international trade was highly asset-specific
and the frequency of transactions had increased immensely. Therefore, formal govern-
ance structures and active management on the part of the hegemon were imperative.
In contrast to the informal British liberal regime, the United States had to institutionalize
financial and trading arrangements with formal conditions as well as regularized
arbitration procedures.
An extension of this argument suggests that in some cases of extreme asset-specificity,
the demand for formal governance over all aspects of production might even lead to
the extension of political rule over other polities. Jeffry Frieden (1994) thus suggests
that imperial extension correlated directly with the level of asset-specific investments
in particular areas. Where private and public actors had investments that could easily
lead to hold-up (through seizure and destruction), they would demand that the imperial
government step in. High levels of investments in plantations or facilities for raw material
extraction thus correlated with the extension of formal empire.
International regimes, hegemonic orders and formal empires thus impose a degree
of hierarchy in the international system. But even in the absence of dominant hegemonic
or imperial actors, states contract with one another to create international orders
between the extremes of anarchy and hierarchy. Indeed, for David Lake (1996, 1999)
all patterns of interaction, including formal empire, are in fact types of contracts.
While others have not quite followed the view that formal empire is best conceived
of as a type of contract, his contracting approach has been extended by others. Thus,
Katja Weber uses a combination of Lake’s insights together with a Williamsonian focus
on transaction costs to explain alliance structure and regional integration (Weber 2000;
Weber and Hallerberg 2001).
Others have pursued this line of inquiry. Alexander Cooley has used Williamsonian
contracting theory and Alfred Chandler’s (1966) analysis of m-form (multi-divisional)
and u-form (unitary) organizations to explore why certain sectors of the former Soviet
economy managed the break-up of the Soviet Union quite well while others floundered
(Cooley 2005). More recently, Cooley and Spruyt have used incomplete contracting
theory to explore the logic of overseas basing, post-imperial relations, and variations
in regional integration (Cooley 2000/2001; Cooley and Spruyt 2009). They argue that
such relations in which sovereign rights are exchanged resemble incomplete contracting.
One of the conclusions they draw is that regional integrations that are closer to
incomplete contracts require subsequent delegation to third parties (new organizations)
that have far-reaching powers, such as the European Union (EU) institutions. Contracts
that are relatively complete, such as the North American Free Trade Agreement
(NAFTA), tend to be far more detailed ex ante, with far less delegation of residual rights
to third- party institutions, thereby explaining the relative lack of NAFTA arbitration.
Principal–agent problems and security policy

Principal–agent perspectives have influenced the study of security policy as well as the
behaviour of international organizations. Deborah Avant (1994) thus argues that the
nature of the delegating institution (the principal) influences the ability of the agent to
circumvent the principal’s wishes. The principal is that group of civilian leaders
124 Hendrik Spruyt
authorized to conduct foreign and military policy, while the military is the agent,
presumed to act under civilian oversight. Divided principals will allow more room for
agent defection because agents can bargain with different groups among their civilian
superiors. In the United States, the divided nature of civilian government allowed the
military to seek congressional allies against the presidency and vice versa. In doing so,
it had greater ability to pursue its preferred policies against the wishes of its civilian
masters. In Avant’s analysis, this meant that the armed services were reluctant to
innovate in peripheral wars, such as Vietnam, because they valued the European theatre
more highly. In more unified civilian governments, by contrast, as in parliamentarian
Britain, oversight tends to be more rigorous and effective, and thus those institutions
generate more coherent civilian control over the military.
Peter Feaver (1998) has analyzed civil–military relations along similar lines. The declining
ability of civilian leadership to punish military leadership and the incentives among the
armed forces to withhold information or shirk their responsibilities, suggest to him that
civilian oversight over the American military might have declined in recent decades.
Principal–agent theory has also made inroads in the study of international organiza-
tions. Nielson and Tierney (2003) thus argue that international organizations respond
to states’ interests when these states (the principals) can adequately monitor the
international organizations (the agents). When such monitoring control is lacking, or
when multiple principals clash, international organizations will pursue their policies
more autonomously.
Principal–agent insights have also been applied to explaining territorial fragmentation.
From a new institutionalist perspective, federalist forms of government, specifically,
create mixed incentives. On the one hand, they give local elites and ethnic minorities
considerable latitude in running their own affairs. This will tend to reduce the
dissatisfaction with the federal government. Preferential treatment of a particular area
will further enhance individual incentives to remain in the federation. On the other
hand, such forms of government also create local institutions that can easily be
appropriated by native cadres. By establishing fixed territories with local institutional
arrangements, the federal government in essence lowers the barriers for potential
secession. Such territories serve as focal points of identity, and spatial segregation from
other territories enhances local institutional distinctiveness. Thus, they create
principal–agent problems. By giving local elites considerable autonomy and resources,
they create the possibility that such elites will defect from the central hierarchy, and
start a polity of their own.
Following that logic one might explain the break-up of the Union of Soviet Socialist
Republics (USSR) and the Socialist Federal Republic of Yugoslavia. The asymmetric
nature of Soviet federalism created variant incentives for leaders to defect or remain
loyal (Bunce 1999; Laitin 1991; Solnick 1996, 1997). The declining ability of the centre
(the party) to monitor and punish, combined with the ability of titular elites to mobilize
local resources and capture rents from their patronage networks, induced local elites
to defect (Nee and Lian 1994). Indeed, once the agents (the titular elites who governed
the union republics) understood that the central government (the principal) was too
weak or not inclined to retaliate, it started an inverse bank run. Agents defected in
ever- increasing numbers, trying to beat the other union republics to the resources that
might be gained in breaking away.
Principal–agent issues also befuddled the relations between the USSR and its
satellites. Dependent on support from the USSR for resources, the satellite states would
overestimate the resources they needed and underestimate what they could trade with
the USSR in return. Knowing this, the Communist Party planners in Moscow thus
supplied the satellites with equal doses of misinformation. In an elaborate game of
ratcheting demands, neither side had accurate information, leading to wide trade
imbalances (Stone 1996).
Patronage politics and credible commitment in

international agreements
The institutionalist approach has also tried to explain when governments have incentives
to adopt liberalization programmes, or when they instead cater to narrow niche clienteles
and pursue patronage politics. It suggests that authoritarian governments are particularly
prone to catering to private interests. In the absence of broad public electoral controls,
the ruling oligarchy will seek to maintain itself by giving in to the demands of powerful
groups in the ruling coalition. Authoritarian governments create strategic incentives
for political entrepreneurs to cater to private interests rather than provide public goods.
But democratic governments may show similar tendencies. As noted earlier, demo-
cratic regimes with proportional representation, low electoral thresholds, and multiple
members per district create greater incentives for political rulers to cater to private-
interest groups. In contrast to the winner-take-all nature of some two-party parliamentary
systems, such as Great Britain, multi-party systems encourage elites to cater to niche
groups in order to be (re-)elected.
The particular nature of electoral systems can thus create greater incentives for
politicians to cater to the broader electorate and thus to be more concerned with
the provision of public goods, rather than more narrow private goods. For example, the
institutional changes in the wake of Spanish democratization in 1978 favoured larger
parties over small ones and diminished the strategic incentives to cater to the old narrow
constituency of the Franco regime (Lukauskas 1997). The result was greater liberalization
of the banking sector.
Domestic institutions also affect a country’s propensity to engage in external
liberalization of trade. To give another example: in the old Japanese electoral system,
candidates could cultivate specific constituencies in order to gain a loyal base of
support. Given the multi-member districts of this system, the members of the dominant
Liberal Democratic Party (LDP) had little incentive to compete with one another.
Instead, party members catered to niche clienteles in construction, agriculture and
other specialized sectors, and thus maximized the chances that LDP members would
gain the majority number of seats in each district. Political entrepreneurs had little
incentive to forego protectionist platforms in favour of liberalization and the provision
of public goods (Cowhey 1993).
Subsequent reforms in the electoral system in 1993 were thus a means of empowering
the pro-liberalization constituency in Japan. With more than half the Diet (legislature)
seats now coming from single-member districts and the rest elected by proportional
representation, the LDP members had less opportunity to cultivate special niche
constituencies.
More broadly, domestic institutions influence the ability of states to commit to
international agreements (Martin 2000). Institutions with multiple veto players –
that is, institutions with multiple actors whose consent is needed to pass a piece of
legislation – will tend to show relatively little policy change (Immergut 2002; Spruyt
126 Hendrik Spruyt
2005; Tsebelis 1995, 1999, 2002). By contrast, a government with few veto points (the
British Westminster system arguably has a single decision point, given prime ministerial
dominance), can more readily engage in policy change. This means that governments
with multiple veto points cannot easily back out of agreements to which they have
consented, because backing out would mean a change from a previously achieved
equilibrium. Thus, institutions with multiple vetoes are more credible in fulfilling the
terms of a concluded accord, although they might be slower in initially consenting to
such an accord.
Critical reflections on new institutionalism and

possible amendments
Weaknesses in the new institutionalist paradigm

While NI has provided useful insights into some important research questions, the NI
approach is not without its critics. First, one can question the methodological assumptions
of rational choice theory that inform new institutional arguments. While some scholars,
such as Milton Friedman, suggest that as-if assumptions can be tolerated as long as
they generate useful predictions, many scholars submit that assumptions should
demonstrate empirical verisimilitude. Indeed, theories based on flawed as-if assumptions
cannot generate accurate models (Blaug 1980: 104–28).
One can also challenge the assumption that individuals’ preferences can be narrowly
defined and posited a priori. As behavioural economists have demonstrated, preferences
and interests are instead informed by the social context in which individuals are
embedded. Variant social contexts will thus spark different sets of preferences, choices
and behaviour.
Similarly, the idea that agents engage in calculative behaviours to achieve their goals
in a utilitarian manner often does not hold. Critics point to a multitude of behaviours
which seem antithetical to self-interest maximization. Even rational choice theorists
themselves seem befuddled to explain relatively simple actions. Thus, rational choice
theory struggles to explain why individuals bother to vote, given that the advantages
of doing so benefit the larger community, while the costs of doing so are borne by the
individual. Hence, free riding should be expected, but occurs only to a limited extent
(Barry 1978).
Furthermore, positing interests as exogenously given is highly problematic. Indeed,
it might be argued that ideas and beliefs not only inform individual calculations of
how to pursue one’s self-interest; they in fact define what is to count as one’s ‘interest’
in the first place (Blyth 2002). In many instances, particularly when it comes to complex
policy issues, individuals are often unaware which policy is in their best interest. Hence,
they make their decision based on broad ideological precepts rather than engage in
cost–benefit calculus towards a known objective.
Rational choice arguments also run the risk of post hoc explanation because they are
functionalist. As careful analysts who work in the NI vein themselves note, if actors
create institutions to serve their interests, then it is tempting to explain the existence
of institutions by the actions and preferences of individuals who now benefit from such
institutions. But doing so commits a ‘post-hoc, ergo propter-hoc’ fallacy (Keohane
1984: 81; Yarborough and Yarborough 1990: 252). The actors who benefit from existing
institutions may have had nothing to do with their formation. Indeed, the extant
institution might be the outcome of accident and unintended consequences. Careful
historical process tracing is required to establish causality (Thelen 1999).
What holds true for critiques of rational choice arguments at the individual level
also holds for ascribing rational maximizing behaviour to institutions and states. As
with individuals, one cannot posit preferences or interests a priori. Constructivist and
post-structural theories thus argue that interests and preferences are social constructs,
and must be treated endogenously rather than exogenously (Wendt 1999; Ashley 1986).
New institutionalism, at the macro level, also tends to aggregate individual choices,
and treats such aggregate choices as ontologically similar to those at the individual
level. States thus choose certain policies and governance structures in the same way
as individuals. But this treats states as ontological primitives, whereas they are in fact
composites of various individual preferences, divergent coalitions and contending
institutions. One needs, therefore, to ‘unpack’ the state.
Amendments to new institutionalist arguments

Several responses to such critiques are possible. First, one might retain the basic
methodological orientation of explaining aggregate outcomes by individual purposeful
action, but surrender its overly narrow assumptions. This requires greater inductive
analysis of particular preferences and motives. This will also avoid the fallacy of post
hoc reasoning. Institutional analysis thus requires the study of preferences and institutions,
in which institutions act as conduits for empirically observed preferences (Milner 1997:
16–17).
Second, the treatment of aggregate state-level choices as ontologically similar to
individual choices needs to be justified. Under which conditions is such an assumption
warranted? When might we treat the state as a unitary calculating actor, rather than
as a forum with various groups and individual preferences in competition with each
other? For example, even if one accepts that international regimes exist to reduce
transaction and information costs, not all domestic groups and sectors will have similar
preferences on that issue. Consequently, in order to understand why states have dissimilar
policies on these issues, domestic analyses will be critical. Martin and Simmons (1998:
747) make a similar claim: ‘Institutionalists have generally neglected the role of domestic
politics. States have been treated as rational unitary actors and assigned preferences
and beliefs.’
One might also expand the new institutionalist approach that political science has
adopted from economics with the sociological understanding of new institutionalism
(Powell and DiMaggio 1991). Unlike the economic literature, it sees institutional
choices as structured within pre-existing organizational fields. Institutions emerge and
spread within a universe of other organizational types. Their relative success must be
explained by their position in the field of institutions in which the emergent type is
embedded. Some fields may be dominated by one or several actors, not unlike
international regimes dominated by hegemonic states. Institutional spread or duplication
will depend on the support of the dominant player for that new type.
Institutions may also spread on grounds of appropriateness. Actors will prefer certain
institutions within those predetermined by an already existing set. Certain solutions
will be taken for granted and not even subject to scrutiny. Alternatives are not even
considered within the realm of the possible. Individual identities and preferences emerge
within a social context. Hence, since individuals in larger group settings interact with
128 Hendrik Spruyt
each other depending on mutually assigned roles and expectations (Abercrombie 1986),
they will opt for choices within an established acceptable repertoire. Existing norms
and rules of behaviour will thus dictate which institutions will survive. Individuals and
groups will create certain institutions simply because doing so identifies oneself as a
member of a particular club, with all the commensurate benefits and obligations. For
example, new emerging states tend to create similar scientific organizations and utilize
similar symbols of statehood to older and more established polities (Thomas et al. 1987).
Such an approach would blend new institutionalist approaches in International Relations
not only with the similarly named new institutionalism of sociology, but also reconcile
them with behavioural economic arguments.
Conclusion
This chapter has argued that the new institutionalist research programme emerged
out of dissatisfaction with the lack of institutional analysis in neoclassical economics.
New institutionalism itself has many incarnations across the various sub-fields of political
science. Without claiming any comprehensiveness, I have suggested several venues in
which NI has been applied with some success.
However, it is not without its own critics. Some criticize the fundamental assumptions
of NI. Others advocate greater sensibility to the tug and pull of domestic politics that
complicate any simple causal argument linking individual preferences to institutional
outcomes. And yet others argue that NI in International Relations should move closer
to its similarly named sociological cousin. In the last part of this chapter, I have identified
some of these critiques and have suggested that the explanatory power of NI can be
enhanced by taking heed of the criticism of the more narrowly defined versions of new
institutionalism.
10 An evolutionary approach to
global political economy
Herman Schwartz
Author’s note: the author would like to thank Bent Sofus Tranøy for very useful
discussions, and more importantly, for some prodding to develop and write down the
arguments below. Any errors remain mine.
An evolutionary approach to global political economy

What would an evolutionary approach to the global political economy (GPE) look like?
The usual approaches to GPE all have some elements of an evolutionary approach,
but none assembles them into a coherent theoretical argument. In this chapter, I will
advance both concept and something resembling proof of concept, albeit very briefly
given the small space provided. The first section lays out the essentials for an evolutionary
model in general to show why existing approaches are not evolutionary in the full
sense. The second section presents the concept, namely, an evolutionary model for the
GPE based on the preceding section. This model is analogous, but not identical, to
natural evolution because humans occupy an unstable intermediate position with respect
to their ability to orchestrate co-operative behaviour as compared to most species.
What I will label ‘social exhaustion’ of relatively abundant resources for growth thus
matters as much as exhaustion of material resources. The third and fourth sections
present proof of concept by way of stylized pictures of two different periods of the
GPE. These sections highlight transformation through material and social exhaustion.
The fifth section concludes by arguing for the utility of an evolutionary approach in
contrast to the usual paradigms.
Evolutionary models
Ian Lustick (2011) argues that much social science writing uses ‘evolution’ in an
unsystematic way, typically as a synonym for any process of gradual change. This broad
brush picture misses several more coherent efforts. On the one hand, George Modelski
(1996) made an early attempt to organize an evolutionarily oriented research agenda
around the development of the world economy. On the other hand, Geoffrey Hodgson
(1993) has systematically tried to apply evolutionary thinking to understand economics
and particularly institutional economics. Hodgson suggests that a coherent evolutionary
model necessarily has four parts which collectively add up to a mechanism for explain-
ing both gradual and abrupt change in the constitutive parts of a given system. These
are principles of variation and divergence for units, a process of natural selection
among those units, and a phylogenetic rather than ontogenetic outlook on any given
130 Herman Schwartz
ecological/biological system and its units. Put in natural language, an evolutionary
theory must answer the questions of why and how individual organisms are different;
what determines how those differences affect the probability that a given unit will
survive long enough to reproduce; and, finally, accept that equilibria are unstable and
that evolution has no final stopping point.
So, first, evolution assumes a population of dissimilar units – both individuals and
species – occupying the same environment. Mutation creates variation and this variation
is what allows natural selection to occur. If all members of a species were identical and
could faithfully transmit their genetic make-up to successor generations, then selection
processes would not operate on individuals inside that species.1 Selection might operate
across species though. Second, the characteristics that define units must be heritable.
Selection is rarely an ‘all or nothing’ phenomenon, in which all units with similar
characteristics are wiped out in one go.2 Instead, selection operates over time by reducing
the probability that an unfit individual will survive long enough to reproduce.
Characteristics that are not heritable will not affect the probability that successor
generations survive long enough to reproduce. Third, obviously, a process of natural
selection must operate such that better adapted, fitter organisms have a higher probability
of having offspring and thus proportionately more offspring than worse adapted
individuals. Over time, these offspring crowd out those from worse adapted individuals,
producing either extinction of competing species or of deviant individual organisms
within a species.3 Together, all three factors imply common descent. All known life
forms on earth use deoxyribonucleic acid (DNA) or ribonucleic acid (RNA) to reproduce
themselves; all known life is thus descended from the operation of selection on variations
in the organisms produced by these first self-replicating proteins.
Hodgson (1993: 94) also argues that variation, heritability and selection imply a
phylogenetic rather than an ontogenetic outlook on a given system and its units. An
ontogenetic outlook assumes that species (and thus their individual units) have
unchanging features or qualities. Tuna are Tuna, can be identified as such through a
list of qualities, and remain Tuna regardless of genetic drift or changes in the
environment. By contrast, a phylogenetic outlook assumes that – despite common
descent from the original self-replicating proteins we know now as RNA, DNA and
prions – units carrying those proteins are constantly changing. Darwin’s tree of life
implied a phylogenetic approach in which sexual recombination, genetic mutation and
environmental disturbances continuously created variety within and across species.
Organisms constantly changed as selection worked its inexorable magic on them. This
change means that a permanent and stable equilibrium is impossible. In this view, a
‘species’ is simply a shorthand expression for a group of organisms that vary from
individual to individual but cluster around a node of shared characteristics; the modal
point for that node can and does change over time. Species are not permanent. The
process of selection for individuals that best fit the environment thus never optimizes
in the strict sense of the word. Evolution does not work without variation among
individuals. Instead, the average set of characteristics defining a species shifts towards
those that define the fitter individuals. Selection produces differentiation, not uniformity,
and species can exhibit considerable internal differentiation. Evolution is thus completely
agnostic about the issue of ‘progress’ or ‘decline’. Adaptation is everything, and the
struggle to acquire resources needed to reproduce both explains and produces adaptation.
At the most basic level, this struggle for resources can be understood as a struggle
for energy to drive self-replication. All life requires energy inputs, and all energy
An evolutionary approach to GPE 131
transformation involves a loss of some energy. Life is thus the uphill, temporary creation
of order in the form of organized structures (viruses, bacteria, cells, organs, individual
animals or plants) at the expense of greater entropy (disorder) in the surrounding
environment. Forms of life that can directly transform solar energy into biological
energy can partially avoid the issue of entropy because they have direct access to what
is in essence an unlimited supply of energy. Everything else, however, is parasitic on
those primary transformers of solar energy. Evolution is the process by which individual
organisms, and the species those organisms constitute, compete to capture energy from
the environment in order to raise the probability that their DNA will be able to
reproduce itself. A relatively greater ability to capture energy, as compared to other
individuals inside the species and across species, defines ‘fitness’ with the environment.
This ability increases the probability that a unit will reproduce, passing its DNA on to
successor generations. The demiurge in this drama, to the extent that there is any, is
DNA. Evolution through adaptation is not necessarily driven by conscious behaviours.
Do mainstream understandings of the GPE have a fully evolutionary outlook? The
closest thing to an evolutionary argument in international relations (IR) in general is
that found in Waltz’s (1979) rather thin neo-realist model for the guns side of the usual
guns and butter divide in IR. This model is taken almost directly from a neoclassical
model of pure economic competition, which explains its strong evolutionary elements.
The core of the neoclassical model is competition among firms for consumers’ dollars
(the resource in the system) in order to assure a given firm’s survival into the next
round of competition. Waltz replaces the profit motive with security seeking (more
properly, death avoidance). The neo-realist version of GPE takes this security-seeking
motive over into its analyses through the concept of relative gain (Grieco 1988b). While
this subordinates economic logics to the security dilemma, it provides a clear principle
for selection. What neo-realist analyses lack, however, are any principles of variety
and differentiation, and any argument about heritability. Like neoclassical economics,
neo-realist political economy assumes that the GPE comes to an equilibrium state
through the balance of power. Unlike the constant differentiation that a phylogenetic
approach predicts, individual states converge on the same strategies. Units may come
and go, but their basic strategy remains the same. Neo-realist approaches thus either
posit invariant units or display an unwillingness to observe and explain variation among
units. Neo-realist political economy thus does not have all the elements needed for a
coherent evolutionary theory. A realist world settles into an equilibrium defined by the
balance of power rather than by phylogenetic change.
What about neo-liberal approaches? Like neo-realist approaches, neo-liberal
approaches stress equilibrium; but unlike neo-realist approaches, they see co-operation
rather than conflict as the source of that equilibrium. While the original neo-liberal
approaches saw bureaucracies and firms as the basic units in the GPE, neo-liberal
approaches after Keohane’s After Hegemony (1984) looked to states as the basic unit for
the GPE. They also took up the neo-realist assumption about invariant human nature,
even though they posited a search for absolute gain rather than relative gains. Unlike
neo-realist approaches, neo-liberal approaches imply that the pool of resources in the
environment can be increased by conscious human action. The GPE is not zero-sum.
The ability to increase the pool of exploitable resources through co-operation is an
important insight we will pick up later in the discussion of social power. But neo-liberal
approaches assume away competition among units. Relatively high transaction costs
explain the failure to co-operate, not a competition over differential rates of reproduction.
132 Herman Schwartz
Finally, constructivists are mute on almost all the elements needed for an evolutionary
approach. While most constructivists would agree that there are some irreducibly
material elements to the GPE, constructivist approaches basically reverse the causality
implicit in neo-realist and neo-liberal approaches. The primary unit of analysis is not
individual states or indeed discrete individuals, but rather social units that constitute
their interests through shared understandings of their roles and identities. Different
identities imply different abilities to resolve the security and co-operation dilemmas
that the two neo-schools posit. Because identities are constituted through interaction
among individual units and are not a property of individual units (whether those are
states or individuals), constructivists are basically operating with species as their core
unit. The constructivist emphasis on emergent social properties comports well with the
flavours of evolutionary theory that emphasize complex bases for selection, rather than
reductionist views focusing only on individual selection (Morris 2001: 92–7; Gould and
Lewontin 1979). This is hardly surprising, as reductionist evolutionary arguments have
much in common with the methodologically individualist rational choice thinking that
constructivism criticizes. But the idea that selection also operates on species (rather
than just among individuals within species) is highly contested inside evolutionary theory
(Morris 2001: 107–11). Finally, constructivists also lack a theory of change. Despite
the absence of evolutionary elements in constructivist approaches, the emphasis on
identity as the constituent force for interests will be important for us when we talk
about social exhaustion below.
An evolutionary model for GPE

Can we model the GPE using variation, differentiation, heritability and selection? Two
issues immediately seem to leap out. First, the GPE is a complex social order. Second,
because the GPE is a complex social order, social exhaustion matters as much if not
more than material exhaustion. Can evolution make sense of the emergence of these
more complex social orders in addition to change and differentiation among the
individual components of the biological order that evolution tries to model? Arguments
that complex ‘social’ order promotes reproduction of DNA are consistent with
evolutionary theory. For Darwin, a complex social order can arise as the unintended
consequence of the interactions among conflicting self-interested individual units. But
the plans or intentions of individuals make no difference at all to whether they survive,
as it is the environment that exerts selection pressure.4 Organisms can use complex
forms of organization to transform the environment. Think of E. O. Wilson’s (1990)
ants. But most of these examples of complex social order are drawn from organisms
whose behaviour seems strongly instinctual and pre-cognitive (Hölldobler and Wilson
2011). By contrast, complex human social orders superficially appear to be consciously
constructed and managed, fluid, and capable of rapid adaptation to changes in the
environment.5
A focus on social order helps explain variation and differentiation among units
in the GPE, because the imperfect reproduction of social order is at the heart of
common descent among human organizations. Without common descent, differentiation
among human social orders could be, as constructivists seem to argue, purely a matter
of chance without heritability. This would invalidate an analogy to evolution. What is
the source of common descent in the GPE? Humans, like other organisms, harvest
energy from their environment to assure reproduction. What makes humans different
from most other organisms is the variety of ways in which humans harvest energy.
Most of these are novel social forms of organization that mobilize human labour more
effectively, rather than novel biological structures. Consequently, variation in human
social forms does not create new physical species. Inuit, Patagonians and everyone in
between can all reliably interbreed – the true test of speciation.
By contrast, different forms of social organization can hybridize in their search for
more ways efficiently to utilize human energy in pursuit of organizational goals, including,
most importantly, organizational reproduction. The GPE is a collection of social
strategies for harvesting more energy, understood as directed human activity. We call
these strategies firms, clusters of firms, and states. These three obviously exhibit variety,
differentiation over time and selection, both among and within themselves. What unites
all three, their common descent, is that they are constellations of social power, what
Lewis Mumford (1966: 188–202) called ‘megamachines’, and what Michael Mann
(1984) disaggregates in Sources of Social Power. Almost all forms of organized, non-
individual power in the GPE are descended from, and in general are refinements of,
the original megamachines Mumford identifies in the neolithic revolution.
These megamachines are the basis for what we call civilization, because they enable
some humans to enforce specialization and co-ordination of production on other humans.
By co-ordinating production across time and space, megamachines can generate
enormous increases in output from both more extensive production and more intensive
production as compared with tribal or nomadic societies. Intensive production is
particularly important after the agricultural and industrial revolutions, which is to say,
after the emergence of capitalist forms of social organization. Mumford’s humans and
Mann’s do not naturally build pyramids, irrigation systems and central granaries.
Instead, elites harness human bodies to these tasks through various forms of social
organization, like religion, civil and military bureaucracy or sale of wage labour in a
market. Megamachines are the organism or unit in an evolutionary understanding of
the GPE.
This coercion-centred view is contrary to that in Ridley (2010), where voluntary
exchange, not coercion, is the source of greater energy capture through specialization
and comparative advantage. Plausibly both views are correct, although temporally it
appears that states emerged just as much to control long-distance trade as they did
literally to harvest a local surplus from agriculture. So the relevant organism in the GPE
is not individual humans, but rather different kinds and forms of social organization
that cage humans inside routinized behaviours that benefit elites. As Mann (1984) argues,
this caging works better when it takes the form of self-motivated behaviours by individuals
reacting rationally to a structure of power rather than openly coerced behaviours. This
is the essence of his distinction between infrastructural and despotic power.
The overlap between routinization of exploitation and elite interests creates heritability,
albeit imperfectly, in human social organization.6 Heritability occurs through what
Dawkins (1976) labelled ‘memes’ and what the rest of us call standard operating
procedures or logics of appropriateness (March and Olsen 1989). Organizations tend
to select and promote individuals whose identity and behaviour match those of the
organization, and organizations exist to capture energy in the form of human labour
and creativity, prestige, money and material resources. The more carefully these
megamachines assure compliance with organizational norms, the more likely it is that
they will continue to mobilize energy and labour, as well as pass those norms along
to future versions of the organization.
134 Herman Schwartz
What creates variation among megamachines? Two phenomena drive variation.
First, the reproduction of memes is imperfect. Unlike ants, whose behaviour is reliably
coded in their DNA, humans maintain social organizations by transmitting cultural
information (i.e. memes) from generation to generation inside organizations as much
as they do inside family lines. One of E. O. Wilson’s books (Hölldobler and Wilson
2011) is subtitled Civilization by Instinct. While Thorstein Veblen ([1914] 1964) makes
much of the Instinct of Workmanship, this is a far cry from what Hölldobler and Wilson
describe for ants. Instead, as Berger and Luckmann (1966) describe, contestation occurs
over the meaning and operationalization of memes, because actors understand that
memes are carriers of social relations and creators of social power, and also because
subsequent generations lose important contextual knowledge about standard operating
procedures. This tends to make standard procedures inflexible and unresponsive to
changes in the environment.7 Second, variation and differentiation emerge from both
conflict and co-operation. By observing other organizations, and how organizations
interact and try to make their routines mesh, these organizations learn new techniques
to mobilize labour. This institutional isomorphism does not always promote efficiency.
Finally, selection operates because megamachines compete with each other for control
over human bodies. This competition eliminates organisms with relatively inefficient
or ineffective routines. As realist IR and GPE both emphasize, strong selection pressures
like war force societies and organizations to develop and replicate memes for organizing
human production and violence more efficiently than those with whom they compete.
All other things being equal, societies whose elites can extract more resources and
mobilize more labour will tend to prevail in conflicts with other societies, whether that
conflict is cultural, economic or military. So organizations face strong pressure to
replicate their operating systems in ways that expand their control over resources. Elites
at the top of religious organizations want more adherents; states want more citizens
and territory; firms want more market share. Conflict among megamachines selects for
those megamachines that are better able to mobilize the kinds of human labour and
material resources that the environment provides, or to innovate new social technologies
that make new or more efficient sources of human labour and material available.
But diversity does not emerge solely from conflict. Diversity also creates and reinforces
diversity, as Ridley (2010) argues. Interaction with other units creates pressure to
specialize based on societies’ differential abilities to tap into resources in the global
economy. Just as an expanding Darwinian tree of life creates more ecological niches
for organisms and species, an expanding division of labour can create new economic
niches in which different kinds of firms and societies can thrive. The Varieties of Capitalism
(Hall and Soskice 2001) literature provides one way to understand this differentiation
at the level of firms, though Spruyt (1994) provides an analysis of competition producing
homogenization among state forms in late mediaeval Europe. Greater complexity
produces instability and disruption that in turn exert selective pressure on units in the
GPE, as when an economic crisis drives firms into bankruptcy or triggers social
revolutions.
The second big issue emerges from the first issue of social complexity. In nature,
only material exhaustion matters for individual and species survival. Wolves that are
too efficient at catching sheep may cause a collapse in the population of sheep that in
turn drives down the wolf population. Wolves cannot negotiate a lower rate of
consumption among themselves. But in the GPE, we have a complex interplay between
material and social exhaustion. Material exhaustion is easy to understand; imagine the
exhaustion of (cheap) oil production in the face of rising demand for liquid fuels. But
what is social exhaustion? Social exhaustion occurs when relatively docile and thus
low-cost human bodies suddenly become less compliant with the megamachine trying
to mobilize their labour. Low cost means lower levels of supervisory labour input to
get a given level of work output. Low cost implies bodies which are self-propelled,
require little supervision, accept their social role, and, most importantly, adapt that
role to changes in the environment in ways that comport with a continuation or
expansion of the relevant megamachine.
Understanding social exhaustion requires some elaboration. Assume that the global
environment at time one is characterized by two abundant resources. One is material
– cheap oil; the other is social – a pool of semi-skilled male labour made exceptionally
docile by mass conscription and the experience of global war. We also have a set of
countries that differ in their institutional capacity to use those available cheap and
abundant resources. Some economies may already be organized around mass production
and have a spatially extensive economy. Some may already have mass production, but
spatially concentrated economies. Others may already be organized around small and
medium enterprises that are also spatially concentrated. Given cheap oil and docile
semi-skilled labour, the first economy will prosper, which in evolutionary terms means
that it will expand its share of the GPE faster than the other economies. The market
selects for firms able to turn docile labour and cheap oil into goods.
Because units in the GPE are capable of social adaptation, the other two societies
in this example will tend to shift their production systems towards readily available
resources. Moreover, social pressures to adopt ‘best practices’ will reinforce this tendency.
Better adapted, and thus better performing, economies will be lauded as the model for
all other economies. This institutional isomorphism (DiMaggio and Powell 1983; but
Lustick 2011: 16 argues against conscious mimesis) shifts deviant economies towards
a greater use of the cheap and abundant resource. So both social and market pressure
pushes countries and firms to emulate the successful models at time one.
But the fallacy of composition matters here for material resources, and perhaps social
resources as well. If all economies try to use the cheap resource, it stops being relatively
cheap. (Gazelles might be the best food for predators, but if all predators hunt gazelles,
zebra live quiet lives and the total number of lions, hyenas, wolves, etc. falls.) If all
economies shift towards an oil-based and spatially expansive economy, then demand
for oil will rise as production processes consume more oil and distances travelled
increase. As oil prices rise, firms and countries characterized by lower consumption of
oil will be favoured by the new environment.
By the same token, imperfect transmission of social or cultural information behind
standard operating procedures or logics of appropriateness also leads to social exhaustion
in this example (Berger and Luckmann 1966: 66–70). An expansion of assembly-line
production beyond the existing supply of semi-skilled labour made docile through war
might bring in workers less inured to assembly-line routines. New, younger workers
who never experienced the disciplining effects of wartime military routines might
similarly revolt against the rigours of assembly-line discipline. This exhaustion of the
social basis for compliance with routines directing human labour makes assembly-line
production relatively less successful as a production strategy, causing firms or economies
based on this strategy to lose market share relative to firms relying less on docile semi-
skilled labour. (We will return to this example in the proofs of concept below.) So time
two is characterized by material and social exhaustion that shifts selection pressures to
136 Herman Schwartz
favour economies characterized by smaller enterprises and spatial concentration.8 This
resource exhaustion in turn undermines the material and social basis for what had
been a model previously favoured by the environment.
Proof of concept No. 1: evolution and exhaustion

in the nineteenth-century GPE
Can we make sense of the nineteenth-century GPE using the evolutionary model briefly
sketched above? The nineteenth century saw a dual evolution of absolutist states into
modern nation states, and very small family-owned firms into larger firms based on
wage labour. Within agriculture, a parallel transformation from peasant production to
capitalist (family) farming occurred. In other words, forms of social organization
(organisms) that were unable to master the new nation-state or new production formats
largely disappeared. While family-based production expanded on the back of the
expansion of commercial agricultural production, family-based production units relatively
lost ground to more formal organizations. These organizations ultimately had absentee
ownership. At the level of the GPE, a very interventionist British state, sometimes aided
by other European states, developed a highly articulated global economy moving
unprecedented volumes of manufactures out of northwestern Europe in return for
equally massive return flows of raw materials. Huge flows of people and capital
accompanied these flows of goods.
Easily available resources material and social resources drove this transformation.
In the material world, a whole range of easily exploitable common pool goods like
cod, timber and minerals could be transformed into capital. Similarly, land previously
occupied (but not ‘owned’) by nomadic or lightly settled populations in the temperate
peripheries was easily engrossed and, via mortgage markets, transformed into capital
(Belich 2009; Crosby 1986; Denoon 1983; Weaver 2003). For example, world wheat
acreage expanded by 78 per cent between 1885 and 1929 (Friedmann 1978: 546).
Newly emerging nation states played a critical role in the strip-mining of these resources
by removing indigenous peoples, establishing title for those lucky enough to be the first
to stumble on those goods or land, and providing enough public infrastructure physically
to abet strip-mining. Strip-mining plus public infrastructure simultaneously injected
generous and parallel volumes of supply and demand into the GPE. On the one hand,
strip-mined raw materials could be sold; on the other hand, the corporations doing
that strip-mining and the owners of newly stolen land could raise and then spend
capital based on the expectation of future income flows. Acquisition of these common
pool goods provided an essential supplement to capital accumulation, because their
sale allowed the social transformation of inert resources into real and fictitious capital
(Luxemburg and Bukharin 1972; Schwartz 2012).
The most important social resource was what seemed like an essentially unlimited
supply of labour. As cheaply acquired land outside Europe and on Asia’s frontiers
began producing ever-cheaper food, urban populations started booming and
uncompetitive peasants began moving off the land. This started a great and largely
voluntary migration of Europeans to new temperate- zone production sites and an
equally great and largely involuntary migration of Asian indentured labour to tropical-
zone production sites. Including ‘internal’ migrants heading to frontier zones in places
like Manchuria, Siberia, Borneo, or Cochin China, perhaps 150 million people shifted
location in the nineteenth century.
Relatively ineffective states, societies and firms vanished or shrank in the face of
competitive pressure from more effective organizations. Although many states tried to
emulate the European military model, few did so quickly and correctly enough to ward
off predation by European empire builders (Ralston 1990). European handwork
production also largely evaporated in the face of machine-powered production.
Nonetheless, continued growth required continuous inputs of the initially abundant
material and social resources. Both were exhausted by the end of the nineteenth century.
The closing of the US frontier was soon followed by the closing of the Argentine,
Australian and Canadian frontiers; North American forests near navigable waterways
were already timbered out. Socially, as Hatton and Williamson (1998) have shown,
wages in the north Atlantic area had steadily converged from 1850 with those of
western Europe; by 1913, the gap was less than 2:1. The convergence of north Atlantic
wages and the ever-growing scale of factory production slowed emigration and led to
a growing labour movement in western Europe. An ecology characterized by extensive
production and depletion of almost all common pool resources started to give way to
one based on intensive production.
Proof of concept No. 2: evolution and exhaustion

in the twentieth-century GPE
Expansion of the GPE after the Second World War also rested on new organizational
forms and the availability of cheap material and social resources. We have already
hinted at the most important of these – oil and docile semi-skilled labour – in the
previous section. A second socially important resource was acceptance of state manage-
ment of economies that had come to be characterized by assembly-line-based mass
production (van der Pijl 1984). The emergence – often state-enforced – of large firms
using continuous flow production required macro-economic stability and labour
quiescence. Continuous flow production systems were highly productive and thus
potentially highly profitable, but they could reap the benefits of that increased
productivity only by running at high levels of capacity utilization (Piore and Sabel
1984). Maintaining social stability and balancing supply and demand in this situation
required the state to enforce – both in the sense of ‘force on’ and the sense of ‘guarantee’
– a class compromise over wages. Though this compromise naturally varied from
country to country, in all countries, a generation of conscripted men was available for
factory work, and willing to accept factory discipline in exchange for stable employment,
steadily rising wages and a social safety net. States that could stabilize wages and keep
wages rising in tandem with productivity not only maintained these class compromises,
but also maintained steady economic growth (Shonfield 1965).
Yet by the late 1960s and early 1970s, each of these resources was exhausted.
Materially, cheap oil at stable prices gave way to expensive and volatile oil. Socially,
the new generation of factory workers revolted against the older generation of union
leaders, producing a wave of unauthorized strikes. And states came under increasing
pressure from financial elites to deregulate the economy. As noted in the previous
section, economies characterized by spatial concentration (e.g. Japan) or small and
medium-sized firms using skilled labour (e.g. Germany) had relative advantages in this
new environment. As in the nineteenth century, the very success of a set of organisms
– institutions – in expanding their population based on a set of cheap resources led to
resources exhaustion and a ‘die back’ of those units. Instead, firms with smaller factories
138 Herman Schwartz
flourished, and many firms began outsourcing to reduce their footprint. States shifted
from direct management of investment towards pure monetary stimulus (though this
was disguised as a retreat from Keynesianism rather than a retreat into Keynesianism).
Conclusion
An evolutionary approach to the GPE yields some insights that are not available from
other paradigms. If we view states and firms as megamachines with varying capacity
to mobilize and co-ordinate human activity – to exert social power – then we can
explain their relative survival rates. We can also explain the continuity in both
organizations and in species like the state, or militarized resource-extraction firms, that
have changed over the past five centuries, but still bear a marked resemblance to their
earlier forms. Both states and firms try to reproduce themselves, or even better, expand
their ‘market share’ over the long run. This expansion rests on access to low-cost
resources, which function as literal or figurative energy for these megamachines. Success
reinforces success only up to the point where expansion and emulation of success leads
to resource exhaustion. In turn, resource exhaustion leads to the extinction or
transformation of different kinds of organizational formats.
An evolutionary approach thus emphasizes power and the limits to power in ways
that the other approaches obscure or oversimplify. Neo-realists correctly focus on power,
but have a static, ontogenetic approach. Neo-liberals emphasize the gains from
mutualism, or symbiosis, but obscure conflict and competition. Constructivists correctly
focus on the importance of socially constituted identities – what we have called standard
operating procedure or logics of appropriateness – but without any systematic
explanation of how these change and what that change means for the GPE. An
evolutionary approach encompasses both competition and co-operation, long-term
change and the crucial importance of low-cost resources for the development of specific
megamachines.
Notes
1 This model ignores epigenetics – modification to the expression of genes that occurs as a result
of contact with the environment. Darwin’s model lacked genetics, let alone epigenetics, so this
is in the nature of a simplifying assumption. A more complex model could incorporate epigenetic
effects with no violence to the original model, as epigenetic expression creates variation across
individuals constituting a particular species. It is unclear at this point in time whether epigenetic
effects are heritable. If they were, it would shift the debate about evolution away from a strict
focus on individual reproduction towards species and clusters of species.
2 However, this is what appears to have happened in the great Permian extinction and the apparent
extinction of those dinosaurs that did not turn into birds.
3
I think it inevitably follows, that as new species in the course of time are formed through natural
selection, others will become rarer and rarer, and finally extinct. The forms which stand in closest
competition with those undergoing modification and improvement will naturally suffer most.
(Darwin 1870: 103)
4 Darwin’s outlook (1870) here is similar to and perhaps influenced Max Weber’s (1978: 38–40)
core concept of ‘action behind the backs of actors’, or auslese, which literally means ‘selection’.
5 Rapid is, of course, a relative concept. Fruit flies can mutate into new species over a period of
years. But given that there are only about 55 centuries of complex societies (starting with the
Sumerians in 3,500 BC), and that many species are stable over geological time measured in
hundreds of thousands of years, human innovation of socially organized adaptation to
environmental changes is fairly rapid.
6 Social reproduction combined with social adaptation could imply either a Lamarckian view of
social evolution, in which new behaviours that emerge from interactions with the environment
become heritable in future iterations with the environment, or an epigenetic view, in which it is
standard operating procedures that are modified.
7 This can be seen in 1970s Germany, where the Social Democratic Party (SPD) set up a new
technology ministry to generate research in biotechnology, electronics and atomic energy. Only
the latter was strongly successful, because the normal policy routines favoured the wrong kinds
of firm (Jasanoff 1985; Giesecke 1999).
8 Alert readers will realize that I have just reproduced the argument in Piore and Sabel (1986) as
a parable.
11 Globalization and theories
of regulation
Michael Dunford
Introduction
The ambition of theories of regulation is to explain the trajectories of capitalist economies.
Historically, these theories operated with a conception of the world economy as a
mosaic of national social formations. The object of analysis is not the political economy
of the international system, though as the trajectories of capitalist societies since the
crisis of the Fordist model were examined, these theories have had to address phenomena
associated with processes of globalization, and as a result do intersect with the literature
on global political economy.
Theoretical foundations
At the outset, regulation theory resulted from a critical assessment of Marxist political
economy. More specifically, it grew out of a critique of the empirical and conceptual
adequacy of some aspects of Marxist theories of value, distribution and growth; and,
in particular, from the view that these theories were incompletely specified, over-generic
and insufficiently concrete. Michel Aglietta’s Régulation et crises du capitalisme (1976), which
founded this approach, asked a fundamental question: why do capitalist economies
sometimes function well, and why are they sometimes crisis-ridden? The answer is
implicit in the title of his study. Capitalism functions effectively when a set of mediations,
called a mode of regulation, is put in place which ensures that the distortions and
contradictions created by competition and the accumulation of capital are kept within
limits that make them compatible with social cohesion and growth in each nation state.
As Boyer (1996) has indicated, the underlying question is one with deep roots in
social, political and economic thought. For several centuries, social scientists and
philosophers have asked a simple question: why do societies founded on competition
and conflict not lead to chaos? Essentially there are two sets of answers to this question.
The first is rooted in the work of political philosophers such as Hobbes and Locke
who concentrate on the role of the state in governing the interaction of human
individuals. The second is rooted in the political economy tradition. Smith for example
argued that, in the pursuit of their own interests, individuals are led by the invisible
and anonymous hand of the market to contribute unintentionally to outcomes which
are mutually beneficial and in the social interest. Modern microeconomic theory
asks whether a competitive equilibrium exists, is unique, stable and Pareto efficient,
and shows that the conditions required for this welfare theorem to hold are extremely
restrictive. In real life, these conditions do not prevail. Kaldor (1972) showed that
increasing returns are pervasive. Markets are also far from universal. Neoclassical
concepts of market adjustment are also questionable. Real markets are therefore not
Globalization and theories of regulation 141
necessarily efficient at solving co-ordination problems, and do not satisfy the conditions
required to make sustainable the claim that competitive markets are self-equilibrating
and Pareto efficient.
Theories of regulation seek to answer similar questions. These theories start with
the view that individuals and groups have goals, that these goals are expressed in their
pursuit of individual interests and that these interests may be antagonistic or may
complement and reinforce one another, depending on the social relationships that
underpin them (as humankind is viewed as naturally social). Capitalism has enormous
potential to mobilize human energy and translate it into economic growth. Capitalism
cannot, however, create all the preconditions for its conditions of emergence and
reproduction. As capitalism develops, it generates conflicts and tensions which can
obstruct its further development. Capitalism lacks ‘the capacity to convert the clash of
individual interests into a coherent global system’ (Aglietta 1998: 49), and ‘is a force
for change which has no inherent regulatory principle’ (Aglietta 1998: 62). Capitalism
can destroy the conditions on which it depends, as the nineteenth and twentieth centuries
demonstrated so clearly. Capitalism must therefore be hemmed in by constraining
structures, which are not a product of rational individual calculation or competition,
but which ‘emanate from the creation of social institutions, legitimized by collective
values from which societies draw their cohesion’ (Aglietta 1998: 50).
The underlying view that capitalist economies, while potentially dynamic, are also
potentially self-destroying is rooted in an analysis of their fundamental social relations:
the commodity relation and the wage relation.
The role of the payments system

In market economies, money is the main link between the individual and society.
Individuals do not have to co-ordinate their actions through the establishment of
equilibrium prices, but can pursue their own ends. To act, individuals must draw on
social resources to invest money, creating a debt or obligation to society. Through their
activity, the same individuals can earn an income which they can use to settle their
debts and pay for the goods and services they need. The settlement of debts and credits
presupposes the existence of a system of payments (see Figure 11.1). A credit and
monetary system comprising a series of commercial banks and a central bank to
compensate for recurring disequilibria among commercial banks is therefore the first
requirement of a market economy.
Money is also, however, a measure of value. Value is the anonymous judgement of
social worth passed by all the members of a market society on the economic actions
of each individual. (This social expression of the value of an individual’s contribution
to society, which is ratified by the system of payments, may, however, differ quite
significantly from individuals’ own judgements of their contributions.)
The role of the market information system

To limit compatibility and co-ordination problems in such a system of decentralized
exchanges, a market must be constituted to centralize information about demands and
supplies and to enable assessments of the quality of goods, the creditworthiness of
customers, the efficiency of delivery, etc. (see Figure 11.1 overleaf). Market competition
also depends on a framework of rules governing conditions of entry, rules of competition
policy and so on.
142 Michael Dunford
A WALRASIAN MARKET A DECENTRALIZED MARKET
AGENT i CENTRAL BANK
p mi q mi
BANK A BANK B
m ij m ij m ij
AUCTIONEER
AGENT i AGENT j
k
p i q ki
k
pk qk
k p kijq k k
MARKET: p ij p kkl
k
p kj qj p kklq k
AGENT i AGENT k AGENT k AGENT l
m kl
AGENT j
Figure 11.1 Walrasian and decentralized markets

Note: p denotes price, q denotes a quantity of goods and services, and m denotes a money transfer – negative for
a payee and positive for the person in receipt of payment. The subscripts refer to agents, I, j and k. The superscripts
m and k refer to two goods.
Source: Based on Boyer (1996: n.p.)
The role of the financial system

Individually, capitalists compete with each other. Competition involves attempts to
reduce costs beneath the social average to earn surplus profits, to open up new markets
or to invent new products. Increased competitiveness can therefore involve an
intensification of work and related strategies of cost reduction, an extension of an
enterprise’s geographical field of operation, and product and process innovation.
Expansion into new areas and innovation often require access to sources of credit and
imply investments in projects the outcomes of which are uncertain. These facts render
the financial system a fourth critical structure of mediation (alongside the payments
system, the market information system and the nexus of employer–employee relations).
The nexus of employer–employee relations

A second fundamental feature of capitalism is the wage relation and the associated
social division between those who are able to advance money as capital with a view
to the accumulation of money wealth, and those whose access to money depends on
the sale of their capacity to work. Capitalists cannot accumulate without incurring
debts and without submitting the results of their initiatives to the judgement of society.
Wage earners are free to change employers and spend their income as they see fit.
Nonetheless, the employer–employee relation is a class relation. On the one side, it
makes it impossible for a group of free individuals lacking sufficient property rights
and money wealth to become private producers in a market economy. On the other
side, wage earners must accept the hierarchical authority of their employer in return
for a wage. The wage-labour nexus is therefore a second fundamental institutional
form governing wage setting and the organization and intensity of work.
To settle their debts to society and earn profits, capitalists collectively depend to a
significant but varying extent on the consumption expenditure of their employees. The
wages that capitalists pay to their employees are simultaneously a cost and an element
of the income on which the sales of their products and those of other capitalists depend.
The ideal solution for any individual capitalist is to pay wages that are as low as possible
to his/her employees, while all other capitalists pay high wages to sustain high levels
of income and demand. The implication is that the individual interests of capitalists
and their collective interest differ. As Aglietta (1998: 47–8) argues, the conflict inherent
in the wage relation can be resolved if capital accumulation also improves the living
conditions of the labour force and furthers the social development of a wage society.
Its resolution depends, however, on the putting in place of mediation mechanisms that
place constraints on the cost-reduction strategy.
The role of the state

Could all of these institutions and systems of mediation be self-implementing? Some
economists say yes. Most accept that a political and legal order is required to establish
the underlying conditions for accumulation and to establish these institutions. Up to
this point in time (2012), viable monetary regimes, rules of competition and market
discipline, effective financial systems, functioning labour markets and the establishment
and protection of capitalist property rights all depend on the actions of public authorities.
At present, it is therefore impossible to conceive of a capitalist economy without an
explicit role for the state.
The state also acts to define citizenship and to enact the legislation that institutes
and enforces social rights – in the recent past through the creation in advanced countries
of a welfare state and its tax and expenditure programmes.
The international regime

The legitimacy and coercive power of the state is, however, confined to a particular
territory. The contemporary nation state is defined by internal political processes
associated with the creation of a domestic constitutional order and its external
recognition, and establishment of relationships with other nation states. Each nation
state is therefore inserted into an international regime or configuration.
Conjunctural, cyclical and secular phases in the

development of capitalism
Theories of regulation draw on these underlying ideas to explain the trajectories of capitalist
societies. Historically, the development of industrial capitalism has been punctuated by
four or five enduring crises. The first occurred after the Napoleonic Wars (c.1817–50)
and saw, depending on the industrial or agrarian character of the country, the first crisis
of industrial capitalism or the last (Malthusian) crisis of the ancien régime. The second
occurred in the Great Depression of the late nineteenth century. The third occurred in
the period between the First and Second World Wars. The fourth started at the end of
the 1960s. The fifth started with the onset of the financial and debt crisis in 2007.
144 Michael Dunford
Throughout the long periods between these phases of turmoil, developed capitalist
economies were reasonably dynamic and stable. At the root of stable growth lay,
according to theories of regulation, the emergence of a sequence of new development
models, often centred on fundamental transformations of the preceding economic and
social order.
These new development models took shape in phases of crisis when older socio-
economic orders failed on the economic front and were rejected on the political and
social fronts. At the root of these phases of regular macroeconomic development were
regimes of accumulation. These regimes of accumulation involved the establishment
of a significant degree of compatibility between accumulation and social progress, due
to the implementation of evolving institutional architectures and systems of mediation
(also called modes of regulation). These modes of regulation managed temporarily
(1) to regulate the conflicts, tensions, imbalances and contradictions that capital
accumulation unleashes; and (2) to translate accumulation into social and economic
progress.
The development models that underlie phases of growth depend on political
compromises between social forces and on the widespread acceptance of particular
worldviews. The stability of regulation presupposes a certain degree of inertia of structures
and institutional arrangements. But stability is only relative. The capacity of mediation
mechanisms (structural and legal constraints; collective agreements; and systems of
values, shared expectations and rules of conduct) to regulate contradictions and stabilize
development is limited. The process of regulation itself engenders permanent movements
which continually modify the character of social relations, the intensity of conflicts and
the relations of strength. A critical moment can arrive when these institutions and
modes of conduct associated with the existing regulatory system are no longer able to
regulate the changes in structure of accumulation and growth. Constraints formed to
channel growth can become fetters, opening up the question of new forms of overall
reproduction.
The Fordist model

At the root of the Fordist model was the diffusion of a new techno-economic paradigm
centred around the mass production of standardized industrial goods and services, and
the associated rise of a range of new consumer and producer goods industries. The
core of the regulation mode was the reconciliation of increasing returns and the rapid
increases in productivity – which the resulting productive principles potentially permitted
– with the growth of real income and stability in its distribution. First, real wages and
consumer demand increased regularly, as real wage growth was linked to productivity
growth. Second, the division of value added into wages and profits remained stable as
increases in money wages were linked to the general level of prices. As the efficiency
of capital was relatively steady, improvements in the standard of living of the workforce
were reconciled with a steady rate of profit and a rapid rate of accumulation of capital
(see Figure 11.2).
At the root of the connection between the growth of income, demand and productivity
were the core elements of the wage-labour nexus and state economic management.
Nationally differentiated collective bargaining arrangements ensured that wages grew
in line with productivity and the cost of living. A variety of social security and progressive
taxation systems redistributed wealth and income and financed collective services
0.8
0.6
Efficiency of capital
0.4
Profit share
Rate of profit
0.2
Capital per FTE
Productivity
0
1920 1940 1960 1980 2000 2020
Figure 11.2 Trends in profitability, 1929–2010: the United States case

Source: Elaborated from US Department of Commerce, Bureau of Economic Analysis (BEA) (2011: n.p.).
provided as a right to all citizens. These welfare state systems helped achieve greater
social justice and granted nearly everyone the possibility to consume, even in cases of
temporary or indefinite incapacity to earn money from work due to illness,
unemployment or retirement, without encroaching too far on the market-determined
hierarchy of wealth and incomes. Keynesian macroeconomic management gave the
state active responsibility for fine-tuning economic expansion and ensured that incomes
and demand grew in a regular manner. In these ways the proto-socialist elements of
the post-war social compromise paradoxically created the conditions for the most
successful phase of expansion in the history of capitalism.
In this context, inequalities diminished. The incomes of almost all sections of the
population increased, but the fastest increases occurred for sections of the population
occupying lower positions in the income distribution: in the US, between 1947 and
1973, the income of the lowest quintile increased by 2.99 per cent per year, while that
of the richest quintile increased at 2.46 per cent per year (Council of Economic
Advisors 1994). Incomes therefore converged strongly in what has been called a ‘great
compression’ (see Figure 11.3).
146 Michael Dunford
50
United States top 10%
40
United Kingdom top 10%
France top 10%

Share of total income (%)
30
China top 10%
20
United States top 1%
United Kingdom top 1%

10
France top 1%
China top 1%
1900 1920 1940 1960 1980 2000 2020
Figure 11.3 Trends in the distribution of income, 1913 –2008: pre-Second World War inequality,
the post-war great compression and the neo-liberal inequality
Source: Elaborated from data from Alvaredo et al. (2011: n.p.).
Equity was an important dimension of the reconciliation of capitalist interests with

social progress. On the one hand, it increased the share of the population enjoying
sustained increases in standards of living. On the other hand, it encouraged the
widespread adoption of modern lifestyles and the development of markets for mass
consumer goods, which served as an engine of accumulation. Alongside the growth of
the consumer goods sector, there was also, however, in several countries (especially in
the US and the UK, but also in France) a parallel growth of a warfare state underpinned
by substantial state defence expenditure. Interestingly, productive performance was
most impressive in those nation states that committed fewer resources to defence
programmes (Kaldor 1990).
To this first pillar, connected essentially with the distribution of wealth, was added
another. The rapid rate of accumulation and investment led to steady increases in the
size of the employed population, relatively stable employment structures and low
unemployment rates. On the one hand, new activities were created to absorb the wage
earners made superfluous by productivity growth and shifts in the sectoral profile of
employment. On the other hand, the expanded reproduction of capital permitted and
required the large-scale movement of people from agriculture to industry, of women
into the workforce and of migrants from less developed countries into employment in
the core metropolitan areas of the world economy. The consequence was a transforma-
tion of the structure of employment involving the movement of increasing shares of
the workforce into paid employment and a stratification of the workforce into socio-
professional categories often within large organizations. (Continued growth depended,
however, not just on an elastic supply of labour, but also on the continuing availability
of cheap raw materials and energy, especially oil and gas.)
As Aglietta (1998: 58–9) indicated, the financial system and government monetary
policies were ‘a second line of defence to guarantee the durability of growth’. The
underlying economic and institutional configurations differed significantly from one
country to another (Albert 1993; Boyer 1999; Hall and Soskice 2001; Peck and Theodore
2007). The general result, however, was growth that was self-sustained and subject to
relatively small cyclical fluctuations. Growth rates in the US and Western Europe
averaged 4.0 per cent and 4.7 per cent per year respectively between 1960 and 1973
(Table 11.1; see also Figure 11.5). Manufacturing productivity increased at 3.3 per
cent and 5.7 per cent per year respectively.
In contrast to the past, domestic markets for consumer goods constituted the engine
of growth: between 1960 and 1973, exports accounted for 5.5 per cent and 19.6 per
cent respectively of gross domestic product (GDP), rising to 10.7 per cent and 29.5
per cent between 1989 and 2000. Comparable figures for imports were 5.1 per cent
and 12.1 per cent for the US, and 19.4 per cent and 28.5 per cent for the EU15. Of
course there were significant exchanges of goods and factors of production across
national boundaries, and national economies were parts of a hierarchical international
order involving a stable set of intergovernmental institutions that had emerged out of
the General Agreement on Trade and Tariffs (GATT) and the Bretton Woods fixed
exchange-rate system (establishing the International Monetary Fund [IMF] and the
International Bank for Reconstruction and Development). The modesty of the share
of trade in GDP, the limited degree of financial integration that stemmed from restrictions
on capital movements, and the capacity of nation states to devalue their currencies in
a system of fixed but adjustable exchange rates nonetheless permitted a significant
degree of national autonomy. National institutions were the main drivers of national
production costs and domestic consumer spending power. For all of these reasons,
national economies were viewed as the building blocks of the international order into
which they were integrated through their participation in a range of international
institutions.
International trade and the international order nonetheless increased in importance.
Until the late 1960s, the Bretton Woods system prevented the emergence of significant
international economic imbalances. Governments could not run massive trade or capital
account deficits or surpluses. If imbalances emerged, governments periodically
implemented structural adjustment measures.
In the late 1960s, however, the pressure to realign exchange rates increased; and in
1971, the US decided to default on its obligations to repay its debts in gold, and
instituted, as a new international currency standard, the US Treasury Bill standard:
surpluses were held in the form of US Treasury Bills at very low rates of interest. This
‘post Bretton Woods System allowed the United States to behave as if she owned a
credit card with no repayment date, and with no limit to her expenditures’ (Pettifor
2010: n.p.). It also opened the way to a strong devaluation of the US dollar, and the
start of floating and volatile exchange rates.
Table 11.1 Output, employment and productivity growth in the EU15, the United States and Japan: average annual percentage rates of growth
EU15 United States Japan

1960– 73 1973–79 1979–89 1989–00 1960–73 1973–79 1979–89 1989–00 1960–73 1973–79 1979–89 1989–00
Real GDP 4.7 2.5 2.3 2.1 4.0 3.0 3.0 3.1 9.7 3.5 3.8 1.8
Real GDP per head 4.0 2.1 2.0 1.7 2.7 2.0 2.0 2.1 8.4 2.4 3.2 1.5
Civilian employment in agriculture –4.1 –2.7 –3.4 –0.3 –0.4 –4.8 –2.3 –2.8 –3.1
Civilian employment in 0.5 –0.9 –0.9 – 1.5 1.1 –0.4 – 3.3 –1.3 1.1 –1.1
manufacturing
Civilian employment in services 1.8 1.8 – – 2.8 3.2 2.5 – 2.7 2.2 1.9 1.3
Real GDP per person employed 4.4 2.3 1.7 – 2.0 0.5 1.2 1.9 8.2 2.8 2.7 1.3
Real value added in agriculture 6.9 3.9 4.7 – 3.9 0.0 3.5 – 6.0 1.0 3.6 0.1
per person employed
Real value added in manufacturing 5.7 3.5 1.9 – 3.3 0.3 2.2 – 10.3 3.8 3.4 2.6
per person employed
Real value added in services per 3.2 1.7 1.0 – 1.4 0.2 0.6 – 6.3 2.3 2.4 1.4
person employed
Exports of goods and services as 19.6 25.2 27.7 29.5 5.5 8.4 8.5 10.7 10.2 12.4 12.6 9.9
a percentage of GDP
Imports of goods and services as a 19.4 25.6 27.6 28.5 5.1 8.8 10.3 12.1 9.4 12.0 10.8 8.4
percentage of GDP
Real long-term interest rates –0.2 5.3 4.5 3.4
Consumer price index 4.3 11.8 7.3 3.2 3.2 8.5 5.5 3.0 6.0 9.9 2.5 1.0
Source: Elaborated from OECD (1999, 2001).
The crisis of Fordism and after
In the 1970s, there were increasing signs of an exhaustion of the Fordist growth regime,
exacerbated by international monetary disorders and a deterioration in the terms of
trade for primary commodities, which triggered shortages and subsequent oil and raw
material price shocks. These signs of a growth slowdown heralded the start of a new
period of uncertainty, crisis and change. Among the first symptoms was the sharp
downturn in rates of profit, itself stemming from the fall in the efficiency of investment
and the increase in the share of wages in national income (see Figure 11.2).
These signs suggested the existence of malfunctions in the core systems of mediation
(the relationships underlying the wage relation, and the market, money and financial
systems), and in particular in their capacity to absorb and regulate the effects of change
in the underlying structure of accumulation and growth. What were these changes in
the underlying structure of accumulation?
The crisis of the Fordist economic order was twofold. In the first place, there was
a ‘supply-side’ crisis of the Fordist wage relation (which involved a combination of
Taylorist principles of work organization, centred on the separation of intellectual and
manual work; and rigid forms of employment and wage determination which
underpinned the regular growth of income and demand). In the second place, there
was an acceleration of the globalization of economic life which added a ‘demand-side’
crisis to the earlier supply-side one.
At the root of the supply-side crisis there were two factors. First, the diffusion and
further deepening of Taylorist principles reached certain technical and social limits,
narrowing the scope for further innovation and intensification of work. Together these
limits contributed to a significant slowdown in rates of productivity growth and the
efficiency of capital (the value of output divided by the value of plant, machines and
equipment). Second, the rigidity of wage contracts and the combativeness of trades
unions and a range of other social movements active in the late 1960s and 1970s saw
substantial increases in the share of wages in national income. Although prices increased,
profitability declined (Figure 11.2). At the same time, inflation made real interest rates
negative (see Table 11.1).
Capitalist enterprises responded in several different ways. On the one hand, there
was an acceleration of automation and a rapid development of information and
communications technologies (ICT). Subsequently this ICT revolution was seen as
heralding a third industrial revolution, involving a Schumpeterian process of replacement
of one productive system by another. On the other hand, there was a range of experi-
ments with new principles of work organization and wage determination (variously
referred to by the phrases ‘job enrichment’, ‘flexible specialization’, ‘lean production’
and ‘dynamic flexibility’), new intra-firm organizational arrangements and management
models, and a redefinition of relationships between firms and their subcontractors and
markets.
These new technologies and new principles of work organization were often put
forward as a way out of the crisis of Taylorism and as the foundations of a new
productive order (Boyer and Durand 1993). To others, these new technologies were
less radical. For these critics, the new technologies and management principles permitted
an adaptation and refinement of the principles of Taylorism rather than their replace-
ment. More specifically, these changes involved an increase in the ease and speed of
reaction of firms to changes in their external environment, an emphasis on the mass
150 Michael Dunford
production of quality goods at low cost, the widespread use of information technology
and a reinforcement of the control of capital over production, rather than an increase
in the autonomy of the workforce and a humanization of work (Boyer and Durand
1993).
These innovations did not, however, stem the decline in the efficiency of investment.
The reason lay in part in the fact that the investments that firms undertook in automated
machines were expensive relative to the increases in output they yielded. The high
costs associated with the design and development of new systems were, in turn, a
consequence of the fact that their development involved the employment of large
numbers of well-paid engineers and technicians.
The increase in the wage share was a further constraint on competitiveness,
profitability and the financing of investment. To reduce costs and restore profitability,
companies sought to rationalize employment, increase employment flexibility and reduce
the share of wages and salaries in value added. In the European case, it was the
reduction in the wage share and increases in the share of profits in national income,
rather than increases in the efficiency of capital, which resulted in a restoration in the
1980s of profit rates to their 1960s levels. Throughout the period after 1965, the
efficiency of capital fell, but decline was more than offset by a dramatic reduction in
the wage share resulting from a combination of increasing the work done and paying
less for it.
The restructuring of productive activities that stemmed from this crisis also involved
an accelerated internationalization of production and markets, at first as runaway
industries sought to reduce wage costs through investment in low-wage cities and
countries, and as emerging economies (including China after the start of reform and
opening up in 1978) sought to attract foreign investment. The fact that this process of
internationalization was designed to escape national wage-bargaining systems, and took
place without an international harmonization of the Fordist wage compromise added
a second ‘demand side’ aspect to the crisis. With internationalization, cost competitiveness
emerged as the overriding concern of governments and elites. Attempts to increase
competitiveness reduced, however, the rate of growth of the mass of wages and salaries.
As a result, the rate of growth of domestic demand, domestic markets and economic
growth slowed.
A key determinant of this slowdown was the internationalization of government
austerity programmes. As Lipietz (1989) has argued, in order to reduce its balance of
payments deficit, each nation state sought successively larger wage reductions than its
rivals. In order to improve its capital account, each nation introduced yet higher
interest rates to attract international deposits. Wage reductions and increased interest
rates had depressive effects on aggregate demand and investment. Accordingly, the
growth slowdown spread and was reinforced in a war of competitive recessions.
To the earlier supply-side problems were accordingly added the demand-side
difficulties of the ‘double-sided’ crisis of Fordism. This demand-side crisis generated
further difficulties. Slower growth tied up large sums of money in stocks of goods and
materials. In addition, instability increased, making it difficult to adjust output to changes
in the composition and level of demand, and adding to the importance of production
flexibility.
Greater internationalization of production and international interpenetration of
national capitals in industry, finance, services and commerce reduced national economic
independence and sovereignty. One consequence was a decline in the scope for
Keynesian reflation; any increase in national demand not matched by corresponding
increases in demand in other countries would lead to a large inflow of imports and
balance of payments deficits as the initial economic policies of the first Mitterand
government in France (from the start of the presidency in June 1981 until 1983)
showed. Any sustained reflation, it seemed, would have to be organized at an
international level. As this experience showed, the scope for the implementation of
effective systems of mediation at a national scale was far more limited than in the past.
Globalization and post-Fordism

In the years since the start of the 1980s there have been profound changes in the
structure and trajectories of the advanced capitalist countries and in their relations
with the rest of the world. These include a sharp increase in the degree of global
economic integration and the rapid development of a new international division of
labour, a radical financial markets regime change, and a major restructuring of the
scope and limits of state action.
As far as the economic trajectories of advanced economies were concerned, the
sluggish growth of the domestic market was associated with a much greater orientation
towards external markets and externally oriented models of development. As paid
employment spread and as capitalism penetrated formerly Communist and Third World
societies, trade and international investment were increasingly seen as a source of profit
and an engine of growth. A consequence was the emergence of a new international
division of labour, increased rivalry between the major economic blocs (North America,
Europe and East Asia) and an associated redefinition of the strategic and security
interests of the most advanced capitalist countries. (The expansionist and imperialist
impulses of the late nineteenth and early twentieth centuries seemed to reassume their
earlier significance as the advanced countries set out unchallenged to mould emerging
markets in their own image, and as the collapse of Communism seemed to permit a
much more aggressive international stance.)
The initial driving force was an internationalization of virtually all of the activities
of multinational corporations. In the developed world, in those sectors producing
traded goods and services, there was an increasing specialization in the skilled, intellectual
work performed by what Reich (1991) called symbolic analysts or problem solvers who
worked on ideas, concepts and symbols, and whose activities (design, technical and
financial consultancy, information and communication, marketing, advertising,
accountancy and legal services, etc.) involved the appropriation of large shares of the
value added created in global production chains. In developing countries – increasingly
called emerging market economies – the scale of capitalist activity increased with the
production of capital and intermediate goods, the growth of a range of processing
industries and the expansion of financial and other market services. To paraphrase
Morgan and Sayer (1987), development occurred in these countries, without necessarily
promoting a development of these countries: real progress would depend on their
ability to acquire and deploy advanced technologies and management techniques on
the model of the Asian latercomers – Japan, the four Asian Tigers (Hong Kong,
Singapore, South Korea and Taiwan) and more recently, China.
Associated with this process of internationalization were a decomposition of a number
of national oligopolies and an internationalization of the spatial arena in which
competition takes place, though it was not the case that markets were made more
152 Michael Dunford
competitive, as there was a wave of agreements, partnerships, mergers and takeovers
resulting in the creation of transnational oligopolies and alliance capitalism (see
Chapter 2 in this volume). An important component of this restructuring process was
the internationalization of privatized enterprises operating in areas of economic life
that were traditionally a part of the public sector, including public transport, telecom-
munications, television and the media, and energy. In the Fordist era, these enterprises
were largely shielded from international competition, but in the 1980s and 1990s they
were often sold off to private owners, usually for sums that fell well short of their
economic value, opening up new areas for profitable investment, shifting the dividing
line between markets and public services, and altering the status of their employees.
Taken as a whole, this new phase of globalization has significantly weakened the
connection between corporations and their territories of origin. In the Fordist era,
internationalization amounted principally to the international exchange of goods. The
exchange of the products of one country’s labour for those of another did not have a
significant impact on domestic price systems, permitting the setting of national wage
profiles in national systems of bargaining (Aglietta 1998: 66). The internationalization
of production and the establishment of globally integrated production chains altered
this situation in several ways. Collective bargaining was no longer the linchpin of
developed wage societies. The connection between corporations, their structures of
production and the distribution of value added, and their territories of origin weakened,
as capitalist enterprises more generally escaped from the national constraints that
formerly shaped the path of accumulation, and were increasingly able to set the agenda,
‘without any longer being subject to the constraints that formerly channelled . . . capital
accumulation in the direction of social progress’ (Aglietta 1998: 67). As Aglietta continues,
their fundamental concerns were with their overall competitiveness, their global
profitability and the global centralization of finance. Their competitiveness and
profitability depended on their capacity to organize flows of resources, knowhow, finance
and goods throughout the world. Strict financial criteria compelled them to maximize
short-term equity values and to bear down on terms and conditions of employment
and wages. In these circumstances, the setting of wages took place in the light of
supranational market conditions.
The restructuring of work and employment and wage setting that resulted created
a new division of the workforce in developed economies (see, for example, Lipietz
1996). At the top of the hierarchy lay a modern petite bourgeoisie, made up of executives
and managers or cadres comprising Reich’s (1991) class of ‘symbolic analysts’. In the
middle were found two groups: a group of secure workers, made up of middle managers,
technicians and public servants, that included welfare professionals; and a group made
up of clerical and manual workers that included personal service sector workers and
operatives in the service sector and whose employment was insecure and low-paid. At
the bottom lay a fourth group comprising those who were excluded from the workforce.
The first group gained from globalization, whereas the fourth group tended to lose.
What happened to the second and third groups depended on whether they could
gain from the prosperity of the first group or suffered from the deflationary competition
from the fourth.
In the Fordist era, there was a hierarchy, yet social cohesion remained relatively
strong as the individualistic pursuit of social advancement, social distinction and wealth
took place in a context that could be characterized as a social escalator on which almost
all individuals and households were more or less guaranteed steady increases in income.
As unemployment levels were low, and as the duration of unemployment was short
and covered by welfare benefits, few fell off. To describe this situation and in particular,
its characteristic distribution of income, Lipietz (1996) coined the term ‘hot-air balloon
society’. Globalization and the weakening of systems of collective bargaining along with
an associated reinforcement of individualistic attitudes ruptured the solidarity on which
this model rested.
Financialization, welfare reform and post-Fordism

Alongside and stemming from the globalization of capital and the increase in the
degree of global economic integration, financial deregulation and financial innovation
permitted a globalization of financial markets. Two groups of factors explain this trend.
The first was the mobilization of global financial resources by international enterprises
on the one hand, and the increasing disconnection of national savings and national
investment on the other. The former was a result of the internationalization of activities,
while the latter stemmed from differences in national growth trajectories and associated
differences in the demand for and supply of savings, with, for example, the US emerging
as a net borrower (debtor) and Japan as a net lender (creditor). Together this group
of factors contributed to a dismantling of controls on movements of capital.
The second group of factors was associated with the relative decline in the role of
bank deposits and banking oligopolies and the rise of a system of market finance
dominated by institutional investors. Institutional investors insist, on behalf of their
investors, on the satisfaction of ambitious performance criteria which are set and
evaluated by financial markets.
This restructuring of the financial sector was accompanied by a major shift in
economic policies in favour of creditors and the holders of financial wealth, creating
a new set of financial constraints which had a profound impact on national state action.
In the 1970s, to encourage economic growth, real interest rates were allowed to fall
(as the rate of inflation was allowed to exceed the nominal rate of interest). To protect
the real value of the financial assets of creditors and rentiers, the financial sector
developed a range of new investment instruments to counter the effects of inflation.
As a result, new financial markets developed in which interest rates were more sensitive
to inflation rates (Aglietta 1998: 75–6). It was in this context that at the end of the
1970s and start of the 1980s, there was a much more forceful switch to a monetarist
agenda, involving the introduction of extremely restrictive monetary policies in the US
and the UK. This reinforcement of a course of action already observable in the mid-
1970s led to a dramatic increase in interest rates, a deep recession that spread throughout
the world, sharp increases in unemployment and a profound debt crisis in developing
countries which had borrowed recycled oil revenues in the 1970s to fund industrial
investment programmes. (Developing countries borrowed to fund industrial investment,
expecting exports of the resulting industrial products to enable the repayment of debt.
Monetarism forced up interest rates, reduced the rate of growth of demand for industrial
output and encouraged protectionism in advanced countries, crippling the debtors.)
By the middle of the 1980s, inflation rates had subsided, yet real interest rates
remained high, often exceeding the rate of growth. High interest rates, combined with
the need to adapt quickly to a rapidly changing economic environment, encouraged
investments in liquid assets guaranteeing high short-term returns, such as currencies,
shares, land and real estate. Conversely, these conditions discouraged productivist
154 Michael Dunford
strategies which tied up wealth in fixed, productive assets whose use could not easily
be switched from one set of ends to another.
As indicated earlier, the productivity, profits and investment slowdowns of the 1970s
and early 1980s entailed a reduction in the rate of growth of output and value added,
which the pursuit of restrictive monetary policies and increased interest rates reinforced.
Slower growth put downward pressure on public fiscal revenues and social transfers,
as did competitive downward pressure on tax rates. At the same time, the transfers
required under existing welfare state arrangements increased due to the increase in
unemployment and poverty, along with the ageing of the population and the increasing
real cost of collective services. Governments at all levels consequently faced mounting
financial pressures and increasing difficulties in raising the revenues commensurate
with the increasing demands for public services. A combination of downward pressures
on revenues and constant or increasing expenditures creates public sector deficits and
increases public debt and debt to GDP ratios, while higher interest rates raise the costs
of debt servicing. (Governments were encouraged to offset these unfavourable trends
through asset sales.) The more restrictive monetary policies are and the longer these
restrictive policies last, the greater – other things being equal – the increase in debt.
As financial markets ‘dislike’ public sector deficits, the credibility of public policy declines,
and long-term interest rates go up to incorporate a risk premium (increasing the
attractiveness of state debt as a profitable placement for financial wealth).
Combined with the increase in individualistic values, these powerful financial
constraints reduced the capacity of governments to finance public services and provoked
a crisis of the welfare state, threatening the cohesion of advanced societies. Essentially,
the universal welfare state was developed to cope with low rates of unemployment
(as well as the requirement for cheap housing), and not the mass unemployment of the
late 1970s and 1980s with its repercussions in the shape of lost output, a narrower tax
base and greater social security expenditures. A consequence was an erosion of the
principle of social insurance, changes in eligibility, a reduction in the real value of
welfare benefits, and a move to more selective modes of intervention. At the same
time, moves were made to finance and provide public services privately, creating new
opportunities for private investment and profit.
An important aspect of this reform process was the increased role of non-governmental
organizations (NGOs) which stepped into the breach to mend some of the fissures in
the social order. Necessarily, these organizations abandon the principle of universality,
exercise discretion in choosing whom to help and whom not to help and function as
competitive interfaces and lobbyists between funding agencies (the World Bank, national
government ministries, the European Commission [EC], charities, etc.) and poor people.
The result is a slow transition to a national/international neo-liberal social state in
which social entrepreneurs organize the people they serve as groups of clients and
engage in a struggle with other NGOs for support from potential financial backers (see
Lipietz 1996).
Economic performance: growth, inequality and crisis

In the 1990s and the new millennium, the globalization of production and finance
were associated with a set of remarkable transformations of governance on national
and international scales. These transformations were almost universally underpinned
by the idea of the self-regulating market and driven by an agenda designed to promote
private property and the accumulation of private wealth.
This neo-liberal agenda was associated with an erosion of the capacity of nation
states to ensure social cohesion and a failure to put in place new mediation mechanisms
capable of channelling growth along lines compatible with universal social progress.
This agenda was, however, able to secure a wide degree of political acceptance. As
was to become clear, however, the new trajectories of capital accumulation and the
new international division of labour were neither self-regulating nor hemmed in by the
type of mediating mechanisms capable of establishing a new socially progressive regime
of growth. This model of development was also unstable, generating a set of debt-
fuelled expansions and contractions, and unsustainable, leading directly to the latest
crisis of capitalism (from 2007) and a significant reshaping of the global economic and
political order.
In the 1980s and again in the 1990s, growth rates picked up. In the advanced
world, however, they never reached the rates achieved in the post-Second World
War Fordist ‘golden age’. In the EU15, average annual rates of growth were just
2.5 per cent between 1973 and 1979, 2.3 per cent between 1979 and 1989, and
2.1 per cent per year between 1989 and 2000, compared with 4.7 per cent between
1960 and 1973. Manufacturing productivity also fell far beneath ‘golden age’ rates
(see Table 11.1).
In the 1980s, the Japanese model of lean production along with the Japanese and
German models of economic organization were seen as the way forward. In the 1990s,
however, German unification impaired European growth, and Japan stagnated from
the time when the 1985 Plaza Accord pushed the exchange value of the yen up against
the dollar without any significant effect on the US–Japan trade imbalance. In the US,
however, apparently strong productivity growth saw new hopes vested in the new
economy, seen as a combination of information and communications technologies
(ICTs), the commodification of knowledge, and US-style institutions and economic
governance: market liberalization and deregulation; market finance; and a model of
corporate governance centred on the maximization of shareholder value. In March
2000, the limits of this model were made clear by the dotcom crash (the collapse of
internet-related companies): a stock market collapse, consequent capital losses of 50–80
per cent and a subsequent wave of bankruptcies and scandals. In the eyes of one critic:
[T]he new economy ha[d] already joined lean production in the museum of
innovations that were once supposed to leave an indelible print on the twentieth
century but whose effects were in fact frittered away after only one or two decades.
(Boyer 2004: 149)
Profitability in the US had started to decline earlier in 1997 (see Figure 11.2).
Growth, however, continued up to 2000, and it resumed quickly after the dotcom
crash. The reason was that the drivers of US and Anglo-American growth lay not so
much in the new economy as in market finance, the supply of credit and increased
consumer expenditure as a result of the wealth effects of increased house and asset
values.
Two developments set the context for this model. The first concerns a fundamental
contradiction of capitalism itself: although capitalism depends on competition and
accumulation, as long as population and technical change are limited, a time will arrive
when there is sufficient capital to produce efficiently the output demanded. Keynes
was ‘impressed by the great social advantages of increasing the stock of capital until
156 Michael Dunford
it ceases to be scarce’ (Keynes 1973: 325), at which point he expected the rate of
interest to decline to a very low level and investment to be socialized. As Chick (2010)
has argued, over time, the expected profitability of further investment has declined,
with offsetting drivers enabling several renewed waves of expansion. In advanced
countries, there is
an underlying problem in the real economy . . . we have had a long period of capital
accumulation and a slowdown of technical change and population growth in the
West. Profits have recovered because of the attack on wages and on trade unions
in both the US and the UK . . . The explosion of finance is partly a consequence
of this underlying crisis: when the opportunities for profitable real investment are
falling away, it becomes more profitable to make money out of money than to lend
for investment in producing real goods and services whose market is very uncertain.
Productive investment has given way to consumption and asset inflation fuelled by
increases in debt, themselves supported by leverage and financial innovations.
(Chick 2010: 9)
The consequence was a succession of excessive debt-fuelled expansions and debt

inflations followed by severe debt-reducing contractions and deflations. These cycles
started on the periphery of the global economy, spreading to Japan and South East
Asia and ultimately the core of the world economy.
The second important development was an increase in inequality in advanced
countries. This increase assumed two different forms. In the US, it assumed the form
of wage inequality and involved an increase in the working poor (what Krugman
[1994] calls ‘moneyless America’). In continental Europe, it assumed the form of
unemployment (‘jobless Europe’). In each case, the main victims were those people
who lacked skills: the model of development saw major shifts in the demand for and
supply of skilled and unskilled labour in a context shaped by increases in the number
of precarious and low-paid service jobs, globalization, waves of immigration and adoption
of new technologies and management practices. At the same time, however, the new
inequality was fractal and affected every occupational group.
No longer do qualifications, seniority or hierarchical responsibility guarantee

recognized positions in organizations. A patchwork of individual destinies is emerging
as unforeseeable changes plunge one person into redundancy, another into precarious
employment, and yet another into work for which he or she is overqualified.
(Aglietta 1998: 72–3)
The consequences were identity crises, a frequent sense of social helplessness and
widespread exclusion as the integration of the labour force ceased to be a core part of
the agenda in capitalist societies. The massive expansion of the global labour force was
one factor, but most important was a profound change in the social norms that set
limits to inequality.
In the US between 1973 and 2008, real average income including capital gains
increased by 0.5 per cent per year (for the trends excluding capital gains, see
Figure 11.4). The income of the richest 1 per cent grew, however, at 2.9 per cent per
year and that of the rest by just 0.14 per cent. In that period, 78 per cent of the total
increase in income went to the richest 1 per cent. In 2008 prices, 99 per cent of tax
Bottom 99% average income (2010 US$) Top 1% average income (2010 US$)
50000 1200000
1000000
40000
Bottom 99% average income

800000
30000
600000
20000
400000
Top 1% average income

10000
200000
0 0
1900 1920 1940 1960 1980 2000 2020
Figure 11.4 Average real income, excluding capital gains, of top 1 per cent of tax units and
remaining 99 per cent in the United States, 1913–2008
Source: Piketty and Saez (2003); updated data, available online at http://elsa.berkeley.edu/~saez/
units with the lowest incomes saw their average income rise only from US$41,333 in
1973 to US$43,372 in 2008. For the richest 1 per cent, average income increased from
US$412,745 to US$1,137,684 (Alvaredo et al. 2011; see also Figures 11.3 and 11.4
above). For those sections of the population whose real income did not increase, increases
in consumption could only derive from credit.
In the Western world, development pathways differed. In Anglo-American economies,
financialization predominated. After the dotcom bubble, a reduction in interest rates,
an increase in the supply of loans and increases in asset values contributed to a continuing
real-estate bubble and debt-fuelled boom in consumer expenditure. At the origin of
these bubbles were credit liberalization and the monetary policy of the authorities.
Growth was sustained by an inflow of savings from the rest of the world: as a result
of the hegemony of the dollar, the US could print dollars without fear of inflation as
low-cost imports kept down US inflation rates and US trading partners had to purchase
US sovereign debt with their dollar-denominated trade surpluses to finance the US
trade deficit. In the Eurozone, stagnation prevailed: companies were indebted after
losses from US new economy acquisitions, the absence of an expansionary monetary
policy, the existence of a fiscal policy constrained by the Eurozone Stability and
158 Michael Dunford
Growth Pact and declining private sector demand. In Anglo-American economies,
house prices increased sharply relative to earnings, and relatively low-income and
potentially insolvent households took out subprime loans. Household debt of all kinds
increased substantially. In 2006–7, a moderate decline in US house prices and a small
rise in interest rates saw the emergence of serious repayment problems. Households
were unable to make repayments or to refinance loans, defaults and foreclosures/
repossessions rose dramatically and the resale of repossessed homes exacerbated the
situation by driving prices down further.
The crisis in the housing market set in motion a global financial crisis that, in the
absence of massive state intervention, would have paralyzed the international bank
liquidity market. The reason why a crisis in just one part of the housing market could
have such dramatic effects was a result of two other phenomena: securitization and
leverage which played a significant role in driving profitability and elite incomes.
Securitization was a change from a traditional model of credit, in which banks made
loans and held on to them until they were repaid, to a model under which loans were
made, repackaged and sold on as low-risk investment products. The property market
downturn resulted in a sharp decline in the value of securitized assets/products sold
by investment banks. As investments in these securitized products were highly leveraged,
the decline in their value led to the collapse of a number of investment banks and the
paralysis of financial markets.
In August 2007, a financial crisis erupted in the US subprime market, quickly spreading
to other Anglo-American economies which had pursued the path of finance- and debt-
driven growth (the UK, as well as some smaller economies such as Ireland and Iceland).
In the US and other affected capitalist economies, the consequence was a massive
destruction of wealth. On 31 October 2007, the market value of publicly traded companies
around the world reached US$63 trillion. One year and four months later, by early
March 2009, the value had dropped by more than half to US$28.6 trillion (Liu 2010).
To avert a complete collapse of the private financial system, in 2008, a global-scale
rescue operation was launched. In Europe and then in the US, governments guaranteed
bank loans and socialized bank losses: as a result, private debts were transformed into
public debts. Meanwhile a set of economic mechanisms transmitted the crisis from the
financial sector to the real economy and from financialized economies to the rest of
the world. Many governments initially responded with economic stimulus programmes.
Combined with rescue operations, these programmes saw gross government debt reach
very high levels in 2010. The country with the largest sovereign debt is Japan (nearly
200 per cent of GDP in 2010), notwithstanding its huge foreign currency reserve, large
export sector and persistent trade surplus. The most serious recent crisis arose, however,
in the Eurozone where in 2010, Italy, Greece, Portugal and Ireland had debt above
or closing in on 100 per cent of GDP. In the Eurozone there is a single currency with
no political union. Member states therefore use a super-national currency that they
cannot print at will: quantitative easing to meet debt servicing of sovereign obligations
is precluded. Neither can they adjust their exchange rates or interest rates to meet
their needs. In the absence of an integrated fiscal policy and fiscal transfers, member
states must conduct their respective fiscal policies so as to support the monetary
policy of the European Central Bank (ECB) rather than what is needed by national
economies with radically different economic development conditions. In an era of
financial liberalization, however, preliminary convergence conditions were weakened,
and the initial adoption of the Euro permitted large increases in Euro-denominated
debt denominated mainly to French and German banks. In the aftermath of the financial
crisis, a number of these governments found themselves unable to earn sufficient Euros
from domestic taxation, export earnings or purchases on foreign exchange markets,
precipitating a sovereign debt crisis that the national authorities could not resolve.
Consequent rescue operations saw the imposition of austerity measures that exacerbated
recessions and worsened government deficits: as Keynes argued in 1933 in the essay
‘The Means to Prosperity’, ‘there is no possibility of balancing the budget except by
increasing the national income, which is much the same thing as increasing employment’
(Keynes 1972: 347).
For the Western world, there lies ahead a protracted period of lower rates of return
on capital (offset perhaps by opening new areas to private investment), deleveraging
of the financial system, and debt reduction. In China and other emerging economies,
such as India, Brazil and Russia, the impact of the financial crisis was smaller and
their economies rebounded quickly. As a result, the catch-up of the parts of the world
with relatively low per capita income and which have experienced relatively fast recent
economic growth will accelerate (see Figure 11.5).
0.12
Graph 1
1960-1973
1073-1989
0.08
1989-1997
1997-2001
Average annual GDP growth (%)
0.04
-0.04
ey
y
ke
rk
a
ni
Tu
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e
ica
Tu
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us
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st
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te
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Figure 11.5 Average annual rates of GDP growth measured in 1990 US$ converted at
Geary–Khamis purchasing power parities (PPPs) over several successive economic
cycles
Source: Elaborated from Groningen Growth and Development Centre (2009: n.p.).
160 Michael Dunford
As mentioned earlier, in Western Europe and in North America and other white
settler countries, growth rates were faster in the ‘golden age’ between 1960 and 1973
than in subsequent cycles. Communist Eastern Europe also saw strong growth between
1960 and 1973. Subsequent slowdowns in growth saw the collapse of Communism
and opened the path to rapid transitions to capitalism. The consequences for output
were little short of catastrophic. Between 1989 and 1997, output declined at an average
of 4.9 per cent per year. In 1997, output still stood at just 68 per cent of its 1989 level.
Foregone output over these years was massive. In these transition economies, growth
subsequently picked up; yet in 2008, output stood at a mere 114 per cent of its 1989
level. More recent growth has depended to a significant extent on net capital inflows
which contributed to unsustainable credit-driven growth (Smith and Swain 2010).
This record compares particularly unfavourably with that of China which chose a
fundamentally different development path to the European ex-Communist states and
to the path recommended by international organizations. The remarkable growth of
China at an average of 8.3 per cent per year since 1980 is one of the reasons for the
growth of Asia at an average of 6.2 per cent, 5.1 per cent, 5.4 per cent and 5.9 per
cent per year in the four cycles from 1960 until 2008, with the growth of the so-called
Tiger economies slowing down during the 1990s. As for the other parts of the world,
high growth rates between 1960 and 1973 gave way to much slower growth between
1973 and 1989, especially in the economies of Latin America and Africa, but with a
significant upturn in the new millennium.
Just as the differences in the performance of European transition economies and
China reflect in part different development choices so do the contrasts between
Asia and Latin American and African economies. In the 1990s, the dominant view
was that the way forward involved the global projection of Western neo-liberal
models of capitalism onto the rest of the world. In that period, short-term indebtedness
enabled the IMF and the World Bank to impose the Washington Consensus
and subsequently the enhanced Washington Consensus model (which required that
the original goals of stabilization, liberalization and privatization be accompanied
by governance reforms and country ownership) on many emerging economies. China,
India and Vietnam were exceptions, violating virtually all of the rules of neo-liberalism.
(Earlier, Japan and the Four Tigers had also pursued a different development
pathway.)
The Asian crisis of 1997–8, however, saw the Asian economies reshape their growth
regime, driving down their exchange rates, driving up trade surpluses and accumu-
lating powerful sovereign wealth funds (see also Aglietta 2008: 71). In the case of China,
these reserves and the high savings rate that underpins them are also ‘a result of
defensive reactions against predatory speculation’, particularly during the Asian finan-
cial crisis of 1997–8 (Zhou Xuanchuan, cited in Wolf 2009: n.p.). These funds also
enabled developed countries to continue to purchase Chinese imports. As its reserves
grew in size, China resisted revaluation, in part in order to protect the value of
its foreign exchange reserves (standing at US$2,000 billion or nearly half of its
2008 GDP).
These trends saw the emergence of major global macroeconomic imbalances (to
accompany existing imbalances in Europe). Countries with large structural current
account deficits saw large increases in public debt as a share of GDP, contributing to
the international financial and debt crises mentioned earlier.
Conclusion
In the advanced world, contemporary processes of accumulation led first in the direction
of relatively slow growth and an intensification of inequality and, subsequently, to a
new crisis of capitalism. The link between capital accumulation and social progress
was comparatively weak. The new trajectories of capital accumulation and the new
international division of labour were not hemmed in by mediating mechanisms capable
of reconciling growth and social progress. In the past, many of these mechanisms were
national. Today, the relationships between corporations and their territories of origin
are far weaker, and there are important constraints on the autonomy of national state
policies. Of these constraints, the most important are financial and are connected with
high interest rates, the cost of servicing public debt and the negative impact of slow
growth on government revenues. Nation states still dispose of enormous volumes of
resources, and with political will could do far more to solve problems of poverty. Its
absence suggests that international constraints are far more pervasive than in the past;
and that in future, theories of regulation will have to pay far more attention to scales
beyond those of the current mosaic of nation states.
The outcomes of recent processes of globalization have, however, further implications.
The differences in the performance of Western and emerging economies further support
the core idea underlying theories of regulation. The remarkable success of China, for
example, demonstrates that the social foundations of economic life play a major part
in shaping the structure, dynamics and comparative performance of different national
economies (see Dunford and Yeung 2011).
At the same time, theories of regulation require amendment to reflect the increased
significance of the international scale. Two steps are involved. The first is a conception
of the global system as a constellation of national institutional configurations and interests
that shape economic trends. The second is recognition of two issues. The first is the
asymmetric integration of varying national models of development and the rise and
decline of hegemonic powers, countries subject to different degrees of domination and
contender states (van der Pijl 2006). The second concerns the ways in which integration,
interaction and interdependence modify the internal dynamics of national configurations
and generate international/global disequilibria.
These conceptions of the trajectories of different models of capitalism and their
asymmetric integration in a global order provide the foundations for an augmented
theory of regulation, accounting not just for the existence of a succession of structural
crises reflecting underlying contradictions/disequilibria, but also for structures of
international economic interdependence and the successive shifts in geographical centres
of economic gravity.
12 Transnational historical
materialism
‘Neo-Gramscian’ theories of class
formation and world order
Henk Overbeek
Introduction
All I know is that I am not a Marxist.
(Karl Marx, quoted by Engels 1890)
‘Neo-Gramscianism’ in the field of international relations (IR) and international political

economy (IPE) first emerged in the early 1980s. Robert Cox published two seminal
articles in Millennium: Journal of International Relations (Cox 1981, 1983) in which he
outlined the contours of his magnum opus (Cox 1987). Neo-Gramscianism, or what for the
purposes of this chapter I will call transnational historical materialism, became a distinct
research programme by the mid-1990s, confirmed in this status by a lively discussion
in the literature of its merits and faults.1
Transnational historical materialism can be defined as the application of the historical
materialist method to the study of transnational social relations. It comprises:
• a materialist philosophy of history (to be found particularly in such classic texts by

Marx and Engels as The German Ideology ([1846] 1970) and the ‘Preface’ to A
Contribution to the Critique of Political Economy (1859) which leads to the ontological
primacy of ‘social relations of production’;
• a rejection of the separation between subject and object which is characteristic of
‘positivist’ social science and the adoption of a dialectic understanding of reality
as a dynamic totality and as a unity of opposites: in the words of Lucien Sève,
‘when the attempt to grasp the essence of things leads us invariably to contradiction,
it is because contradiction is the essence of things’ (Sève 1975: 676 [author’s
translation]);
• the method of abstraction as outlined by Marx in the ‘Introduction’ to the Grundrisse
(1857–8).
Building on these foundations, transnational historical materialism (THM) departs

from mainstream approaches in IPE on two fundamental terrains.
First, it breaks with the state-centrism that remains a core assumption in most
writings on IPE from a mainstream perspective. In the debate between neo-realist
(or neo-mercantilist) and pluralist (or neo-liberal) approaches about the relevance of
Transnational historical materialism 163
non-state actors, the ontological primacy of the state is not in question. In that sense,
both these currents of IPE thinking can be said to be state-centric. In contrast,
transnational historical materialism identifies state formation and interstate politics as
moments of the transnational dynamics of capital accumulation and class formation.
This also implies that the national–international dichotomy (so central to mainstream
theories of IPE) is seen as subordinate to the dynamics of social relations.
Second, transnational historical materialism rejects the reductionism implied in
structuralist as well as in actor-oriented approaches. It advocates a historically grounded
conception of the dialectic totality of structure and agency. This position also leads to a
rejection of the positivism that underpins much of mainstream theory in IPE. To be
sure, certain mainstream IPE theorists have shown an inclination to move away from
a straightforward positivist epistemology – in particular, such authors as Wendt (1987,
1995) and Ruggie (1998) – towards ‘social constructivism’ which addresses many of
the same concerns characteristic for transnational historical materialism.2
There are, however, even after 30 years, very few examples of any serious engage-
ment of neo-realist, institutionalist or constructivist authors with the contributions
of transnational historical materialism. In fact, only Robert Cox was paid attention to
(beyond disparaging comments in a footnote), and initially really only by Robert
Keohane.3 Since then, something of a ‘transatlantic divide’ has opened up (Cohen
2007; Phillips and Weaver 2010). Most major textbooks in international relations and
international political economy published in the US by and large ignore transnational
historical materialism, while British and continental European authors publishing for
British publishers generally give it more recognition.
In order to situate transnational historical materialism in the context of an older
tradition, this contribution will first briefly trace its antecedents from the days of
classical theories of imperialism to the late 1970s. In the following section, we will
highlight the main themes that have emerged in the writings of transnational historical
materialism in the 1980s and 1990s. In the final section, we will briefly survey the
main themes in the transnational historical materialism of the new millennium.
The archaeology of transnational historical materialism

Transnational historical materialism brings back to life themes that were central to the
debates on imperialism in the early years of the twentieth century. The global dimensions
of the processes of capital accumulation and of class formation, and the changing roles
that national states play in these processes, were central in Marx’s own understanding
of capitalism: ‘The world market itself forms the basis for this mode of production’
(Marx 1979: 451). By the end of the nineteenth century, however, it was the struggle
between rival imperialisms rooted in the various European nation states that diverted
attention away from the transnational dynamics.
Classical theories of imperialism

The scramble for Africa, the rivalry in China among the European imperialist
powers, and of course the rivalry in Europe itself (culminating in the First World War)
prompted a range of contributions to the theory of imperialism.4 These contributions
clearly recognize that the dynamics of capitalism are international. Bukharin’s book
([1917] 1972) is organized around the dialectic between ‘internationalization’ and
164 Henk Overbeek
‘nationalization’, reverberating in Lenin’s characterization of imperialism as entailing
both the division of the world market between associations of capitalists and the carve-
up of the globe into spheres of influence among the major imperialist powers. However,
to reread these studies will bring disappointment if the purpose is to find clues which
transnational historical materialism can claim as support for its emphasis on transnational
relations. For most of them, including Lenin (1917), the global dimensions of imperialism
are clearly subordinate to the tendency towards ‘nationalization’ or the coagulation of
organized capital within the nation state with its inevitable periodic wars. Only Kautsky
(the ‘renegade’) recognized the possibility of joint inter-national co-operation in what
he called ‘ultra-imperialism’. But ironically, Kautsky’s article ([1914] 1970) appeared
in the very month in which war broke out.
In the years after the Bolshevik Revolution, and certainly after Stalin consolidated his
position vis-à-vis Trotsky, the interests of building ‘socialism in one country’ pushed aside
the interests of the international socialist revolution; and with it, any original theoretical
work on the global dynamics of capital. The process of turning inward was reinforced
by the effects of the Great Crash of 1929 and the ensuing collapse of the world market
in the subsequent years of Depression and war. Only with the gradual reconstruction of
an open capitalist world economy after 1949 and the relative relaxation of Soviet predomin-
ance in the international communist movement after the Twentieth Party Congress in
1956 could conceptions of the global reach of capital again come to the fore.5
Debates in the 1960s and early 1970s

The suppression of independent thinking, of course, was never total: Marxist political
economy has always been practised by creative theorists who kept their independence
from the dictates of the Comintern and Cominform (e.g. Sweezy 1942; Mandel 1962;
Baran and Sweezy 1966). The study of the political economy of imperialism and
(under)development also produced important contributions from a Marxist perspective
(Baran 1957; Emmanuel 1972; Frank 1967; Magdoff 1969). And particularly in the
late 1960s and 1970s, in the wake of the Cuban Revolution, the Sino–Soviet split, the
US debacle in Vietnam, and the rise of Eurocommunism, original contributions to a
general Marxist political economy abounded (Althusser and Balibar 1968; de Brunhoff
1976; Mandel 1972; Miliband 1973; Poulantzas 1968). The authors in question, however,
were almost without exception caught up in, if not imprisoned by, the fierce ideological
struggles of the period between social democrats, Stalinists, ‘Eurocommunists’, Trotskyists
of various persuasion, and Maoists (each of them passionately hated by all the others)
which explains why they found very little response outside their own circles.6
For our purposes, the most important debate was that about the nature of the relations
between the major imperialist powers and the possible role of the emerging European
Community (EC). The all-pervasiveness of American dominance in the 1950s and early
1960s explains the prevalence of the theory of American superimperialism as expounded
by Paul Baran and Paul Sweezy (Baran and Sweezy 1966).7
These views were opposed by adherents of the theory of inter-imperialist rivalry whose
antecedents go back to the classical theories of imperialism of Hilferding, Bukharin and
Lenin. Basing their work on the ‘law of uneven development’, Mandel (1968), Rowthorn
(1971) and others expounded the view that capitalist development was unequal and
uneven and would inevitably produce a new challenge to American hegemony. Mandel,
in fact, saw in the process of interpenetration of European capital (via inter-European
mergers such as Hoogovens–Hoesch and Agfa–Gevaert) and in the success of the
European Community, proof of the rise of renewed inter-imperialist rivalry.
Finally, in response to the rise of multinational corporations as the main institutional
forms of capital in the post-war world, theories dealing with the ‘internationalization
of capital’ in France (Palloix 1973; Andreff 1976) and with the Weltmarktbewegung (world
market movement) of capital in Germany (von Braunmühl 1973; Busch 1974; Neusüss
1972; but also Mandel 1972) raised an issue that had long been suppressed in Marxist
theory: the centrality of the world market for an understanding of the dynamics of
capital accumulation.8
The debate about the European Union (EU)–American relationship took a decisive
turn with the intervention by Nicos Poulantzas (1974). Poulantzas argued that the dominant
trend was not interpenetration of capital within Europe, but penetration by American
productive capital of the European economies. This penetration had far-reaching effects
for the competitive position of European firms and for the European class structures.
Poulantzas pointed to a process of reconfiguration of class forces in Europe reflecting
the fundamental dependence of European capital on American capital, and leading to
the reproduction within Europe of ‘American’ relations of production. With this analysis,
Poulantzas introduced for the first time a conceptualization of transnational relations that
became one of the foundations of transnational historical materialism.9
A second crucial foundation was the reception – in the emerging IPE community –
in the 1970s of Gramsci’s work, facilitated by the translation into English of selections
from the Prison Notebooks appearing in 1971. Gramsci’s influence in France had become
considerable in the wake of the revolutionary convulsions in 1968, but references to
Gramsci do not appear in the work of the ‘founding fathers’ of transnational historical
materialism until 1977 (Cox) and 1979 (van der Pijl). Gramsci’s emphasis on the role
of ideas in the reproduction of bourgeois hegemony and on the consensual aspects of
rule in developed capitalist societies was like music to the ears of the revolutionary
generation of the 1960s because it offered an explanation for the passivity and
acquiescence of the working class (cf. Boggs 1976; Ransome 1992).
With Poulantzas’s understanding of the dynamics of transnational class formation
and the rediscovery of Gramsci’s analysis of bourgeois hegemony, the stage was set for
the emergence and consolidation of transnational historical materialism as a relatively
coherent approach to the study of social relations at the international level.
Main themes
As with any theoretical tradition, there are almost as many variations of transnational
historical materialism as there are authors. It is hardly possible to present a simplified
categorization, or to draw clear boundaries identifying who is an insider and who is
an outsider to the tradition.10 It is nevertheless possible to identify a number of key
themes that play a role, albeit in varying proportions, in all transnational historical
materialist analyses.
Commodification and the deepening of capitalist relations

of production
From the standpoint of historical materialism, any analysis of the world we live in must
be grounded in an understanding of the way in which human beings have organized
166 Henk Overbeek
the production and reproduction of their material life. This in fact is what Marx
understands by ‘social’: the totality of all activity undertaken by human beings towards
the (re-)production of their existence.11
The most explicit attempts to construct a theory of the contemporary global political
economy based on this departure point are to be found in the works of Robert Cox
(1987), Kees van der Pijl (1984, 1998) and Mark Rupert (1995a). In his study of class
formation at the Atlantic level in the years between 1945 and 1973, building on earlier
work on European integration published in Dutch (van der Pijl 1978), Kees van der
Pijl organizes the analysis around the ‘successive levels of decreasing abstraction’ (van
der Pijl 1984: 1), i.e. the labour process, the level of circulation relations and the level of the
profit distribution process at which concrete class fractions form. It is in the labour process
where the real subordination of labour to capital takes place, the precondition for
extended capital accumulation. Kees van der Pijl assigns special importance to the shift
from the production of absolute surplus value to the production of relative surplus
value as a result of the introduction of new management techniques and production
technology to improve the productivity of labour, first in the United States in the early
decades of the twentieth century. In a similar vein, Mark Rupert (1995a) also analyzes
the rise of mass production (‘Fordism’) in the United States as a necessary first step in
the analysis of the extension of American global power.
Robert Cox presents us with the most extensive discussion of ‘the concrete
historical forms of the ways in which production has been organised – into modes
of social relations of production’ (Cox 1987: 1).12 Each society is characterized by a
specific hierarchically ordered configuration of these modes, conditioning in this way
a particular configuration of social forces, which in turn conditions (and is conditioned
by) the form of the state and the insertion into the international division of labour and
the global state system. Cox emphasizes that the relationships involved (i.e. between
relations of production, state forms and world order) all have material, institutional and
ideological dimensions, and that moreover there is no predetermined hierarchy between
these dimensions: production relations may be logically prior, but are not in any way
historically prior. ‘Indeed, the principal structures of production have been, if not
actually created by the state, at least encouraged and sustained by the state’ (Cox 1987:
5).
The question, however, is to what extent it is possible to identify the underlying
dynamics involved. In other words, if we argue that change is the essence of the historical
process, then what drives this change? What generates the contradictions that produce
historical change?
In van der Pijl’s later work (1997; most elaborately in his 1998 book), the dynamics
of contemporary social relations are traced to the contradictions engendered by two
processes: commodification and socialization (or Vergesellschaftung). Commodification
entails the incorporation of more and more dimensions of the lives of ever more people
into ‘tendentially world-embracing market relations’ (van der Pijl 1998: 8). Socialization
is the process (driven by the division of labour and the extension of commodification)
in which individual ‘integral’ labour is transformed into functionally differentiated
specialized labour, and in which individuals are drawn out of closed self-sufficient kin-
ordered communities into wider circles of social interdependence and ‘imagined’
communities. In his most recent work –, the hugely ambitious trilogy on Modes of
Foreign Relations and Political Economy – van der Pijl has extended these themes
into a radical rethink of the whole conceptual apparatus that underpins the field of
international studies – both the narrower field of ‘international relations’ as well as the
broader field of ‘global political economy’ (van der Pijl 2007, 2010, forthcoming).
The political articulation of class interests

For the sceptical reader, there is little in the above passages to warrant the claim that
transnational historical materialism breaks with the established ‘orthodoxies’ of classic
Marxism. This is different when we consider the question of the translation of ‘class’
into politics. An instrumentalist understanding of the Communist Manifesto on the one
hand13 (e.g. Miliband 1973) and a structuralist one on the other (e.g. Poulantzas 1968)
have long dominated the Marxist debate. Both of these views in their own way were
rather deterministic, allowing little autonomy to the political and ideological spheres.14
This is where the adoption of Gramsci becomes of crucial importance.15 Gramsci
was concerned to rethink political strategy in light of the very different experiences of
the Russian and the West European revolutions of 1917–19. It is really in the context
of this project that all the concepts that have come to serve as keys to recognize ‘neo-
Gramscian work’ were developed (civil society, hegemony, historic bloc, organic
intellectuals, passive revolution, trasformismo, war of manoeuvre and war of position).16
In the West, the political power of the ruling class does not rest (exclusively or primarily)
on the control of the coercive apparatus of the state, but is diffused and situated in the
myriad institutions and relationships in civil society. This form of class rule, hegemony,
is based on consent, backed up only in the last instance by the coercive apparatus of
the state. Ideological and moral elements play a crucial role in cementing the historic
bloc (in Cox’s words, it is ‘a configuration of social forces upon which state power rests’
[Cox 1987: 105; also 6, 409 n. 10]) and its hegemony in wider society (Gramsci 1971:
161, 168). Organic intellectuals of the dominant social groups formulate and disseminate
these intellectual and moral ideas, transforming them into ‘universal’ ones which bind
subordinate groups into the existing social order (e.g. Gramsci 1971: 181–2).
The question that to some extent divides two strains of transnational historical
materialism is what determines the content of the hegemonic ideology, or at least the
overall strategic orientation of the historic bloc of any particular period. The most
systematic attempt to develop an understanding of the relationship between the substance
of hegemonic ideas and the underlying dynamics of capital accumulation from a non-
deterministic standpoint is the ‘capital fractions approach’.17 The starting point for this
analysis is found in Volume 2 of Capital in which Marx considers the different functional
forms that capital assumes in the circuits composing the overall reproductive circuit of
capital: commodity capital, money capital, and productive capital. In terms of concrete
firms, merchant houses, financial firms, and industry approximate these fractions.18
In turn, this process of fractionation of capital shapes class fractions which share
common orientations, interest definitions and collective experiences, providing
ingredients for a coalition of interests aspiring to represent the ‘general interest’. These
formulations of the ‘general interest’ are called comprehensive concepts of control
(van der Pijl 1984, 1989; Overbeek 1990). Concepts of control are constituted around
two prototypes: the money capital concept and the productive capital concept. The
latter reflects the particularities of the productive process and its social context. Usually
those groups assert themselves most effectively whose specific group interests at a given
juncture most closely correspond with the prevailing objective state of capital
accumulation and class struggle (van der Pijl 1984: 33–4).
168 Henk Overbeek
Comprehensive concepts of control express the ideological – and in Gramsci’s sense,
hegemonic – structure of particular historical configurations of capital, and function
to organize and direct bourgeois hegemony. The notion of ‘concepts of control’ thus
provides a clue to understanding the nature of the relation between structure and
agency. The structure is defined by the process of the accumulation of capital; the
agency is that of the concrete social forces originating from the sphere of production
relations and struggling continuously over the direction of the accumulation process,
over the role and nature of the state, and over the world order. To put it another way,
concepts of control capture the strategic element in the construction of a historic bloc
by linking the construction of politico-ideological projects in a non-reductionist manner
to the structural underpinnings of the social order.19
Forms of state
The next theme in transnational historical materialism is that of the various types of
state –society configurations to be found in the world, both in terms of the variety to
be found at any time in history (synchronic) as well as in terms of the variety over time
(diachronic).
The need to organize bourgeois hegemony – i.e. to effect the rule of the historic
bloc mainly through consent –, is most typical for highly developed capitalist formations
with a strong civil society. In societies where the process of socialization is not as deep,
power is based more strongly on coercion and effected directly through the state, as
Gramsci understood pre-Revolutionary Russia.
Following Cox, we may start with identifying ‘hegemonic state/society complexes’20
where political power is based on consent rather than on domination. The economic
basis of the state is a self-regulating market, social relations are subject to the rule of
law, and the state plays a facilitating rather than a leading role in social and economic
life. Kees van der Pijl calls this type of state–society complex Lockean (van der Pijl
1998: 64–97).21 The first hegemonic state–society complex came into being in England
with the Glorious Revolution of 1688. From the very start, its essence was transnational:
the sphere of its essential features was not restricted to the territory of England proper,
but was expanded by the transnational extension of the English historic bloc through
emigration and colonization.
In non-hegemonic states22 the state–society complex is based on mobilization by one
single dominant class. The ‘Hobbesian’ state–society complex is characterized by a
fusion of ruling class and governing class into a single ‘state class’ which is constrained
in its capacity to articulate its interests in the transnational space dominated by the
Anglo-Saxon ruling class (cf. van der Pijl 1998: 78 ff.). Hobbesian states are thus forced
to a continuous catch-up drive through revolution from above.23
In van der Pijl’s work, this scheme is extended to the present. The history of the
‘modern state system’ and of international relations is the history of the confrontation
between the expanding Lockean heartland of the English-speaking West and contender
states engaged in a drive to shield themselves from penetration by Western capital and
to achieve a status of equality, technologically, economically and strategically. In the
current era, the main Hobbesian contender state and rival to US supremacy obviously
is China (van der Pijl 2006).
Transnational hegemony
Transnational historical materialism maintains that relations among states are as it
were embedded in the wider context of evolving transnational social relations.24
Consequently, international hegemony should also be approached from this same
vantage point, namely as a form of class rule based on consent more than on coercion,
and on accommodation of subordinate interests rather than on their repression (Gramsci
1971: 161). In Cox’s words,
The hegemonic concept of world order is founded not only upon the regulation
of inter-state conflict, but also upon a globally-conceived civil society, i.e. a mode
of production of global extent which brings about links among social classes of the
countries encompassed by it.
(Cox 1983: 171)
Hegemony in the global system is a form of class rule, and not primarily a relationship
between states as it is in neo-realist theory. Hegemony, moreover, is not primarily
‘economic’, or ‘political’: ‘World hegemony is describable as a social structure, an
economic structure, and a political structure; and it cannot be simply one of these
things but must be all three’ (Cox 1983: 171–2).25
The liberal world order of the nineteenth century (pax Britannica) was in fact the
expression of the internal hegemony of the financial and commercial aristocracy in
Britain. This historic bloc projected its social hegemony outward through its control
over the British state and its overwhelming military powers, and through the promulga-
tion of its liberal internationalist concept of control around the globe. The liberal order
of the mid-nineteenth century was, however, not without its own internal contradictions.
First, the operation of the free market system created social inequalities of both national
and global dimensions which strengthened the call for one or another form of social
protection.26 Second, the operation of the gold standard reinforced these same
inequalities, and thus also deepened the dialectical contradiction between the free
market and the principle of social protection.27
The reconstructed liberal world order of the decades after the Second World War
reflected and reproduced on an enlarged scale the hegemony of the corporate–liberal
bourgeoisie, not only in the United States (where its cradle stood), but in Western
Europe too. The successive steps in the construction of the pax Americana have been
extensively analyzed by the authors of transnational historical materialism and need
not be recounted here.28
The analysis of hegemony at the global level raises a number of conceptual problems
and challenges. It does represent a crucial step in overcoming the limitations of the
state-centric discourse in a way which theories of ‘complex interdependence’ and regime
theory have been unable to. However, it is not self-evident that Gramsci can be read
in such a way that his core concepts can be applied to the analysis of global politics.
Doubt as to the acceptability of such a reading has inspired many critiques of trans-
national historical materialism.29 And although neo-Gramscians do have convincing
replies to such an essentialist critique (Murphy 1998; Rupert 1998), it is nevertheless
necessary for transnational historical materialism to complement its theoretical defence
of the transnational position with concrete historical work to substantiate its claims.
The work on the internationalization of the state and on recent tendencies towards
170 Henk Overbeek
the extension of global disciplinary neo-liberalism, as well as on possibilities for building
counter-hegemony in ‘global civil society’, is quite crucial in this respect. These issues
are discussed in the next three sub-sections.
Internationalization of the state

In ‘Social forces, states and world orders’ (1981), Cox introduced the concept of ‘the
internationalisation of the state’ to explain the mechanisms for maintaining hegemony
in the era of pax Americana. The ‘machinery of surveillance’ used for that purpose was
primarily made up of the Bretton Woods institutions supplemented by structures for
the harmonization of national policies in such fields as defence (through the North
Atlantic Treaty Organization’s [NATO] annual review procedure) and macro-economic
policy (through the Organisation for Economic Co-operation and Development
[OECD]).
Most elaborately, Cox reformulated his definition (1987: 253–65) in a section entitled
‘the internationalising of the state’ (without explaining why ‘internationalisation’ had
changed into ‘internationalising’). There, he notes that ‘the nation state becomes part
of a larger and more complex political structure that is the counterpart to international
production’ (1987: 253). The process can be expressed in three points:
• a process of interstate consensus formation regarding the needs or requirements

of the world economy takes place within a common ideological framework;
• participation in this consensus formation is hierarchically structured;
• the internal structures of states are adjusted so that each can best transform the
global consensus into national policy and practice, with ‘state structure’ both
referring to the machinery of government and to the historic bloc (the alignment
of dominant and acquiescent social groups) on which the state rests (Cox 1987:
254).30
The emphasis on the mutual interests and ideological perspectives of social classes
in different countries is important. This aspect is characteristic not only for the work
of Cox, but also for Stephen Gill’s study of the Trilateral Commission (Gill 1990; also
see his later work). In the focus on the rise of a transnational historic bloc and the
emergence of a transnational managerial class in command of the global economy,
there is a strong resonance of the notion of ultra-imperialism as formulated on the eve
of the First World War by Karl Kautsky ([1914] 1970). This line of thought has been
extended even more by Leslie Sklair in his study of the transnational capitalist class
(Sklair 2001), and by William Robinson in his work on the global state (Robinson
2004).
The ‘fractionalist’ approach is less susceptible to Kautskian tendencies. In van der
Pijl’s work, the process of class formation, explicitly understood as a transnational
process, is structured by the fractionation of capital. Crucial in van der Pijl’s view on
the internationalization of the state is his concept of a Lockean ‘heartland’. The first
Lockean state–society complex came into being in England: its essence, however, was
transnational. Emigration and colonization projected ‘English’ civil society across the
seas, and the coherence of this emerging transnational civil society was cemented by
the rise of cosmopolitan banking families such as the Rothschilds and transnational
elite networks such as the Round Table Society. Through this gradual expansion there
emerged a hegemonic ‘core’ of the state system, or a Lockean ‘heartland’. The
infrastructure of the heartland has two crucial features: the transnational spread of civil
society, and the establishment of a single state, or a group of states with quasi-state
structures, serving as the world’s banker and providing the power to safeguard capitalist
relations of production around the globe.
The Lockean heartland is the sphere where comprehensive concepts of control
circulate:
The struggle for hegemony between fractions of the bourgeoisie, through which
the general tendency of the transnational ruling class asserts itself nationally, and
between different states within and outside the Lockean heartland, replaces the
traditional forms of world politics ever more by ‘global domestic politics’.
(van der Pijl 1989: 19)
The expansion of the heartland has historically taken place in confrontation with a
variety of ‘Hobbesian’ contender states where the state–society complex is based on
mobilization by one single dominant class. The ‘Hobbesian’ state–society complex is
characterized by a fusion of ruling class and governing class into a single ‘state class’
which is constrained in its capacity to articulate its interests in the transnational space
dominated by the Anglo-Saxon ruling class (van der Pijl 1998: 78–83). Hobbesian states
are thus forced to a continuous catch-up drive (revolution from above) that mostly ends in
failure, collapse, or violent defeat by the Lockean heartland. This defeat is followed
either by gradual incorporation into the heartland (as with Germany after 1945) or by
disintegration (as has so far been the case with the former Soviet Union). Kees van
der Pijl calls this incorporation ‘hegemonic integration’ in the context of an analysis
of how the dynamics of capital accumulation, institutional developments and ideological
processes combine to produce a truly transnational society.
Recently, the field has been enriched with a range of excellent empirical studies
mapping changes in the structure of the network of global corporate power which
underpins the transnational capitalist class, displaying a remarkable degree of
methodological sophistication and theoretical sensitivity.31
New constitutionalism
The concept of ‘internationalization of the state’ is perhaps slightly misleading when
attempting to analyze the newly emerging structures of authority in the global political
economy. The inescapable connotation after all is state-centric (also pointed out by
Owen 2011). This perhaps explains why, since the collapse of the Soviet Union, the
emphasis has shifted to other aspects of the governance structures in the global economy.
The first signs of this are to be found in pieces by Cox on ‘global perestroika’ (1992a)
and Gill on the internationalization of authority (1992).
Stephen Gill has taken the task of rethinking this question furthest, not least thanks
to his creative incorporation of many insights of Michel Foucault’s work on discipline
and power (cf. Gill 1995b, 2003). The collapse of the Soviet Union and the subsequent
transformation of the global state system have eliminated many obstacles to the further
expansion of markets through the enhanced global reach of transnational capital. The
priorities of economic and social policies worldwide have been recast to reflect the new
dominance of investors.32 International institutions (such as the OECD, International
172 Henk Overbeek
Monetary Fund [IMF], World Bank and World Trade Organization [WTO]) and
groupings of dominant states (e.g. G7) are engaged in the legal and political reproduction
of this disciplinary neo-liberalism and ensure through a variety of regulatory, surveillance
and policing mechanisms that neo-liberal reforms are locked in. The erosion of democratic
control that is implied in this process is called by Stephen Gill ‘New Constitutionalism’:
‘the move towards construction of legal or constitutional devices to remove or insulate
substantially the new economic institutions from popular scrutiny or democratic
accountability’ (Gill 1992: 165).
The creation of the Economic and Monetary Union (EMU) in Europe produced a
stream of analyses in the tradition of transnational historical materialism; EMU, at
least in the neo-liberal mould which overlays it, is generally interpreted as the European
manifestation of these tendencies. The disciplinary effects of monetary unification
under the supervision of an independent European Central Bank (ECB) – entrusted
with the constitutional responsibility to eliminate inflation and deficit financing in the
EU – have been clearly recognized by transnational capital throughout the Union.33
The movement towards New Constitutionalism had a deleterious effect on the United
Nations (UN) system. Robert Cox and Yoshikazu Sakamoto directed an important
project sponsored by the United Nations University on ‘Multi-lateralism and the
United Nations System’ (MUNS), the aims of which were to draw on the insights and
expertise of like-minded academics around the world in order both to analyze the
background to the crisis of multi-lateralism and the prospects for reviving it in the face
of global disciplinary neo-liberalism (see Cox 1996: 494–536).34 The decline of the UN
system was of course accelerated after 9/11, reflected in studies of the shifting global
power relations by Gill (e.g. 2003) and van der Pijl (2006).
Counter-hegemony
Like all the writings of transnational historical materialism, even the products of the
MUNS project are much stronger in the analysis of the process of global restructuring
and the rise of global neo-liberalism than in the analysis of possibilities to resist the
power of transnational capital. In this sense, the approach suffers from an elitist bias,
which most authors realize and acknowledge without actually overcoming it.35
Kees van der Pijl concludes from his analysis of transnational class formation that
it is the cadre class, the embodiment of transnational socialization in the contemporary
epoch that might represent the best hope for transformative action. However, van der
Pijl’s final words in the end do not give much strategic guidance:
[T]he concrete history of our present world and the development of its ruling
classes to global unification under a neo-liberal concept, teach us that such a
community [i.e. a classless society, a planetary community of fate] cannot come
about in a single act. Only through the cumulative momentum of a series of
particular, largely contingent episodes, can we hope that the forces capable of
imposing limits on the capitalist exploitation of people and nature can prevail, and
the suicidal drive of neo-liberalism reversed.
(van der Pijl 1998: 165)
For Cox, resistance must take the form of patiently building up a counter-hegemonic
historic bloc, ‘a long-term task for organic intellectuals working in constant interaction
with the groups whose dissent from the established order makes them candidates for
inclusion’ (Cox 1987: 390). This is too vague for some. In the words of Drainville, for
instance, this project must now ‘give way to more active sorties against transnational
neo-liberalism, and the analysis of concepts of control must beget original concepts of
resistance’ (Drainville 1994: 125). In recent years, neo-Gramscian scholars have become
more engaged with studies of counter-hegemonic movements (e.g. Bieler and Lindberg
2010; Moore 2007; Rupert and Solomon 2006).
Not only have critics addressed the lack of sophistication in transnational historical
materialism with regard to political strategies directed to transform the existing order
from below. It has also been argued that notwithstanding the refined analysis of
globalization processes (or perhaps as a result thereof), transnational historical materialism
tends to take on board the assumption of growing uniformity and homogeneity that
is central to many less critical analyses of globalization. Instead, it is argued, globalization
produces hybridity, fragmented identities, and therefore open-ended and non-ordered
change (see Ling 1996).
Conclusions
The transformations that the global political economy has gone through in the past
decades have fundamentally uprooted traditional theories of international politics. For
one thing, these changes have opened up the space for efforts to revitalize the Marxist
tradition and particularly to introduce non-dogmatic and non-deterministic historical
materialism into the discipline of international relations theory and its offspring,
international political economy.
Transnational historical materialism (however difficult it is to establish the precise
boundaries of this tradition) offers a relatively coherent framework for the analysis of
the contemporary global political economy. In this framework, the analysis of the
organization of the social relations of production provides the basis for an understanding
of transnational class and state formation.
Although it is primarily of Anglo-American origin if looked at in a narrow sense,
and to be found almost exclusively in English-language literature, it has strong roots
in the traditions of European Marxism. The role of the Dutch ‘branch’ in particular
has been important as a transmission point between the continental European (especially
French and German) and the Anglo-Saxon traditions (see Overbeek 2004). And
transnational historical materialism has also made modest inroads into the Japanese
and German language areas in particular.36
Simultaneously, under the impetus from constructive critiques, transnational historical
materialism branches out into new fields of empirical enquiry and new terrains of
theoretical work. One theme that is receiving increasing attention is that of the role
of culture and civilizational diversity in the global political economy (cf. Cox 1992b,
2002). The role of ideology not just among elites and the dominant classes, but among
various non-hegemonic and oppositional groups and social forces is also studied more
intensely (e.g. Rupert 2000). Finally, in acknowledgement of the need to pay more
attention to hybridity and to modes and moments of resistance, we have seen an increase
in the number of studies within the tradition that tackle issues of transnational identity
politics, gender, citizenship and people’s mobility (e.g. Germain and Kenny 2005).
Finally, the expectations of neo-Gramscian scholars regarding the further growth of
the transnational capitalist class have been increasingly confronted with contradicting
174 Henk Overbeek
evidence on the increased importance in the new millennium of geopolitical rivalries.
It is fair to say that the neo-Gramscian approach, in spite of such exceptions as some
work by van der Pijl (e.g. 2006) has so far struggled to deal in a satisfactory way with
the fact that transnational integration is not necessarily a one-way street towards a
global state, but can be thrown into reverse – perhaps for a long time to come – in a
global crisis with financial, economic, but also ecological dimensions.
Notes
1 No label can wholly satisfactorily capture at once what is common to the set of approaches to
be discussed in this contribution and what sets them apart from other approaches. Several labels
have been proposed, among them ‘open Marxism’ (cf. Drainville 1994), ‘Coxian historicism’
(Mittelman 1998) and in particular ‘neo-Gramscianism’ (see Germain and Kenny 1998, for a
critical survey of ‘neo-Gramscian’ approaches; and Murphy 1998 as well as Rupert 1998 for
‘neo-Gramscian’ responses). The debates engendered by the Germain and Kenny article highlight
very clearly why it is confusing at best to identify a broad and living theoretical tradition with
the name of any single individual (alive or dead). Following Stephen Gill (1993) and Kees van
der Pijl (1998), and indeed Robert Cox (1981), we prefer to adopt the more generic conceptual
label of historical materialism, prefaced by ‘transnational’ to distinguish the characteristic concerns
of the global political economy to which these authors apply historical materialism in the late
twentieth century.
2 In the summary of Ruggie, social constructivism raises four types of questions that neo-realism
and neo-liberalism cannot answer: how are the identity and interests of states shaped (or socially
constructed); what conception of causality is adequate to recognize ‘ideational causation’ (or the
real and material impact of, again socially constructed, ideas and beliefs); what are the constitutive
(as opposed to regulative) rules that make organized social activity possible at all; and lastly, how
can we account for systemic transformation (Ruggie 1998a: 13–28).
3 Cf. Keohane (1984, 1986); see also Mittelman (1998: 74).
4 See Bukharin ([1917] 1972), Hilferding (1910), Hobson (1902), Kautsky ([1914] 1970), Lenin
([1917] 1978), Luxemburg ([1913] 1951), Schumpeter (1951); for good overviews, see Brewer
(1980) and Kemp (1967).
5 For an account of developments within the ‘official’ communist world in these years, see Claudín
(1975).
6 Specific applications of Marxist thinking to the discipline of international relations remained very
sparse. For exceptions, see Berki (1971), Tomaschewski (1973), and especially Krippendorff (1975).
Later contributions on, or discussions of, Marxism and IR theory include Brucan (1978), Gills
(1987), Kubálková and Cruickshank (1980), Linklater (1990), Maclean (1988) and Rosenberg
(1994).
7 In terms of intellectual pedigree, Baran and Sweezy were inspired not so much by the
Hilferding–Lenin line, but saw more relevance in Rosa Luxemburg’s work on imperialism and
in particular the role of the armaments industry (cf. Luxemburg [1913] 1951).
8 The German scholars, in particular, claimed that their work actually took up a theme that Marx
had intended to deal with in a subsequent volume of Capital, namely the world market.
9 The term ‘transnational relations’ was in fact introduced into the discipline by Keohane and Nye
in their 1971 special issue of International Organization. However, their understanding of ‘transnational’
is primarily actor-oriented, while Poulantzas focuses on structures and processes rather than
‘actors’. ‘Transnational’, moreover, must be distinguished from inter-national, supra-national,
and global: it refers to processes that are simultaneously (sub-)national, inter-national, and global,
i.e. that take place within, across and beyond national borders.
10 A large number of edited volumes brings together contributions from various quarters of the
transnational historical materialism field. See in particular, van Apeldoorn (2004), Bieler and
Morton (2006), Cox (1997), Gill (1993, 1997), Gill and Mittelman (1997), Hettne (1995), Mittelman
(1997), Overbeek (1993), van der Pijl (1989) and Sakamoto (1994). The main monographs in the
tradition are van Apeldoorn (2002), Augelli and Murphy (1988), Bieler (2000), Cox (1987), Gill
and Law (1988), Gill (1990), Holman (1996), Morton (2007), Murphy (1994), Overbeek (1990),
van der Pijl (1984, 1996, 1998, 2006), Röttger (1997) and Rupert (1995a, 2000). Particularly
noteworthy, finally, is the collection of many of Cox’s articles edited by Timothy Sinclair (Cox
with Sinclair 1996). ‘Neo-Gramscian’ approaches have also proliferated in adjacent fields of study,
such as geography, ecology, anthropology, cultural studies, etc.; but in this contribution, we must
in the interest of space, limit ourselves to the field of international political economy, although
we realize that it is practically impossible (as well as nonsensical, in substantive and theoretical
terms) to draw these disciplinary boundaries.
11 This is brought out very clearly in The German Ideology:
The first premise of all human history is, of course, the existence of living human individuals.
. . . They themselves begin to distinguish themselves from animals as soon as they begin to
produce their means of subsistence . . . The production of life, both of one’s own in labour
and of fresh life in procreation, now appears as a double relationship: on the one hand as
a natural, on the other as a social relationship. By social we understand the co-operation
of several individuals, no matter under what conditions, in what manner and to what end.
(Marx and Engels [1846] 1970)
12 Cox distinguishes 12, ranging from subsistence farming to central planning and state corporatism.
13 This view is based on the famous description by Marx and Engels in the Communist Manifesto of
the state as the ‘executive committee of the whole bourgeoisie’ (Marx and Engels [1848] 1977).
14 The best work on Marxist state theory – partly from a Gramscian perspective – is no doubt to
be found in the oeuvre of Bob Jessop, culminating in his most recent book State Power (Jessop
2007).–
15 Gramsci’s work was ‘rediscovered’ in France, particularly after 1968. In the English-speaking
world, the New Left Review published a series of articles by Tom Nairn and Perry Anderson in
1964–5 making use of Gramsci’s work to reinterpret British history, but it was not until the
appearance of the translation of the Prison Notebooks (see. Gramsci 1971) that the wider dissemination
of Gramsci’s thought picked up pace (see also Anderson 1977). Of course it is not possible here
to go into the debates that the discovery of Gramsci has engendered, and to which Germain and
Kenny (1998) refer extensively in their critical assessment of the contribution of the ‘new
Gramscians’ to international relations theory (for recent critical evaluations, see Worth 2008,
2011). The references throughout this chapter intend to enable readers to find their own way
into the ways in which the ‘neo-Gramscians’ understand Gramsci.
16 The first coherent exposition of these concepts, particularly in terms of their relevance to
understanding international politics, can be found in Cox (1983). More extended discussions are
Cox (1987), Augelli and Murphy (1988), Gill (1990, 1993) and Rupert (1995a); see Tooze (1990)
for a review of Augelli and Murphy and Gill.
17 The approach is often associated with the ‘Amsterdam School’ (cf. van Apeldoorn 2004). See
van der Pijl (1989) and Overbeek (1993) for some early collections of papers adopting this
perspective.
18 Cf. van der Pijl (1984: 1–20, 1998: 49–63); also Overbeek (1990: 23–9, 176–81). It is important
to point out here that ‘fractions of capital’ is an abstract concept which does not refer to any
directly observable material reality, but which refers to aspects of, or moments in, the overall
and integral movement of capital in the accumulation process, thus influencing the preferences
and behaviour of concrete firms, interest groups and political actors.
19 Peter Burnham has critiqued this claim:
The neo-Gramscian analysis . . . simply offers a pluralist analysis of global capitalism which
overemphasises the role of ideology in economic policy and regime formation, illegitimately
invokes the dominant ideology thesis and fails to specify its implicit fractionalist theory of
the state.
(Burnham 1991: 90–1)
See also Clarke (1978) for an early critique of fractionalism. Rather than extrapolating Gramsci,
Burnham tells us that we must understand that ‘the culmination of “scientific political economy”
is to be found in a critical reading of the work of Marx’ (1994: 222).
20 Liberal (nineteenth-century Britain), nationalist-welfare (developed capitalist, first half of the
twentieth century), neo-liberal (developed capitalist, 1950s–1970s), state capitalist (1980s and
1990s).
176 Henk Overbeek
21 The terms ‘Lockean’ and ‘Hobbesian’ of course refer to the political philosophers John Locke
and Thomas Hobbes. Hobbes’s Leviathan ([1652] 1951) paints the picture of a strong centralized
state imposing its will on society (the only way to avoid a struggle of all against all). Written
shortly after the Glorious Revolution, Locke’s Two Treatises of Government ([1690] 1988) in contrast
sang the praises of self-governing civil society.
22 Fascist corporative before 1945, mercantilist–developmentalist thereafter in Cox’s words;
‘Hobbesian’ contender states in van der Pijl’s terminology.
23 Gramsci’s concept of revolution from above (and the passive revolution which might be seen as the
gradual accumulation of the unintended social transformations resulting from the revolution from
above) is crucial in understanding the process of late development in the capitalist era (cf. Cox
1983; van der Pijl 1998: 78–83). Interesting analyses in which these concepts are central include
Amineh (1998), van den Berg (1995) and van der Pijl (1993).
24 This is something that Gramsci (1971: 176) was quite outspoken on: ‘Do international relations
precede or follow (logically) fundamental social relations? There can be no doubt that they follow.’
25 For a recent overview of the use of the concept of ‘hegemony’, see Overbeek (2011).
26 For the dialectic of the ‘double movement’ of laissez faire versus social protection, see Polanyi
([1944] 1957).
27 For representative accounts of the nineteenth-century hegemonic order, see Cox (1987: 11–150);
Murphy (1994 13–152); Overbeek (1990: 35–58); van der Pijl (1984: 35–49).
28 Cf. Augelli and Murphy (1988: 58–74, 138–53); Cox (1987: 211–67); Gill (1990: 57–121); Murphy
(1994: 153–259); van der Pijl (1984: 76–243); Rupert (1995a: 167–207).
29 See the argument by Randall Germain and Michael Kenny (1998). More recently, this issue has
been raised by Femia (2005).
30 Picciotto (1991) argues that transnational corporations favour weak rather than strong transnational
regulatory structures, and instrumentalize the existence of different national regulatory systems.
The two positions are not mutually exclusive, as the one is framed in terms of objectives, while
the other analyzes (at least partially unintended) outcomes.
31 Above all, the study by Bill Carroll (with collaboration by Colin Carson, Meindert Fennema,
Eelke Heemskerk and P. Sapinski) must be mentioned here (Carroll 2010); in addition, we can
think of contributions such as de Graaff (2010), Heemskerk (2011), Plehwe et al. (2006) and van
der Pijl et al. (2011).
32 Interesting analyses of the ways in which investors and credit-rating agencies reproduce disciplinary
neo-liberalism both globally and in everyday life can be found in the work of Timothy Sinclair
(1994) and Adam Harmes (1998).
33 See van Apeldoorn (2002), van Apeldoorn et al. (2009), Bieler (2000), Bieler and Morton (2001),
Bruff (2008), Buch-Hansen and Wigger (2011), Cafruny and Ryner (2003), Gill (1998), Holman
(1992, 1996), Holman and van der Pijl (1996), Holman et al. (1998), Horn (2012).
34 Publications coming out of the MUNS efforts include Cox (1997), Gill (1997), Hettne (1995) and
Sakamoto (1994).
35 This is the main thrust of André Drainville’s critique of what he calls ‘open Marxism’ (Drainville
1994). Later critiques have echoed this point: see various contributions in Germain and Kenny
(2005) and in Bieler and Morton (2006).
36 In Japan, the efforts of Yoshikazu Sakamoto and others have made the approach better known,
resulting among others in the translation of Gill’s book on the Trilateral Commission into Japanese.
The efforts of Frank Deppe and Leo Bieling at the University of Marburg have done much to
broaden the appeal of transnational historical materialism in Germany (e.g. with translations of
some of Cox’s articles (cf. Bieling and Deppe 1996, Bieling et al. 1998, Cox 1998; also van der
Pijl 1996 and Röttger 1997). The work of Cox, Gill, van der Pijl and others has also been noticed
and discussed in countries outside the core of the global political economy, e.g. in India (see
Harshé 1997: 149–91).
13 Trends in development
theory
Jan Nederveen Pieterse
Development in question
Globalization and regionalization are overtaking the standard unit of development, the
nation. International institutions and market forces overtake the role of the state, the
conventional agent of development. The classic aim of development – modernization
or catching up with advanced countries – is in question because modernization is no
longer an obvious ambition. Modernity no longer seems so attractive in view of eco-
logical problems, the consequences of technological change and many other problems.
Westernization no longer seems compelling in a time of revaluing local culture and
cultural diversity. In view of the idea of multiple modernities, the question is:
modernization towards which modernity? Several development decades have not
measured up to expectations, especially in Africa and parts of Latin America and South
Asia. The universalist claims of neoclassical economics and structural adjustment policies
have undermined the foundation of development studies, the notion that developing
countries form a special case.
Doesn’t all this mean the end of development? Everything that development used
to represent appears to be in question, in crisis. There are various views of what this
crisis means. One is that since development is in crisis, let us close the shop and think
of something entirely different – ‘beyond development’. This is the position associated
with post-development thinking. A different response is to qualify the crisis, acknow-
ledging the failures of the development record but also its achievements, avoiding
simplistic, one-sided assessments. Thus, health care and education have improved even
in the poorest countries and in countries where growth has been stagnant. Another
reaction is to acknowledge crisis and to argue that crisis is intrinsic to development,
that development knowledge is crisis knowledge. From its nineteenth-century beginnings,
development thinking was a reaction to the crises of progress, such as the social
dislocations caused by industrialization. Hence questioning, rethinking and crisis are
part of development and not external to it. A related view is not merely to acknowledge
questioning as part of development but to consider it its spearhead – viewing development
thinking as ongoing questioning, critique and probing alternative options. Development
then is a field in flux, with rapid change and turnover of alternatives. Precisely because
of its crisis predicament, development is a high-energy field.
This chapter maps major trends in development thinking. Since the major
development theories are also policy frameworks, this approach includes development
strategies; but actual policies are informed by many other considerations, so this
discussion emphasizes development theories. Trend spotting is not exactly an intel-
lectually neutral activity, so it needs to be contextualized. This treatment opens with
178 Jan Nederveen Pieterse
general observations on the character of development thinking and the status of
development theory. The argument then turns to the different meanings of ‘development’
over time, which places the discussion of contemporary trends in a historical context.
The next section juxtaposes these different understandings of development to changing
patterns of global hegemony. Zeroing in on the contemporary setting, I map out different
stakeholders and institutions in the development field. Against this backdrop we turn
to development trends over time: first, long-term trends in theory and methodology
and next, policy changes.
The status of development theory

What is the contribution of development theory to this situation? Theory is the critique,
revision and summation of past knowledge in the form of general propositions and the
fusion of diverse views and partial knowledge in general frameworks of explanation.
What is referred to as ‘development theory’ largely belongs to the level of grand theories,
broad explanatory frameworks. This is part of its limited character. There is a lot that
development theory does not talk about. Many development problems are addressed
by mid-range or micro theories – questions of rural development, industrialization,
urbanization, trade policy, etc. Development theory as such concerns the larger
explanatory frames. In addition, ‘development theory’ usually refers to the leading
theories, and many rival and subsidiary theories do not quite make it to the limelight.
In social science it is now widely assumed that realities are socially constructed. The
way people think and talk about social realities affects agendas, policies, laws and the
ways laws are interpreted. Just as perception not merely registers but shapes reality,
knowledge does not simply reflect but constructs reality. Knowledge is political, shapes
perceptions, agendas, policies. If this were not the case, then why bother, why research,
why hold conferences? Theory is a meeting place of ideology, politics and explanation.
Framing, defining the field, the rank order of questions is the business of theory.
Theory is a distillation of reflections on practice in conceptual language so as to
connect with past knowledge. The relationship between theory and practice is uneven:
theory tends to lag behind practice, behind innovations on the ground; and practice
tends to lag behind theory (since policy makers and activists lack time for reflection).
A careful look at practice can generate new theory, and theory or theoretical praxis
can inspire new practice. Theories are contextual. While theories react to other theories
and often emphasize differences rather than complementarities, the complexities
encountered in reality are such that we usually need to combine several analytical
approaches.
Is development theory a matter of social science or of politics? Writers have different
views on the degree of autonomy of development theory. Some treat development
theory primarily as part of social science and thus emphasize the influence of classical
economic and social thought (e.g. Preston 1996; Martinussen 1997). Others implicitly
view development theory mainly as ideology – like a ship rocked in a sea of political
pressures and shifting tides. They consider political leanings, in a broad sense, as more
important in shaping development theory than theoretical considerations (e.g. Frank
1971). The advantage of this view is that it draws attention to the ideological role of
development theory – in setting agendas, framing priorities, building coalitions, justifying
policies. Its limitation is that it treats development theory as a by-product of political
processes and not as an intellectual process as well. Some cynicism in relation to theory
Trends in development theory 179
is appropriate: how often is a theory in effect a political gesture? What are the politics
of theory? Whom does discourse serve? In between these views is a middle position
that recognizes the intellectual as well as the political elements in development theory.
It does not make sense to isolate development theory from political processes and treat
it as an ivory-tower intellectual exercise; but neither can we simply reduce it to ideology
or propaganda. In the contextual approach to development theory, both political
contexts and influences from social science count (as in Corbridge 1995; Leys 1996).
This is the approach – we can term it the sociology of development knowledge – that
this chapter adopts.
For a development theory to be significant, social forces must carry it. To be carried
by social forces it must match their worldview and articulate their interests; it must
serve an ideological function. However, to serve their interests, it must make sense and
be able to explain things. By the same token, explanation is not a neutral function.
There are as many ways of explaining things as there are positions from which to view
realities. The explanation that satisfies a peasant is not the same as one that satisfies
a landlord, a banker or International Monetary Fund (IMF) official.
According to Björn Hettne, ‘Development in the modern sense implies intentional
social change in accordance with societal objectives’ (2008b: 6). Since not all societal
objectives are developmental (some are simply concerned with establishing authority,
etc.), I would insert the criterion of improvement and define development as the organized
intervention in collective affairs according to a standard of improvement. What constitutes
improvement and what is appropriate intervention obviously vary according to class,
culture, historical context and relations of power. Development theory is the negotiation
of these issues.
The strength and the weakness of development thinking is its policy-oriented character.
This is part of its vitality and inventiveness. It is problem-driven rather than theory-
driven. It is worldly, grounded, street smart, driven by field knowledge, not just book
knowledge. In part for the same reasons, development thinking ranks fairly low on the
totem pole of social science. As applied social science, development thinking has a
derivative status. It has more often been a follower of frameworks developed in other
sciences than a trendsetter. It has been a net importer of social science theories and
has been influenced by other social sciences more often than it has influenced them.
Evolutionism, Marxism, neo-Marxism, Keynesianism, structural functionalism, neo-
classical economics and post-structuralism are among the social science paradigms
imported by development theories at different times. A major area in which development
theory has influenced social science generally is dependency theory. Studies in
dependency theory have been widely read outside development studies and inspired,
for instance, world-system theory.
Arguably, development theory is underestimated in social science. The notion that
development theory counts for less because it concerns ‘merely the South’ while major
developments in social theory are spearheaded by the West reflects a deep-seated
prejudice. It reflects a (neo)-colonial division of labour in the production of knowledge
according to which theory is generated in the North and data, like raw materials, are
produced in the South (Pletsch 1981; Slater 2004). In this schema, the advanced societies
are supposed to be the mirror and guide of less developed societies. This cognitive
colonialism is passé on several counts. This kind of unilinear thinking is no longer
plausible. Besides, development knowledge is increasingly relevant also in the North.
The conventional distinction between developing and developed societies is less and
less relevant – the ‘South’ is in the ‘North’ and vice versa. With the decline of welfare
economies, there is increasing polarization within countries on account of shrinking
public services. In the United States and the United Kingdom there is mention of ‘two
thirds societies’. Social exclusion nowadays is a problem that is common to North and
South, West and East.
Knowledge production in the South has been influential not merely in the past, but
also under the shadow of western hegemony. A case in point is Gandhi and his
influence on the Civil Rights movement (Nederveen Pieterse 1989). Dependency
thinking, Maoism, Guevarism and the Delhi school of development thought (Dallmayr
1996) are other examples. Japanese perspectives on management, production and
development have been profoundly influential and so has the Asian developmental
state (Iwasaki et al. 1992; Wade 1996).
Development is a strange field. Development practice, policy and studies are all
flourishing. Universities open new development schools (particularly in the UK). Yet
for quite some time, the field has been said to be in crisis, in an impasse, or passé.
Part of this is a crisis of ideologies, which reflects a wider paradigm crisis – of neo-
Marxism and dependency theory as well as Keynesianism and welfare politics. There
have been plenty of critical positions but no coherent ideological response to the neo-
liberal turn. The crisis is further due to changing circumstances including development
failures, the growing role of international financial institutions, and conflicts in developing
countries.
According to Marx’s eleventh thesis on Feuerbach, ‘Philosophers have only interpreted
the world in various ways. The time has come to change it.’ Arguably the actual power
of development is the power of thesis 11. Nowadays the ambition to ‘change the world’
meets with cynicism – because of the dismal record of several development decades,
doubts about modernism and its utopian belief that society can be engineered (how
about social engineering if we look at Bosnia, Rwanda, Somalia, Sierra Leone, Liberia?)
– and media triviality (‘We are the world’).
The status of development theory reflects the theory lag between development
studies and social science generally, a ‘colonial legacy’ in knowledge and a recurring
impasse in the development field. The decolonization of knowledge is a matter of
ongoing contestation (Apffel-Marglin and Marglin 1996; Nederveen Pieterse and Parekh
1995; Dahl 2008). As part of accelerated globalization, neo-liberal policies impose
neoclassical economics on the South, applying western standards of policy and systems
of accounting to align economies and financial and credit regimes. It is appropriate to
consider this episode as part of the wider historical relations between North and South.
In tandem with changing geopolitical relations, ‘development’ has been changing its
meaning over time.
Meanings of ‘development’ over time

Over time, ‘development’ has carried very different meanings. The term ‘development’
in its present sense dates from the post-war era of modern development thinking. In
hindsight, earlier practices have been viewed as antecedents of development policy,
though the term ‘development’ was not necessarily used at the time. Thus Kurt Martin
(1991) regards the classic political economists, from Ricardo to Marx, as development
thinkers for they addressed similar problems of economic development. The turn-of-
the-century latecomers to industrialization in Central and Eastern Europe faced basic
development questions such as the appropriate relationship between agriculture and
industry. In central planning the Soviets found a novel instrument to achieve
industrialization. During the Cold War years of rivalry between capitalism and
communism, the two competing development strategies were western development
economics and central planning (in Soviet, Chinese or Cuban varieties). In this general
context, the core meaning of development was catching up with the advanced
industrialized countries.
Cowen and Shenton (1996) uncover yet another meaning of development. In
nineteenth-century England, ‘development’, they argue, referred to remedies for the
shortcomings and maladies of progress. This involves questions such as population
(according to Malthus), job loss (for the Luddites), the social question (according to
Marx and others) and urban squalor. In this argument, progress and development (which
are often viewed as a seamless web) are contrasted, and development differs from and
complements progress. Thus, for Hegel, progress is linear and development curvilinear
(Cowen and Shenton 1996: 130). Accordingly, twentieth-century development thinking
in Europe and the colonies had already traversed many terrains and positions and was
a reaction to nineteenth-century progress and policy failures where industrialization
left people uprooted and out of work, and social relations dislocated.
The immediate predecessor of modern development economics was colonial
economics. Economics in the European colonies and dependencies had gone through
several stages. In brief, an early stage of commerce by chartered companies, followed
by plantations and mining. In a later phase, colonialism took on the form of trusteeship:
the management of colonial economies not merely with a view to their exploitation
for metropolitan benefit, but allegedly also with a view to the interest of the native
population. Development, if the term was used at all, in effect referred mainly to colonial
resource management, first to make the colonies cost-effective and later to build economic
resources with a view to national independence. Industrialization was not part of colonial
economics because the comparative advantage of the colonies was held to be the export
of raw materials for the industries in the metropolitan countries. Indeed there are many
amply documented episodes when European or colonial interests destroyed native
manufactures (textile manufacturing in India is the classic case) or sabotaged
industrialization efforts in the periphery (as in Egypt, Turkey and Persia; see Stavrianos
1981). This is a significant difference between the colonial economies and the latecomers
in Central and Eastern Europe.
In modern development thinking and economics, the core meaning of development
was economic growth, as in growth theory and Big Push theory. In the course of time,
mechanization and industrialization became part of this, as in Rostow’s Stages of Economic
Growth (1960). When development thinking broadened to encompass modernization,
economic growth was combined with political modernization – i.e. nation building;
and social modernization, such as fostering entrepreneurship and ‘achievement
orientation’. In dependency theory, the core meaning of development likewise was
economic growth or capital accumulation. Its distorted form was dependent accumula-
tion which led to the ‘development of underdevelopment’, and an intermediate form
was ‘associated dependent development’. The positive goal was national accumulation
(or auto-centric development). Alternative development thinking introduced new
understandings of development focused on social and community development and
‘human flourishing’ (Friedmann 1992). With human development in the mid-1980s
came the understanding of development as capacitation, following Amartya Sen’s work
on capacities and entitlements. In this view the point of development, above all, is that
it is enabling. The core definition of development in the Human Development Reports
of the United Nations Development Programme (UNDP) is ‘the enlargement of people’s
choices’.
Two radically different perspectives on development came to the fore around the
same time. Neo-liberalism, in returning to neoclassical economics, eliminates the foundation
of development economics: the notion that developing economies represent a ‘special
case’. According to the neo-liberal view, there is no special case. What matters is to
‘get the prices right’ and let market forces do their work. Development in the sense of
government intervention is anathema for it means market distortion. The central
objective, economic growth, is to be achieved through deregulation, liberalization,
privatization – which are to roll back government and reduce market-distorting
interventions and in effect annul ‘development’. In other words, this retains one of the
conventional core meanings of ‘development’ – economic growth – while the ‘how to’
and agency of development switch from state to market. Accordingly, neo-liberalism
is an anti-development perspective, not in terms of goals but in terms of means. Post-
development thinking also puts forth an anti-development position. This is still more
radical for it applies not merely to the means (the state is accused of authoritarian
engineering), but also to the goals (economic growth is repudiated) and the results
(which are deemed a failure or disaster for the majority of the population) (Rahnema
and Bawtree 1997). An overview is given in Table 13.1.
Thus the lineages of development are quite mixed. They include the application of
science and technology to collective organization, but also managing the changes that
arise from the application of technology. Virtually from the outset, development includes
an element of reflexivity. It ranges from infrastructure works (roads, railways, dams,
canals, ports) to industrial policy, the welfare state, new economic policy, colonial
economics and Keynesian demand management.
There are several ways of making sense of the shift of meanings of development
over time. One is to view this kind of archaeology of development discourse as a
deconstruction of development and as part of a development critique. Another is to
Table 13.1 Meanings of development over time
Period Perspectives Meanings of development

1800s Classical political economy Remedy for progress; catching up
1870 > Latecomers Industrialization, catching up
1920 > Colonial economics Resource management, trusteeship
1940 > Development economics Economic growth – industrialization
1950 > Modernization theory Growth, political and social modernization
1960 > Dependency theory Accumulation – national, auto-centric
1970 > Alternative development Human flourishing
1980 > Human development Capacitation, enlargement of people’s choices
1980 > Neo-liberalism Economic growth – structural reform,
deregulation, liberalization, privatization
1990 > Post-development Authoritarian engineering, disaster
2000 Millennium Development Goals Structural reforms
treat it as part of the historical context: it is quite sensible for development to change
meaning in relation to changing circumstances and sensibilities. ‘Development’ then,
serves as a mirror of changing economic and social capacities, priorities and choices.
A third option is to recombine these different views as dimensions of development; i.e.
to fit them all together as part of a development mosaic and thus to reconstruct
development as a synthesis of components (e.g. Martinussen 1997). A limitation of this
perspective is that it takes history out of development. If we consider each theory as
offering a Gestalt of development, a total picture from a particular angle, then the
array of successive and rival theories offers a kaleidoscopic view into the collective
mirror. By any account, the different meanings of development relate to changing
relations of power and hegemony, which is part of the view in the collective mirror.
Development is struggle
Besides different meanings of development over time, there are different dimensions
to ‘development’ at any one time. To each development theory there are, implicitly
or explicitly, various dimensions or layers: first, the historical context and political
circumstances. Each perspective unfolds in a particular historical setting. Understanding
development theory in context means understanding it as a response to problems and
arguments at the time. Another dimension is explanation or assumptions about causal
relationships. This implies epistemology or rules of what constitutes knowledge. In
addition, it involves methodology, or indicators and research methods. Development
thinking also performs a role of representation, of articulating and privileging particular
political and class interests and cultural preferences. Besides different meanings of
development, another register is ‘perceptions of development’ or how different
stakeholders perceive and represent their interests (e.g. Wallman 1977). Development
theories also reflect images of improvement or desirable change. A further element is
the agenda-setting role of theory, as a set of policy implications and a future project.
Understanding development theory means being aware of these multiple layers
(Figure 13.1). Each development theory can be read on multiple levels and in terms
• Context – historical context and political circumstances

• Explanation – assumptions about casual relationships
• Epistemology – rules of what constitutes knowledge
• Methodology – indicators and research methods
• Representation – articulating or privileging particular interests
and cultural preferences
• Imagination – images, evocations, symbols of development, desire
• Future – policy, agenda, future project
Figure 13.1 Dimensions of development theories

of the ongoing and shifting relations among the following components: Practice →
Research → Policy → Ideology → Image → Theory → Ideology → Policy →
Practice → Theory → Ideology → Image → Policy . . .
A central issue is the relationship between knowledge and power. That every truth
is a claim to power and every power is a centre of truth is the point of discourse analysis
and part of post-modern understandings of knowledge. This involves more or less subtle
considerations. For instance, one can argue for a relationship between technological
capacities and epistemology and politics. ‘Heavy technology’ such as the steam engine
then correlates with an epistemology of determinism and a politics of hierarchy; whereas
soft or light technology, such as touch-button and ambient tech, implies subtler
epistemologies and more horizontal relations (Mulgan 1994).
Broadly speaking, each development theory can be read as a hegemony or a challenge
to hegemony. Explanation, then, is not always the most important function of theory
– others are agenda setting, mobilization and coalition building.
In line with the neo-colonial intellectual division of labour in which ‘theory’ is
generated in the West and data are supplied by the South, grand theories have typically
been fashioned in the West and therefore articulate western political interests and
western intellectual styles and priorities. Reading development theory then is also
reading a history of hegemony and political and intellectual Eurocentrism (Amin 1989;
Mehmet 1995). Notable exceptions are dependency theory (which was also informed
by Marxism, i.e. a western counter-hegemony), alternative development and human
development thinking, which largely originate outside the West.
We can map the main contours of development thinking in different periods alongside
the patterns of international hegemony and the structures of explanation that were
prevalent at the time (Table 13.2). Thus we relate global relations of power or
international hegemony to intellectual patterns of hegemony (in line with the Gramscian
approach to international relations; see Cox 1991). The assumption in this schema is
that the paradigms that are available in the intellectual market at the time shape the
explanatory frameworks that inform development thinking.
Table 13.2 Global hegemony and development theories
Historical context Hegemony Explanation Development thinking

19th century British Empire Colonial anthropology, Progress, evolutionism
Social Darwinism
1890–1930s Latecomers, colonialism Classical political economy Catching up
Post-war boom US hegemony Growth theory, structural Modernization
functionalism
Decolonization Third World nationalism, Neo-Marxism Dependency
Non-Aligned Movement
(NAM), Group of 77
(G77)
1980s > Globalization, finance Neo-liberalism, monetarism Structural adjustment
and corporate capital
1990s > Rise of Asia, big Capabilities, developmental Human development
emerging economies, state
BRIC
The development field
Development thinking and policy, then, is a terrain of hegemony and counter- hegemony.
In this contestation of interests there are many stakeholders and multiple centres of
power and influence. Taking a closer look at the contemporary development field, we
can schematically map the main actors and forces as shown in Table 13.3 below.
To the surface structure of dispersed centres of influence we can add the infrastructure
of forces behind the scenes, i.e. those on which the overt centres of influence depend.
Thus what matters are not simply the World Bank or the IMF, but their boards of
trustees and other forces that shape policy parameters. Thus the ‘Wall Street –Treasury
–IMF complex’ (Wade and Veneroso 1998) identifies two forces behind the scenes, to
which we can add the US Congress, the Federal Reserve, G7 central banks and the
Bank for International Settlements (BIS) in Basel. Further, at some remove (because
these relations are not always clear-cut and straightforward), we can add the development
thinking that would be congenial to these circles and the disciplines that typically
inform their angle of vision. The dispersal of stakeholders in development roughly
correlates with the disciplinary sprawl of development studies, so this fragmentation
may have not only an intellectual basis in the academic division of labour, but also an
institutional basis.
This is only a schematic representation. There are some provisos: in the infrastructures
of power, different ideologies may prevail; non-governmental organizations (NGOs)
need to be differentiated in various types, etc. From this mapping of the development
field, several points follow.
Table 13.3 Actors in the development field: different stakeholders, different development
Institutional State IFIs* UN System Civil Society

Structure Governments, IMF, World UN agencies (International)
ministries South Bank NGOs
and North
Infrastructure Bureaucracies, WTO, G8/G20, UN General People. Social
interest groups, central, Assembly, movements, trade
parties, factions, international governments, unions, parties,
citizens and development ILO, WHO, firms, churches,
banks, TNCs etc. etc.
Locations Capitals, etc. Washington, DC New York, Dispersed
Geneva, Paris,
Nairobi, etc.
Development Economics Neoclassical Human Alternative
thinking (neoclassical to economics, development development (and
Keynesian) neo-liberalism post-development)
and human
development
Disciplines Economics, Economics Economics, Sociology,
political science, political anthropology,
public economy, ecology, gender and
administration, IR, political cultural studies
demography science
* International Financial Institutions
1 It is not really possible to generalize about development – the question is, whose
development? Different stakeholders have different takes on what development
means and how to achieve it. This is not a minor point but a fundamental
circumstance. Development is intrinsically a field of multi-level negotiation and
struggle among different stakeholders.
2 Though it is schematic, this outline may enable us to fine-tune our thinking about
the relationship between power and knowledge in development. The field is in
flux. Thus, the World Bank has been shifting position repeatedly in view of policy
failures and political pressures and trends.
3 New concerns and priorities that are broadly shared by development stakeholders
– such as globalization, sustainability, gender, diversity, poverty alleviation – prompt
new combinations and partnerships that cross-cut ‘boxes’. Complex emergencies,
such as humanitarian action, conflict prevention and post-conflict reconstruction,
also make for cross-cutting combinations. In this light, this kind of map is already
overtaken on the ground, which is a reminder that the map should not be mistaken
for the territory.
Trends in development theory

Obviously, the selection and representation of trends are tricky issues. If it is true that
development is a mirror of the times, then a development trend report is a look in the
collective mirror – and there are many angles to take and arguments to fit the occasion.
There is no methodology to achieve this in a neat and clean fashion. The format
adopted here is a concise profile of trends. Limitations of this kind of discussion are
the absence of magnitudes or relative values and the fact that everything is contextual.
Certain trends may well be significant, but without a quantitative analysis, this remains
inevitably impressionistic. First we will discuss long-term trends in development theory.
Because they are long-term changes (over 50 years or more), they have a certain degree
of plausibility; but, on the other hand, they are also rather general and of a high level
of abstraction. Even so, a long-term perspective in a field dominated by short-termism
may be welcome. Next we will look at current trends in development thinking and
policy.
Arguably, the long-term trends in development theory parallel general shifts in social
science. They may be characterized as a gradual shift from nineteenth-century to late
twentieth-century epistemologies. In the first place, this involves a shift from structuralist
perspectives that emphasize the role of macro-structures towards more agency-oriented
views. Classical and modern development thinking were structuralist: the emphasis was
on the large-scale patterning of social realities by structural changes in the economy,
the state and the social system. This also applies to critical development thinking of
the time, which was informed by Marxism, which in its orthodox forms is basically
structuralist. It further applies to the structuralist school associated with Raúl Prebisch,
which preceded the emergence of dependency theory in Latin America, and to neo-
Marxism, dependency theory, modes of production analysis, structuralist Althusserian
Marxism and the regulation school.
In social science generally, this outlook began to change with the growing influence
of phenomenology (dating back to nineteenth-century antecedents) and a variety of
orientations such as existentialism (and its emphasis on individual responsibility);
hermeneutics (involving a more complex epistemology); symbolic interactionism and
ethnomethodology (in anthropology); new institutional economics and rational choice,
public choice and capability (in economics); and feminism (e.g. standpoint theory). In
Marxism, it began to change with the influence of Gramscian Marxism. In different
ways, these orientations all imply a shift in emphasis from structuralist towards insti-
tutional and agency-oriented views. This can also be described as a change from
deterministic to interpretative views (cf. Bauman 1992 on the changing role of the
intellectual from legislator to interpreter) and from materialist and reductionist views
to multidimensional and holistic views. A different account of this shift is from
structuralism to constructivism; i.e. from an account of social realities as determined
and patterned by macro-structures, to an account of social realities as being socially
constructed. The lineage of constructivism includes phenomenology – as in Schutz
([1932] 1972) and Berger and Luckmann (1966); and Max Weber – much of Weber’s
work is constructivist in outlook. A familiar turning point is Giddens’s structuration
theory (1984). Post-structuralism and post-modernism, taken in a methodological sense,
are further expressions of this reorientation (Rosenau 1992).
In development studies, these broad changes involve various implications. One of
the consequences of the emphasis on agency is that development thinking becomes
spatialized and more local, or regional. Another implication is the concern for
differentiation and diversity. Early and modern development thinking were generalizing
and homogenizing; structuralism is intrinsically essentialist. By contrast, the post-impasse
trend in development thinking highlights diversity and differentiation (Schuurman 1993;
Booth 1994). Along with this comes a movement away from grand overall theories
and big schema policies. There are no more general recipes, no development policies
that are relevant across countries and regions. The singular makes way for the plural
generally – not simply development, but what kind of development; not simply growth,
but what kind of growth. Thus new qualifiers and attributes proliferate such as sustainable
development, people-friendly growth, pro-poor growth, etc. Such qualifiers had always
figured in the critical literature; now they enter mainstream discourse. Among the
concrete expressions of the agency orientation in development thinking are work on
strategic groups, the actor-oriented approach (Long 1994) and the general emphasis
on a participatory approach (e.g. Oommen 1998).
The concern with diversity and agency introduces a new kind of tension: what then
is the relationship between the local and the global, between the internal and the
external, the endogenous and exogenous, between micro- and macro-policies? The
shift from structuralism to constructivism and from structure to agency refers to a shift
in emphasis and perspective; one does not replace the other but complements it.
Structural changes and macro-policies obviously matter, such as structural adjustment
lending and the World Trade Organization. What has changed is that these no longer
constitute the field, but are perceived as only part of the field. Many stakeholders
actively negotiate them politically and analytically and feel they can do something
about them. The impact of these actors on public debate and policy making can be
measured (e.g. Clarke 1998). This is a step towards the democratization of development
politics. Constructivism, in this sense, is the methodological expression of a political
transformation.
This perspective offers one angle on current trends in development studies. Several
trends are linked to these general changes (outlined in Figure 13.2 overleaf ), or follow
from it, without being reducible to it. Current trends are discussed further with a view
to changes in different spheres. In methodology, what stands out is the trend towards
From To
Macro-structures Actor-orientation, agency, institutions
Structuralism Constructivism
Determinism Interpretative turn, contingency
Generalizing, homogenizing Differentiation
Singular Plural
Eurocentrism Polycentrism, multipolarity
Figure 13.2 General trends in development theory over time
interdisciplinarity and the role of discourse analysis. In general sensibilities, the cultural
turn is significant. In development policy, significant themes are inter-sectoral co-
operation, social diversity, human security, gender and environment, and changes in
development co-operation and structural reform.
Interdisciplinarity
A significant methodological change is the gradual trend towards interdisciplinarity.
Traditionally, sectoral theories have dominated development studies. They have been
marked by a gap between economic development and social and political development,
although in grand theories (such as modernization and dependency theory) these were
somehow articulated. A transitional phase has been the shift from disciplinary case
studies and policies towards multidisciplinary approaches. Increasingly we now see –
although fragmented development economics, politics, etc. also continue as usual –
more attention to cross- or transdisciplinary work. Several developments contribute to
this: failures in development policies; new problems that require combined approaches;
crises and emergencies that prompt new combinations of efforts. Novel disciplinary
combinations and themes include, for instance, new institutional economics, sociology
of economics, the social economy, development as social process or as public action.
Notions such as the embeddedness of economic and market activities in political
institutions, as well as social capital, cultural practices and social relations, imply new
combinations of disciplinary sensibilities. New methodologies, such as social accounting,
require such new combinations. Accordingly, there is a new awareness that development
requires a multidimensional, holistic approach.
Discourse analysis
While it owes its influence to the general impact of post-structuralism, the origins of
this methodology are in linguistics and literature studies. Here development studies
follow a general trend in social science. The upshot is to treat development as story,
as narrative, text. This has generated a wave of deconstructions and critiques of
development texts. According to this literature, the power of development is the power
of storytelling – development is a narrative, a myth (Crush 1996; Rist 1997); this has
since become a standard genre (Grillo and Stirrat 1997).
Discourse analysis in development involves a medley of motifs. At a general
methodological level, it represents a gain and is not remarkable; it is simply the ‘linguistic
turn’ applied to development studies. It is the awareness that development is not simply
theory or policy but in either form is discourse. This means a step beyond treating
development as ideology, or interest articulation, because it involves meticulous attention
to development texts and utterances, not merely as ideology but as epistemology. Thus
it involves sociology of knowledge, not only in terms of class interests (as in ideology
critique) but also in terms of what makes up an underlying ‘common sense’.
An effective use of discourse analysis is as an analytical instrument applied, for
example, to development policy (e.g. Apthorpe and Gasper 1996; Rew 1997). A different
application is to argue that since development is discourse, it is therefore fictional,
untrue, bogus, deceptive. It is a form of western modernism and scientific distortion
that sets illusory goals of material achievement and in its pursuit wreaks havoc upon
Third World people. In this mode, discourse analysis turns into anti- or post-development
thinking (e.g. Escobar 1992; Sachs 1992). In the process, methodology turns into ideology
– an instrument of analysis becomes an ideological platform, a political position; politics
of knowledge turn into knowledge of politics. There have been similar agnostic moves
in Foucault and Derrida’s work. In development studies, this shift from methodology
to ideology likewise involves the admixture of outside elements: an esprit of anti-
modernism with romantic overtones (as in Ivan Illich), or post-Gandhian utopianism
(as in Nandy 1989). Development as a discourse that is alien to the Third World
(western), authoritarian (state, IMF), engineering (modern), controlling and steamrolling
and perverting local culture, grassroots interests and perceptions: this development
critique is the newest critical populism.
A slightly different current is to apply discourse analysis in the sense of ‘unmasking’
development as ‘myth’ or ‘fairy tale’ (Rist 1997); i.e. development is ‘only a story’, only
a narrative, only a grand narrative. In a methodological sense, this is a contradictory
move: the very point of discourse analysis is that discourse matters, talk and
representation matter; representation is a form of power, it constructs social realities.
Some analysts seem to want to have it both ways: development is a story and it is ‘only
a story’. This confuses two different methodological dispositions: that of ideology critique
(which measures ideology, taken as masked interests or false consciousness, against
some yardstick of ‘truth’) and discourse analysis.
The methodological gain of discourse analysis is to add a level of reflexivity, theoretical
refinement and sophistication to development studies, and thus to open the politics of
development to a more profound engagement. Its weakness and limitation – in development
studies just as in literature criticism and cultural studies – are that it may skirt the actual
issues of power. It may divert attention from relations ‘on the ground’. In that case, from
determinism we risk slipping into discursivism, i.e. reading too much into texts, or textualism,
and overrating the importance of discourse analysis, as if by rearranging texts one changes
power relations. This comes down to an alternative structuralism: from economic and
political macro-structures to linguistic and epistemic structures; or, the order of language
as a stand-in and code for the order of social relations.
The emergence of new fields of interest also shapes development studies. Gender,
ecology, democratization, good governance, empowerment, culture and communication
now figure prominently in development agendas. Ecology involves not just resource
economics but novel syntheses such as ecological economics and ecological politics.
Gender plays a fundamental role in development practice and discourse. ‘Empowerment’
and ‘participation’ are also ubiquitous in development management. Besides more
effective public administration, accountability, democracy and citizenship figure
prominently. Globalization is also a major vortex of change in the development arena.
These fields of interest generate new theoretical and policy angles, but so far, not
necessarily new overall theoretical frameworks.
Several themes are not new in themselves, but the emphasis they receive is novel.
Or, some themes acquire a new significance over time. Thus, corruption has been a
familiar theme in development work, but at each turn of the wheel it takes on a
different meaning. In the context of modernization, it was taken as a residue of pre-
modern, particularist leanings. In the dependency framework, corruption was a symptom
of dependent development and of the comprador politics of the lumpen bourgeoisie.
Kleptocracy, crony capitalism and ‘money politics’ are variations on this theme. In the
context of neo-liberalism, corruption becomes rent seeking, an ominous sign of state
failure and market distortion and ‘a hazard to free trade and investment’ (Leiken 1996:
55) and the remedy is transparency. From a political angle, corruption is a matter of
public accountability and democracy.
Culture and development

Conventionally, development has been a monocultural project. Modernization and
westernization were virtually synonyms. As part of ‘nation building’, development was
taken as a homogenizing project. In the context of decolonization struggles, this began
to change: along with the indigenization of politics and administration, indigenous
culture and knowledge became an additional topos. Thus, culture was incorporated
into development studies, but in a subsidiary fashion (‘add culture and stir’). The critique
of Eurocentrism generated a concern with polycentrism, cultural multipolarity (Amin
1989) and pluralism. The World Decade on Culture and Development, sponsored by
the United Nations Educational, Scientific and Cultural Organization (UNESCO), also
resulted in growing regard for cultural dimensions of development. In the wake of the
cultural turn in development, culture represents another dimension of development,
which is no longer ignored or viewed as just an obstacle, as in orthodox modernization
thinking. ‘Culture’ now figures in several ways. One is regard for cultural diversity –
which in an age of ethnicity and religious resurgence is not an entirely innocent theme.
A second concern is cultural capital, both as a form of human capital and capability
and as political currency (in ethnic and religious mobilization and as an asset in economic
relations). A further step is to view cultural diversity as an engine of economic growth.
The unit of development

In development thinking from the classics to dependency theory, the conventional
unit of development was the nation. The key development statistics and measures
used by the international institutions are still country statistics. However, while the
nation remains the central domain of development, it is no longer the only game in
town. Gradually development is becoming a multilevel, multi-scalar series of efforts,
simultaneously taking place at levels lower than the nation, at the national level and
at levels beyond the nation.
Below the national level are community development, local economic development
(LED) and micro-regional development. Community development, a subsidiary theme
in colonial times and modernization, received a new emphasis with alternative develop-
ment. Local development in its various forms connects with questions of rural–urban
disparities, urban development, regional inequality, new regionalism, ethnic mobilization
(‘ethnodevelopment’), and new localism with a view to endogenous development
and in reaction to globalization. Beyond the nation are questions of macro-regional
co-operation and global macroeconomic policies. Macro-regional co-operation concerns
economies of scale, increase of market size, regional standardization and inter-firm
co-operation as well as the horizons of the regional Development Banks. Besides country
statistics, other development statistics are regional, concerning ‘Latin America’, ‘Africa’,
‘Asia’, ‘the Caribbean’, etc. The region, in other words, is becoming almost as familiar
a unit of development as the nation. A third scale of development action is the world:
local, national and macro-regional decision making interfaces with global macro-policies
on the part of international institutions and the UN system.
Hence, development policy is increasingly a matter of decision making dispersed
over a wide terrain of actors, institutions and frameworks. Development theorizing,
which is habitually centred on the state, needs to accommodate this widening radius.
It needs to be renewed by reconceptualizing development as multi-scalar public
action. Contemporary development policy is incoherent because the different levels of
development action – local, micro-regional, national, macro-regional, international,
global – are not adequately articulated. Thus a comprehensive, holistic approach to
development is not only multidimensional but also multi-scalar, so development efforts
at different levels are cumulative and interconnect.
Inter-sectoral co-operation
After development thinking has been, more or less successively, state-led (classical
political economy, modernization, dependency), market-led (neo-liberalism) and society-
led (alternative development), it is increasingly understood that development action
needs all of these in new combinations. New perspectives and problems (such as complex
emergencies, humanitarian action) increasingly involve co-operation among government,
civic and international organizations, and market forces. Human development, social
choice, public action, urban development and LED all involve such inter-sectoral
partnerships. For government at local and national levels, this increasingly involves a
co-ordinating role as facilitator and enabler of inter-sectoral co-operation.
The theme of development partnership at present serves an ideological role as part
of a neo-liberal new policy framework which papers over contradictions and the roll
back of government. However, the underlying significance is much more profound:
just as sectoral approaches and disciplinary boundaries have been losing their relevance,
sectoral agendas are now too narrow. The ideological use that is being made of this
conjuncture should not obscure the significance of the trend itself.
International development co-operation has been changing in several ways. The
emphasis has shifted from projects to programmes and from bilateral to multilateral
co-operation. The trend is towards, on the one hand, formal channels (particularly
multilateral co-operation through international and regional institutions); and, on the
other hand, informal channels (NGOs) (Bernard et al. 1998). A précis of current trends
is given in Table 13.4.
Table 13.4 Current trends in development theory
Conventional and recent views PRIVATE Trend New themes

Grand theories Differentiation Middle-range theories, local
knowledge
(1) Unreflexive use of Reflexivity, self-questioning Development as social learning,
language, indicators, social feedbacks, reflexive
models; (2) discourse development
analysis
Sectoral theories; gap Interdisciplinarity Bridging approaches (new
between economic and social/ institutional economics, sociology
political development; of economics) and themes
(multi)disciplinary case (embeddedness, social capital,
studies, policies social economy, holism)
State, market or society-led Inter-sectoral co-operation Inter-sectoral synergies; public
development action
Homogenization, essentialism Diversity Politics of difference
(1) Betting on the strong; Human security Risks of polarization, global
(2) humanitarian assistance, social policy, global social
from relief to development contract
(1) Gender blind; (2) WID Gender awareness Gender interests, gendering
[Women in Development] development
(‘add women and stir’)
(1) Mastery over nature; Environment Green GDP, political ecology
(2) sustainable development
(‘add environment and stir’)
(1) Westernization; Cultural turn Diversity and cultural capital as
(2) homogenization versus political currency, (3) as growth
indigenization (‘add culture pole
and stir’)
(1) Nation; (2) local Unit of development Regional and world
development and multi-scalar
partnerships
These changes in development thinking, such as interdisciplinarity and discourse

analysis; and in policy, such as the changing unit of development and inter-sectoral
co-operation, do not add up to a single pattern, but they significantly change the
Gestalt of development.
14 Constructivism in
International Political
Economy
André Broome
Introduction: a new theory for a new world order?

Few scholars start their intellectual journey by describing their work as constructivist:
like most academic labels, it is one that is worn in gradually over time. Pared down
to a single common attribute, constructivism in the field of International Relations (IR)
can be defined as ‘an approach to social analysis that deals with the role of human
consciousness in social life’ (Finnemore and Sikkink 2001: 391), which gained prominence
within IR scholarship during the second half of the 1980s and early 1990s. Constructivist
approaches reject a positivist epistemology that privileges description and explanation
of objective empirical facts through the application of natural science methodologies
in the social sciences. Instead, constructivists focus on understanding the dynamic roles
played by ideas, norms, values and identities in political processes and outcomes. In
doing so, constructivist approaches to the study of non-material factors can be
differentiated from both positivist rational actor models that privilege material variables,
as well as from ‘soft’ rationalist approaches. The latter include ideas and norms as
salient issues for explaining aspects of individual preference formation and behaviour,
but understood only as epiphenomenal factors that either reinforce or compete with
an actor’s material interests as alternative motivations for their behaviour (see e.g. the
contributions to Ben-Ner and Putterman 1999). For constructivists, in contrast, ideas
are considered to be an essential ingredient in the social production of both:
1 who an actor thinks he or she is within a particular context (their identity); and
2 what he or she seeks to gain through the performance of their social role (their
interests) (Blyth 2003).
When rationalist scholars have engaged with the causal dynamics of non-material factors
such as ideas and norms, these have been conceived as regulative variables that shape
an individual actor’s behaviour, while constructivists view ideas as intersubjective
constructs that are constitutive both of an actor’s identity and his or her interests.
The rise of constructivist scholarship in IR was facilitated by structural changes in
the international environment, such as the inability of existing rationalist theories to
account for the end of the Cold War (Koslowski and Kratochwil 1994), the subsequent
demise of the Soviet economic system and its enduring legacy (Johnson 2000), and the
variation in post-communist choices made by East and Central European governments
and the newly independent states of the former Soviet Union (Abdelal 2001). While
constructivism in IR remains a fairly recent intellectual endeavour, the overt use of
constructivist methods and conceptual tools in the study of International Political
194 André Broome
Economy (IPE) has been commonplace for an even shorter interval, leading some to
suggest that ‘there is no constructivist IPE’ (a view effectively challenged in McNamara
2009: 78). Not without cause, therefore, Finnemore and Sikkink’s (2001) concise
stocktaking of the constructivist research agenda, published a decade ago, concentrates
primarily on security-related constructivist scholarship with only a handful of prominent
IPE-oriented constructivist works cited.
The ‘constructivist turn’ in IPE has both broadened and deepened during the last
decade, and now permeates the mainstream of IPE scholarship. If IR constructivism
emerged as one response to the intellectual challenge of understanding the post-Cold
War era, constructivism in IPE has come of age in large part as an attempt to develop
new analytical tools to understand the recurrent crises that have dogged the global
political economy after the mid-1990s ushered in a new era of global volatility. From
the ‘Tequila’ crisis in 1995 and the Asian financial crisis of 1997–8 to the Argentine
debt crisis of 2001, the 2007 US sub-prime crisis, the 2007–8 global financial crisis, and
the Eurozone sovereign debt crisis that first hit the headlines in 2010, an increasing
number of IPE scholars have drawn on a constructivist toolbox to make sense of a
rapidly changing subject matter, one where the facts clearly do not ‘speak for themselves’.
In short, what the collapse of bipolarity was to constructivist IR, the rise and fall of the
neo-liberal market consensus have been to constructivist IPE (see Abdelal 2009: 66).
In recent years, a new generation of scholars has built upon earlier works – which
focused on establishing that ideas matter in the study of IPE – to examine how, when,
and how much ideas matter in explaining and understanding the changing dynamics of
the global political economy. This chapter discusses the analytical strengths and
limitations of the growing school of ‘economic constructivism’ in IPE, and explains
both the common elements of the constructivist approach as well as the important
differences that continue to divide distinctive varieties of economic constructivism. The
chapter first provides an abridged version of an intellectual ‘family tree’ for economic
constructivism, before examining the core features and ontological assumptions that
guide contemporary constructivist approaches. The final section provides a brief overview
of contemporary research agendas and suggests several possibilities for the future
direction of constructivist scholarship in IPE.
Constructivism in IPE: a brief ‘family tree’

New schools of thought within established social science disciplines inevitably lay claim
to older intellectual traditions in order to boost their scholarly credentials, as well as
to identify retrospectively a progressive academic trend that can be carried forward
across new intellectual frontiers. In this sense, the appeal to ‘past masters’ acts as a
developmental stage in the construction of a new intellectual identity and bounded
realm of theoretical inquiry (see Quirk and Vigneswaran 2010). For IPE as a sub-
disciplinary field of inquiry within political science and International Relations,
constructivism has a remarkably short intellectual lineage. Working backwards, the
immediate antecedents to economic constructivism are found in the ‘Third Debate’ in
IR theory, which took place during the 1980s between rationalists and early critical
international theorists (Price and Reus-Smit 1998). This Third IR Debate in turn grew
out of intellectual developments across the social sciences, and was inspired by the
critique, articulated by philosophers such as Michel Foucault ([1969] 2002), of the
power relations inherent in scientific disciplines.
Constructivism in IPE 195
More broadly, constructivism in IPE shares with its IR variant an intellectual affinity
with older theoretical frameworks from a range of academic disciplines. Notable
intellectual forebears include, first, Berger and Luckmann’s (1966) pioneering work
within the ‘sociology of knowledge’ literature that emphasized the dynamics of social
construction in producing the ‘commonsense’ knowledge used in everyday life. Second,
constructivists trace the origins of their approach to Mead’s ([1934] 1967) concepts
that inspired the development of ‘symbolic interactionism’, which holds that the dynamic
interplay between an actor and the world, combined with an actor’s processes of
interpretation, shape people’s behaviour, rather than material incentive structures or
individual interests per se. Third, constructivists lay claim to the legacy of the early
twentieth-century phenomenology of Husserl ([1913] 1931), and his theory of the
constitutive role played by human consciousness in the intersubjective understanding
of something as an object. What these antecedents of IR constructivism have in common
is the principle that the nature of an object is not external to the social dynamics and
series of interpretive acts by which human beings make sense of and seek to know the
object (cf. Adler 1997; Palan 2000).
Compared with IR constructivism, economic constructivism does not yet have its
own distinctive canon of seminal works that have been essential in shaping the subject
matter of constructivist IPE (although Mark Blyth’s [2002] Great Transformations has
become a contemporary classic in the field, while Peter Hall’s [1989] The Political Power
of Economic Ideas provided early inspiration for political science scholars to take the
political role of ideas more seriously). Nonetheless, two thinkers whose work is regularly
cited as providing a crucial inspiration for contemporary economic constructivist
scholarship are the British economist John Maynard Keynes and the Chicago economist
Frank H. Knight. Scholars have drawn on Keynes’s (1936) work to develop constructivist
understandings of market failure (Widmaier 2004), the intersubjective nature of finance
(Best 2005), and to redefine the economy as a social realm (Best and Widmaier 2006).
Meanwhile, Knight’s (1921) notion of uncertainty (‘Knightian uncertainty’) refers to
situations where actors are unable to calculate in advance the future probabilities of
different courses of action, leading them instead to rely more heavily on ‘shared social
constructions of how the world works’ in order to interpret unfamiliar circumstances,
to redefine their interests, and to enable decision making (Abdelal et al. 2010: 12; cf.
Seabrooke 2006: 39). Knight’s (1921: 233–4) concept of uncertainty understood as
‘subjective probability’ can be distinguished from risk defined as ‘objective probability’,
which unlike uncertainty is potentially calculable. The concept of Knightian uncertainty
has had a major impact on the development of constructivist understandings in IPE
of the interplay between actors’ interests and intersubjective ideas, while helping to
boost the argument that ideas can trump interests as explanatory variables (Blyth 2002).
In the time-honoured tradition of International Relations, constructivist scholars in
IPE have also not been shy about bringing in contemporary concepts and approaches
from other disciplines. In particular, numerous studies have drawn intellectual inspiration
and borrowed conceptual insights from the burgeoning literature on economic sociology
and neo-institutionalism. The work of scholars such as Granovetter (1985, 1992), March
and Olsen (1989), Swedberg (1990), Fligstein (1996), Beckert (1996), Campbell (2004)
and others has served to provide a rich palette from which contemporary constructivist
scholars have expanded the study of ideas in IPE scholarship, enabling the articulation
of new lines of inquiry while building upon an existing body of work for intellectual
support. Contemporary IPE scholars have also drawn on innovations developed in a
196 André Broome
range of additional fields of study, such as political anthropology (see Broome and
Seabrooke 2007, 2012). These existing literatures from cognate disciplines that have
been utilized within the study of IPE helped to achieve three main aims:
1 the expansion of the conceptual toolbox available for economic constructivism;

2 refinement of the empirical methods and research design of economic constructivist
scholarship; and
3 sharpening lines of critique against rationalist scholarship without abandoning the
disciplinary high ground of rigorous empirical research in favour of abstract theory.
Recent examples from (broadly) economic constructivist scholarship which adapt

concepts from either economic sociology or neo-institutionalism, or both, include most
notably Blyth (2002), as well as Sinclair (2005), Seabrooke (2006), Sharman (2006),
Abdelal (2007b), Hobson and Seabrooke (2007), and Park and Vetterlein (2010).
Despite the relatively recent emergence of overtly constructivist scholarship within
IPE, economic constructivism has rapidly become established as one of the primary
theoretical challenges to rationalist approaches. Indeed, contemporary theoretical
divisions within the field are often simplified to the notion of a rationalist–constructivist
divide (Checkel 1997). Summarized in Table 14.1 (below), this divide is centred along
four key fault lines:
1 the unit of analysis (whose actions matter?);

2 the primacy of interests versus ideas (what drives behaviour?);
3 the nature of causality (why did x and y happen?); and
4 the definition, forms, and exercise of power in the global political economy (how
are outcomes determined?).
On these main points of debate, each school attempts to out-explain the other, but
cross-fertilization over this great divide remains limited. Whereas rationalist IPE scholars
assume that human behaviour in the political and economic marketplace is mostly self-
regarding and that individuals enter their environment already endowed with a fixed
set of interests, constructivists emphasize the intersubjectivity of beliefs, identities and
interests, and therefore focus on understanding how these are socially produced (Ruggie
1998b).
State-of-the-art surveys of constructivist scholarship in IR tend to leave the field
bifurcated between a ‘conventional/mainstream/moderate/soft’ constructivist strand
and a ‘critical/radical/post-modern/hard’ constructivist strand (Price and Reus-Smit
1998; Palan 2000; for a nuanced overview of economic constructivist approaches, see
Table 14.1 The rationalist–constructivist divide in International Political Economy
Primary unit of Primary unit of Key explanatory Ontology of power

analysis observation variables
Rationalist IPE Individual actors Actor Material Power is a
and institutions preferences properties quantifiable resource
Constructivist Social Intersubjective Ideational Power is a social
IPE communities ideas dynamics fact
Abdelal et al. 2010). Membership within each branch of constructivist scholarship is
generally identified by individual scholars’ notional intellectual distance from rationalist
theories, which continue to remain dominant in IR/IPE, although the clearest indicator
of these intellectual differences is the methodological tools that each approach relies
on to conduct empirical research. Whereas conventional constructivists tend to be more
willing to engage in dialogue with (and to build bridges towards) rationalist scholars,
critical constructivists eschew engagement with rationalists, and instead gravitate more
towards a critical international theory epistemology that is directly at odds with rationalist
assumptions about the nature of knowledge, what it is possible to know, and how we
should go about the business of knowing (Price and Reus-Smit 1998: 289, n. 2).
Despite the conventional and critical constructivist labels often representing a false
dichotomy, this distinction serves as useful shorthand for identifying different
constructivist intellectual projects. For the purposes of illustrating the methodological
distinctions between varieties of economic constructivism, this chapter uses the term
interpretive to refer to what is commonly called critical constructivism, qualitative to refer
to conventional constructivism, and quantitative to refer to an emerging form of economic
constructivism that openly embraces rationalist methods. Quantitative constructivism
utilizes statistical techniques in an attempt to establish an objective measurement of
the causal weight of ideas relative to other variables (discussed in further detail below),
which is distinct from qualitative constructivism because such methodological choices
necessarily shape the scope of the questions it is possible to investigate with a particular
analytical framework. These distinctions are illustrated in Figure 14.1, based on a
methodological continuum that stretches from positivist to avowedly non-positivist
approaches.
There are nonetheless several important drawbacks to this approach: one is that it
can result in individual scholars being mistakenly located in the wrong strand of
constructivist scholarship. Moreover, this dichotomization of constructivism assumes
an essential unity and consistency in the distinct ways in which scholars put constructivist
concepts to work that, in practice, is rare. At the same time, by splitting the constructivist
project between those targeting a rationalist audience and those targeting a critical
international theory audience, the borders of the constructivist camp become porous
enough to include the majority of scholars working on issues relating to ideas, identity
or norms, ignoring the possibility that each of these subjects can be studied within a
range of theoretical frameworks in IPE. The role of ideas in the global political economy,
for example, could as easily be explored from a neo-Gramscian or a rationalist perspective
as from a constructivist one (see e.g. Bieler and Morton 2008; Goldstein and Keohane
1993; cf. Blyth 1997). In short, constructivist scholars do not own the field of ideas,
Quantitative Interpretive
Constructivism Constructivism
Positivist Non-Positivist
Approaches Approaches
Rational Qualitative Critical

Actor Models Constructivism International
Theory
Figure 14.1 Methodological distinctions in economic constructivism

198 André Broome
identity and norms; although many of the major contributions to the broader field of
IPE on these subjects have been inspired by a constructivist approach.
One further caveat needs to be noted before the next section moves on to examine
the core features and ontological assumptions that guide contemporary constructivist
approaches, and this concerns the ways in which constructivism has been modified in
the process of its translation from IR into IPE. The predominant concerns within the
first wave of IR constructivism during the late 1980s and early 1990s were generally
connected to international security issues through focusing on the construction of identity
as well as how international norms govern interaction among states (see Finnemore
and Sikkink 2001: 396 –9). With a handful of exceptions (see e.g. Katzenstein 1996),
studies of identity in IR constructivism initially centred on state or regional identities
and the dynamics of international society (see Suzuki 2009) rather than national identity
and social dynamics that operate below the international level. In contrast, the first
wave of economic constructivism during the late 1990s and early 2000s focused more
attention on the political impact and policy consequences of economic ideas (Jacobsen
1995; Woods 1996; Blyth 1997; Hay and Rosamond 2002; Clift and Tomlinson 2004).
The shift to focusing on identity in constructivist International Political Economy
occurred much more recently compared with International Relations. In particular,
contemporary research in IPE has aimed at understanding the construction of identity
at the level of non-elite actors and social groups (Seabrooke 2006), nations (Abdelal
2001), elite policy fora (Baker 2006), international organizations (Weaver 2008), and
transnational policy communities (Hall 2008), rather than the focus in IR scholarship
on the ‘personality of the state’ or international society dynamics (cf. Wendt 2004).
Economic constructivism has nonetheless continued to share with its IR variant a
preoccupation with the notion of uncertainty in international life, the problem of how
actors reason through uncertainty, and the catalytic role of crisis frames as drivers of
structural political and economic change (Seabrooke 2007; Widmaier et al. 2007; cf.
Homolar 2011).
Economic constructivism 101: a toolbox not a paradigm

Ideas matter for understanding the dynamics of the global political economy. The chief
assumption common to quantitative, qualitative and interpretive strands of constructivism
in contemporary IR and IPE is that exploring the intersubjective bases of everyday
social reality is essential for understanding political processes, practices and outcomes
(Hopf 1998: 182). Constructivist approaches differ most from rationalist approaches
because of the specific role they assign to ideational factors in the process of institutional
change, policy reform and political contests. Simply put: constructivist approaches
understand ideas as constitutive of political practices and political power (Adler 1997;
Price and Reus-Smit 1998; Checkel 1998).
With the exception of quantitative constructivism, the language of variables often sits
uneasily with constructivist approaches in IPE. Many constructivist scholars eschew
the disciplinary preference within political science for neat models based on cause-and-
effect explanations in favour of gaining greater analytical purchase on the complexity
of processes, interactions and outcomes in the global political economy. Indeed, most
interpretive constructivists object to the representation of ideas as variables, and to the
framing of research objectives and questions within IPE in terms of counter-intuitive
puzzles and testable hypotheses. In contrast, qualitative constructivists have drawn on
the language of variables in rationalist scholarship as an opportunity to further refine
and disaggregate key concepts in the constructivist toolbox, such as different categories
of identity (see Abdelal et al. 2006).
As Table 14.1 has illustrated, rationalist and constructivist approaches to the
study of IPE differ starkly on the logical order of variables in their respective causal
frameworks. For rationalist IPE approaches, material properties such as economic
factors, regulatory mechanisms and bargaining resources are examples of typical
independent variables, with ideas cast in an analytically subordinate role as intervening
or dependent variables. Goldstein and Keohane (1993), for example, limit the causal
role of ideas to three functions as road maps, focal points for co-ordination, and
institutional design blueprints. Ideas may therefore exert a regulative effect on behaviour
– how individual actors pursue their strategic interests – and institutionalized processes,
but they are not constitutive of actors’ interests, identities and values. For economic
constructivists, this causal chain is exactly reversed. Because material properties cannot
be understood without actors first employing an intersubjective system of interpretation
that assigns them meaningful content, ideas are assumed to be analytically prior as
independent variables. This point is aptly illustrated by Blyth (2002: 32), who argues
that ‘without having ideas as to how the world is put together, it would be cognitively
impossible for agents to act in that world in any meaningful sense’. This is especially
the case during a crisis period of Knightian uncertainty, where actors’ interests are
unknowable even to themselves because the range of potential outcomes is incalculable
(Knight 1921). Constructivists are thus more comfortable understanding the role
of ideas in the global political economy either through the notion of contingent
‘constellations of variables’ that emphasize the constitutive relations between variables
rather than depicting a clear-cut linear causal process, or simply by avoiding the
language of variables altogether.
For the most part, constructivist scholars have investigated the indirect effects of
ideas. This tends to involve research that explores how political outcomes are shaped
by a particular system of meaning, rather than constructing theoretical models that
present ideas as direct causes of a specific outcome without anything else going on in
between (Hopf 1998: 198). International Political Economy scholars have drawn in
particular from constructivist methods to explore the role of intersubjective mental
frameworks and discursive practices in specific political struggles, and how these have
contributed to generating one contingent political outcome rather than another (Blyth
2002; Best 2005; Seabrooke 2006; Sharman 2006). Constructivist lines of scholarly
inquiry draw upon a common set of ontological and epistemological assumptions, but
emphasize the polysemic nature of ideas and the importance of understanding historical
contingency rather than the pursuit of generalizable explanations or principles. For
this reason, economic constructivism is better described as a conceptual toolbox rather
than a theoretical paradigm.
In relation to the four key fault lines that constitute the rationalist–constructivist
divide described above, the first wave of economic constructivist scholarship in IPE
during the late 1990s and early 2000s dealt mostly with questions connected to the
second, third and fourth: what drives behaviour? Why did x and y happen? How are
outcomes determined? Until recently, the first fault line between rationalist and
constructivist IPE (whose actions matter?) has received far less sustained attention. This
has gradually begun to change with new scholarship concentrating on expanding the
category of actors deemed causally significant in shaping processes and outcomes in
200 André Broome
the global political economy. For example, scholars whose work has helped to develop
this research agenda include Seabrooke (2006), Langley (2008), and Hobson and
Seabrooke (2007a), works which have focused on the role of non-elite ‘everyday actors’
in the global political economy. In addition, scholars of international economic
organizations, such as Woods (2006), Park and Vetterlein (2010), and Broome and
Seabrooke (2007, 2012), have demonstrated the independent ideational influence these
organizations wield in global governance processes. As illustrations of a much broader
and heterogeneous trend in economic constructivist research, these studies have helped
to shift the answer to the question ‘whose actions matter?’ away from a state-centric
focus on national policy elites, towards greater recognition of the causal significance
of units of analysis both ‘below’ and ‘above’ the state.
In comparison with debates over the rationalist–constructivist divide, which centres
on questions of ontology and epistemology, methodological differences are often the
unacknowledged ‘elephant in the room’ that can be used to distinguish between varieties
of constructivist research programmes. While relatively little has so far been written
with respect to constructivist methods in either IR or IPE that directly grasps the nettle
of how the ontological and epistemological features of a constructivist approach should
be operationalized in practice, most economic constructivist research evinces a strong
preference for qualitative rather than quantitative methods (and for methodological
pluralism over uniformity). Following Hopf (2006) and Lupovici (2009), three
methodological tools can be identified that are commonly used in constructivist
scholarship:
1 process tracing;
2 counterfactuals; and
3 discourse analysis.
There are significant advantages in combining these three tools in a mixed-methods

approach rather than using one in isolation. As Lupovici (2009: 201–2) points out:
‘combining process tracing and discourse analysis helps to establish the ‘context’,
combining counterfactuals and discourse analysis helps to establish the constitutive
relations between ‘variables’, and combining counterfactuals with process tracing helps
to establish causality’. Process tracing enables scholars to explore causal processes and
the evolution of social construction dynamics over time, while discourse analysis provides
a means to uncover how actors interpret their social environments and how social
practices and actors’ identities are constituted and defined. Consideration of alternative
‘counterfactual’ scenarios that did not occur – including ‘non-decisions’ (Strange 1988:
22) – can further enhance ‘the analysis of mutual relations between variables and the
exploration of constitutive relations’ (Lupovici 2009: 203), as well as helping scholars
to avoid the pitfalls of adopting a static or overly path-dependent conception of the
role of ideas and norms in the global political economy. As Blyth (1997: 236) observes:
‘Attributing a change in behaviour to a change in ideas is tenable only if it is
counterfactually demonstrated that the change would not have occurred without the
ideas.’ Another way to put this is that, when combined with process tracing, the use
of counterfactuals helps to ensure that economic constructivists retain the capacity
for their empirical research to yield surprising results and counter-intuitive insights
(thereby guarding against the selection bias problem of cherry-picking evidence to fit
a preconceived conclusion).
Overwhelmingly, economic constructivist scholarship in IPE relies on qualitative
research methods to analyze and evaluate empirical phenomena, even when ‘hard’
statistical data are also incorporated. One of the most prominent recent efforts to apply
quantitative as well as qualitative methods in economic constructivist research is provided
by Chwieroth’s (2007, 2010) comprehensive study of the role of the International
Monetary Fund (IMF) in the emergence of capital account convertibility as a global
economic norm. Chwieroth (2007: 5) takes aim at ‘how much’ and ‘how to’ problems
in economic constructivism: how much causal weight should be assigned to ideas in
explaining outcomes, and how can abstract concepts such as norms be measured by
empirical indicators?
One way to overcome the ‘how much’ problem is to show through a combination
of process tracing and counterfactual analysis when ideas clearly cut across actors’
shared material interests in a given institutional environment, which can potentially
enable ideational factors to be accepted as compelling causal variables by rationalist
scholars (see Parsons 2002: 48). However, this raises another conceptual problem: how
much ideas can matter in causal relations is reduced to a function of scenarios where
actors deviate from their assumed interests within a rational actor model. This limits
the demonstrable causal significance of ideas to a role as ‘error terms’ that explain
only what interest-based frameworks cannot deduce (see Seabrooke 2006: 11), and is
unsatisfactory if the goal is to analyze the relative causal weight of ideas versus interests
in explaining a given outcome. In addition, limiting the causal weight of ideas to
instances where non-material factors cut across actors’ interests implies that scenarios
characterized by objectively measurable probabilities are normal, with those where
actors struggle with incalculable Knightian uncertainty defined as the exception. For
most economic constructivists this is an untenable perspective because of the constitutive
role that ideas are deemed to play in moulding how actors conceive their interests in
the first place, a process most clearly at work during periods of radical uncertainty
(Blyth 2003: 702), but which is constantly operating either in the foreground or the
background of social dynamics as ideas ‘saturate the determination of material interests’
(Seabrooke 2006: 7).
In building the case for quantitative constructivist research, Chwieroth (2007: 6)
offers a more nuanced upgrade on the ‘ideas as error terms’ approach, in an attempt
to assess the net causal weight of ideas as variables by utilizing a method of difference
in formal statistical modelling. With respect to the ‘how to’ problem of establishing a
credible set of indicators for empirical measurement, Chwieroth constructs a quantitative
model of intersubjective ideas about capital mobility based on the proxy of individuals’
organizational backgrounds and professional training. As Chwieroth (2007: 8)
acknowledges, however, quantitative techniques may be of limited utility ‘for tracing
the processes of ideational diffusion and compliance’, and ‘[n]ot all questions that
concern ideational researchers are amenable to quantitative analysis’.
What is more problematic is identifying reasonable proxy variables to measure the
causal impact of intersubjective ideas. A key issue here is the problem of clarifying
interaction effects among different variables (Chwieroth 2007: 23–4). Attempts to measure
the net causal weight of ideas risk missing the forest for the trees if what really matters
is establishing the contingent configuration through which ideas interact with material
variables in determining a given outcome. In this sense, the core methodological
questions that need to be addressed by economic constructivists are not only ‘how
much’ and ‘how to’ questions, but also a ‘how do’ question: how do ideational dynamics
202 André Broome
interact with material dynamics to shape outcomes in specific cases? This problem is
not simply a matter of establishing the causal weight of ideas vis-à-vis interests as
independent variables, but centres on the challenge of mapping and understanding
variation in the causal configurations through which ideational and material variables
feed into each other.
New directions in economic constructivism

Contemporary constructivist research agendas in IPE represent a rich variety of areas
of empirical inquiry. Like other studies in IPE, economic constructivist scholarship is
clustered around analytic distinctions, including: levels of analysis (sub-national, national,
regional, global); categories of actors (elite versus non-elite actors); the subject matter
(such as trade, finance, consumption, tax, or monetary relations); as well as temporality
(historical versus contemporary inquiries). While all constructivist scholarship in IPE is
preoccupied with understanding the dynamic role of non-material factors in the global
political economy, recent work also varies, based on the analytical category of non-
material factors under investigation. Following in the wake of the turn towards ideas per
se, scholars have begun to open up new lines of inquiry in IPE based upon an expanded
range of analytical categories. These include the study of ‘culture’ as distinct from ideas
or norms (Best and Paterson 2010: 5; cf. Jessop and Sum 2010); the concept of ‘emotional
forces’ as a separate category from cognitive factors (Widmaier 2010); and the notion
of ‘linked ecologies’ (Seabrooke and Tsingou 2009) to understand how professional
coalitions construct policy problems and solutions, which differentiates a conception of
actors who cannot control how their ideas travel from actors who can strategically
employ interpretive frames as weapons in political contests (Blyth 2002: 39).
As well as pushing for a broadening of economic constructivism through the adoption
and refinement of new analytical categories, recent scholarship has contributed to a
deepening of existing research agendas. For example, a substantial body of work has
developed on understanding ideational dynamics in global economic governance and
the roles performed by international economic organizations. Standing on the shoulders
of pioneers such as Barnett and Finnemore (2004), recent contributions have examined
the dynamics of global normative change through studying how organizations such as
the IMF and the World Bank act not only as norm enforcers in the world economy
but also as norm makers (Park and Vetterlein 2010), as well as the dynamics of how
cognitive authority over specific policy areas is constructed at the global level (Broome
and Seabrooke 2007, 2012).
Economic constructivists have also continued to build upon earlier studies of
socialization and regional economic integration, especially in Europe (McNamara 1999).
In research on the European Union (EU), for example, scholars have examined the
ideational dynamics that underpin the integrative forces at work in EU enlargement
and monetary integration (Parsons 2003). Others have examined the social construction
of the ‘European economy’ and ‘European identity’ (Rosamond 2002; Checkel 2009),
or have drawn from the case of the EU to conduct cross-regional comparisons (Duina
2006).
Following the emergence of the global financial crisis in 2007–8, both current and
earlier works by constructivist IPE scholars have been at the forefront of debates over
the nature of crisis and change (Widmaier et al. 2007), economic austerity (Blyth 2013),
changing dynamics in international financial governance (Best 2005), and the link
Table 14.2 Contemporary research agendas
Economic crisis Everyday IPE Cultural political Ideas in global Socialization and
and change economy economic transnational policy
governance networks
Widmaier et al. Hobson and Paterson (2007) Weaver (2008) Chwieroth (2010)
(2007) Seabrooke (2007)
Blyth (2013) Langley (2009) Best and Broome and Sharman (2011)
Paterson (2010) Seabrooke
(2007, 2010)
between ideational environments in transnational policy communities and international

regulation (Helleiner 2011: 75–6), to name only a few areas where economic
constructivists have made prominent contributions. Further contemporary examples
include studies of socialization mechanisms (see Johnston 2008), policy diffusion (see
Simmons and Elkins 2004), and transnational policy networks (see Stone 2004), where
economic constructivist scholarship is fast developing into a distinctive research agenda
that has begun to dig deeper into the processes by which ideas and norms travel between
states, public institutions and policy communities in the world economy (Chwieroth
2010; Sharman 2011).
A small selection of these new and emerging research agendas in contemporary
economic constructivism are illustrated in Table 14.2 above. The new directions for
constructivist IPE share several common features, despite their conceptual pluralism
and wide variety of subject matters. Key similarities include:
1 borrowing conceptual insights and tools from work in cognate disciplines, such as
sociology and cultural theory;
2 expanding the range of analytical categories such as actor types, sites of governance,
and causal mechanisms beyond the narrower conceptual toolbox found in rationalist
scholarship; and
3 a rigorous commitment to question-driven empirical research of complex and
contingent phenomena.
As such, economic constructivism in the study of IPE is situated firmly within a

framework that Sil and Katzenstein (2010: 9) term ‘analytic eclecticism’, which is
geared towards escaping the blind spots inherent in more parsimonious and theoretically
segmented analytical frameworks.
Conclusion
Within the field of IPE there is a need to foster diverse theoretical perspectives with
which to understand the sources of change and continuity in the world economy. As
Abdelal (2009: 71) cautions, constructivism is not ‘the new and improved theory of
everything’. Explaining actors’ calculated pursuit of their material interests is important
for understanding political outcomes, but ideas matter as well. Shared ideas may provide
the impetus for actors’ preferences, and studying the role of ideas can therefore help
to understand the underlying motivations for an actor’s behaviour. When constructivists
204 André Broome
conceive of ideas as inherently intersubjective, they are not simply normative
commitments that either reinforce or compete with an actor’s material interests as
alternative motivations for their behaviour. Rather, shared ideas mould how actors
conceive of their interests in the first place (Blyth 2003: 702). At the same time, while
constructivists have emphasized the constitutive role of shared ideas for actors’ identities
and for constructing norms that define socially legitimate actions, shared ideas and
norms do not necessarily perform this role in every political contest. Rather, regulative
norms might drive behaviour without actors necessarily believing them to be legitimate,
and without reshaping an actor’s identity, based on an actor’s expectation that he or
she will incur material costs if the social norms of a particular community are not
adhered to.
With these qualifications in mind, a useful note to conclude on is to restate once
again that economic constructivism in IPE is currently a work in progress. Two decades
after the publication of the then ground-breaking political science and IR texts on the
role of ideas such as Hall’s (1989) The Political Power of Economic Ideas and Goldstein and
Keohane’s (1993) Ideas and Foreign Policy, and more than a decade after the first wave
of major constructivist works within IPE such as McNamara (1999), Abdelal (2001),
and Blyth (2002), the debate on whether non-material factors such as ideas matter in
the study of the global political economy has been won by those arguing in favour.
Instead, earlier ontological and epistemological controversies have been in part
supplanted by a new set of methodological ones. A new generation of constructivist
IPE scholars is grappling instead with these additional challenges, principal among
which is the further development of the constructivist toolbox in order to show when,
how, and how much ideas matter in shaping political processes and outcomes.
15 Libidinal political economy
A psycho-social analysis of
financial violence
Earl Gammon and Duncan Wigan
This chapter explores a set of theories that take issue with the rationality postulate that
underlies contemporary economics, both mainstream and heterodox. The standard
approach to economics is founded on the psychology of acquisitiveness which views
motivation in terms of pleasure seeking and pain avoidance (Blaug 1992). So too, though
certain critical approaches suggest that individuals may engage in social behaviours
that do not necessarily offer material gain, as in seemingly altruistic action, they are
still based on a rationale of maximizing pleasure. In this case, pleasure may derive
from non-material rewards, such as a sense of belonging, community and social well-
being. Despite replacing a money-grubbing homo economicus with a more sympathetic
homo sociologicus, who makes decisions on a normative basis (Dahrendorf 1973), the
underlying binary logic remains undisturbed.
The theories discussed in this chapter suggest that the hedonic calculator model is
sustained by way of a false parsimony that conceals the complexity of motivation and
social agency. Individuals commonly engage in behaviours that, from the binary logic
of pleasure and pain, present themselves as irrational. Individuals often pursue ends
which ultimately play out as self-destructive and self-sabotaging. Individuals engage in
behaviours that confer minimal or ephemeral pleasure despite foreseeable painful
outcomes. Rather than suggesting that the issue is one of a faulty logic on the part of
such individuals – exceptional or pathological cases – these theories suggest that what
is at fault is the underlying premise of human psychology that undergirds much of
social science analysis.
Drawing on a more psychoanalytic conception of the functioning of the psyche, we
take as our principal assumption that rather than pleasure, it is a drive towards stasis
that is the determinant of agency. By stasis, we mean a state in which the psyche is
effectively able to deflect external perturbations and thus maintain a sense of ego
coherency. This is what Freud referred to in ‘Beyond the pleasure principle’ as the
‘principle of constancy’ (Freud [1920] 1955a: 9). Psychical stasis induces a form of
narcissistic fulfilment, a state in which feelings of lack are suspended, where individuals
no longer feel the pressures of the external world threatening injury to their sense of
selfhood. In a state of narcissistic fulfilment, the passing of time goes unheeded, physical
want and deprivation are diminished, and social pressures alleviated. Stasis confers
upon the individual a semblance of sovereignty, with the tensions between the inner
psychical realm and the external world all but abated.
In moving beyond the pleasure principle, this chapter reproblematizes the functioning
of finance in the global political economy, illuminating a non-rational dimension (Amin
and Palan 2001). We seek to demonstrate how financial market activity cannot easily
206 Earl Gammon and Duncan Wigan
be squared with the rationality postulate. The chapter reassesses the re-emergence of
global finance contemporary with the collapse of the Fordist mode of accumulation,
claiming that the pursuit of profit only partially captures the motivations behind this
transformation. The idea that financialization derives primarily from the promise of
pecuniary gain neglects the way in which the increasing growth of financial markets
and novel financial techniques became a means of effecting violent and destructive
social outcomes. The chapter explores the structural violence of finance, suggesting
that it is not so much driven by the attainment of pleasure in a utilitarian schema, but
by the attempts to stave off narcissistic injury and induce a return to stasis.
Theorizing homo narcissus

A psychoanalytic understanding of psychical life suggests that the acquisitive individual
driven by the pursuit of monetary gain is but a second-order configuration of subjectivity
– historically and culturally contingent. In advanced market civilization, where social
relations have become mediated by money and commodities, the means of negotiating
selfhood is understandably through market presence. Self-commodification and the
pursuit of material gain constitute an instrumental performance within a broader
libidinal political economy. They are the means of returning to stasis within advanced
capitalist society, not entirely unlike the narcissistic fulfilment derived from engagement
in religious practice or reciprocal and non-accumulative forms of economic exchange.
The Smithian propensity to truck, barter and trade can only take root where social
prestige has become attached to external and visible accumulation.
At first glance, the notion of self-interest that defines the traditional hedonic model
of economic agency might not seem too far from a psychoanalytic conception of the
self. The idea of a ‘narcissist’ seems to fit well with the acquisitive individual, he or
she who in their pursuit of material gain see themselves as superior to and more
deserving than others. Few would disagree with the characterization of the Gordon
Gekkos of the world as consummate narcissists.
The idea of narcissism presented to us through psychoanalysis, particularly in Freud,
is a more complex conception. It should not be conflated with greed or avarice, though
it may manifest itself in this form. Narcissism for Freud was a universal condition and
not necessarily a pathological one. Though we might think of the narcissistic individual
as being ‘ego-centric’, narcissism antecedes the formation of the ego construct in
childhood. The concept of primary narcissism refers to a feeling Freud described as
‘oceanic’, a feeling of unboundedness (Freud [1930] 1961c). Primary narcissism suggests
a state akin to the psychical life of early infancy, or even in utero, in which there is
no conception of an external world, a world outside the sensations of the mind. Primary
narcissism, rather than explicitly self-love, is more properly a state of self-immersion.
Understanding the universal condition of narcissism gives insight into the distinct
strategies of organizing selfhood across history and cultures. As Freud theorized the
ego construct, it is defensive in posture, an investment of psychical energy or libido in
a sense of self that offers an illusory compromise between the inner psychical world
and the social world. Reluctantly abdicating an infantile sense of omnipotence, by
assuming an ego identity, a self-image, an individual can thus modulate exposure to
disturbances to one’s narcissism. The ego provides the means for organizing predictable
social relations, of negotiating the self–other divide, and thus helps to maximize
narcissistic fulfilment.
Libidinal political economy 207
The ability to placate the need for narcissistic fulfilment varies with the pressures
exerted by society, with those having high levels of interdependence also seeing greater
levels of psychical tension. As Freud argued in ‘Civilization and its discontents’ ([1930]
1961c), and as sociologist Norbert Elias (1983) supported with his notion of the civilizing
process, increasing social interdependence (which is associated with a market economy
or contractual society) exerts greater pressure on the ego, invoking the need for greater
emotional self-control and regulation. Drawing on Freud’s topology of the psychical
apparatus (the id, ego and super-ego), the agency of the super-ego, crudely understood
as the conscience, develops to a greater extent in highly interdependent societies in
order to invigilate behaviours and thoughts. The super-ego internalizes the demands
of society and pre-empts external disturbances by threatening self-castigation. It is the
super-ego, working in accordance with the demands of society, that unleashes aggression
against the self in the form of anxiety to effect a transformation in the self’s external
orientation. The stronger the super-ego demands, the less the likelihood of narcissistic
fulfilment. Ultimately, in societies where the division of labour produces higher levels
of specialization in social roles, the discipline exerted upon the self is accentuated.
Understanding the motivation of social agency in terms of narcissistic fulfilment, we
come to reconceive the social economy as more properly a libidinal political economy
(Gammon and Palan 2006). Our engagement or performance in a world populated
by fictitious commodities (land, labour and money) entails a complex series of libidinal
investments – psychical attachments that aim to strengthen our ego defences and bring
about a modicum of stasis. Libido, understood as a type of energy emanating from the
id, allows individuals to make mental attachments to the external world, whether these
attachments are to physical objects, other people (identification) or ideas. Libidinal
investments are a means of encompassing aspects of the external world, of giving the
impression of control. By identifying with people, individuals reaffirm a sense of ego
coherency and indulge, at some level, a fantasy of omnipotence. The investment of
libido with the aim of integrating aspects of the external world was what Freud referred
to as Eros, the life drive.
Despite our incessant attempts to quell disturbances to the inner sanctum of the self,
our libidinal investments sometimes go awry when our objects do not behave as expected.
As mentioned, libido can manifest itself in the form of anxiety, which forces the ego
to reposition itself in relation to the external world. Alternatively, libido can manifest
itself in the form of aggression, inducing motility that aims at forcing external objects
to behave in the desired manner. It is this aggression – outwardly displaced libido that
seeks to eliminate dissonance in one’s world view – that Freud denominated as the
death drive.
Aggression, when it manifests itself, takes innumerable forms. Perhaps this is most
easily pictured in cases of the use of physical violence to compel external objects to
conform to the ego’s expectations. For example, corporal punishment has been, and
is, widely used to force the obedience of populations. More commonly, though, in
advanced market civilization, aggression manifests itself in much more mundane forms.
It is, in psychoanalytic terms, sublimated in the practices and rituals of everyday life.
Sublimation is when the psychical drives, rather than finding direct unmediated
expression, are deflected into substitutive and less socially harmful forms (Freud [1908]
1959). We can look to the use of wit, the sparring of words, as a channelled form of
wrestling for control between egos, keeping at bay more violent types of motility. More
generally, in society, the competition for prestige, whether through career or monetary
accumulation, is a sublimated expression of aggressivity. By acquiring prestige, one
achieves a means of establishing hierarchical precedence over others in a way that is
conceived of as socially acceptable.
As Elias (1983) elaborated in The Civilizing Process, since the late mediaeval period,
the West has witnessed increasing self-regulation, sublimating the drives which Freud
theorizes. For example, whereas the use of violence was quite common in mediaeval
Europe, with pleasure commonly taken in its spectacle, in the modern epoch it generally
attracts revulsion. The ascension of the absolutist monarchies in seventeenth-century
Europe, with a class of warrior nobles drawn in by the centripetal forces of court life,
set in motion a need to tame emotional expression, particularly its more violent
manifestations. The ‘courtization’ of warriors led to new forms of competition for social
prestige that relied on heightened levels of self-censorship and affected performances
in keeping with the requisites of complaisance and courtoisie (Elias 1982). Rather than
recourse to the sword as a means of enhancing one’s status, it was essential to walk a
disciplinary tightrope that flattered the monarch, avoiding any slight misstep that could
leave one vulnerable to the depredations of resentful peers. Aggression, decreasingly
having socially acceptable display in the violent competition characteristic of the
Middle Ages, found renewed outlet in the pageantry of court life, with its elaborate
rituals of social interaction, and its refinements in language and dress. By practising
greater self-control and possessing a nuanced understanding of the constantly shifting
conventions of court life, one could establish ‘invidious distinctions’ (Veblen 2007).
Thus the gentleness and refinement of the courtier gave expression to sublimated
aggression that sought a sense of control in a psychologically tense environment where
one was under incessant observation.
It is this type of self-control that Elias traces – underpinned by narcissism – that
was fundamental to shaping modern sociality with its dissemination through the
bourgeoisie. As an emergent bourgeoisie vied for greater influence in court society,
they emulated the behaviour of traditional nobles, subjecting themselves to the
strictures of self-control. The successful promotion of some bourgeois elements into
the nobility fuelled competition for prestige by acquiescing to the codes of civility.
As Elias’s account helps to show, it was not merely the drive for commercial success
that invigorated the demands for frugality, temperance and industry among the
bourgeoisie, but also the drive for the prestige attached to self-control and behavioural
refinement. Though these adaptations to personal conduct were useful for commercial
endeavour, pecuniary motives were arguably secondary to the narcissistic fulfilment
attained through disciplining the self in accordance with the new behavioural
conventions. The bourgeoisie, long occupying the disparaged rung of non-nobility,
pursued a strenuous regime of self-control and self-cultivation, sublimating their
aggression towards others. In doing so, though, society increasingly became constituted
by psychologically isolated individuals, dispossessed of the previous means of externalizing
ego conflicts (Elias 1991).
It is on the basis of this ‘regime of the self’ (Rose 2004), that the modern conception
of homo economicus took shape. With greater psychological pressure on individuals to
pacify their emotional expression – and here one can think of the rigid performances
of selfhood enacted by the Victorians – commercial relations became imbued with or
overdetermined by a sublimated aggression. Maintaining status and prestige required
heightened self-mastery, leaving market competition and acquisitiveness as an indirect
means of displacing aggression against external objects. Thus the seemingly natural
desire for commercial and material success was epiphenomenal to a process of
individuation and self-enclosure that was precipitated by the intensification of the
civilizing process. Beneath the costume of homo economicus, a creature that ostensibly
took pleasure in accumulation, was the injured figure of homo narcissus. Homo narcissus,
corralled by the tightening thresholds of shame and fear of ego insolvency, channelled
the drives of life and death through increasingly impersonal commodity-mediated social
relations.
Market civilization and the problem of economics

In the guise of homo economicus, homo narcissus experienced to a greater degree a problem
that all societies confront, the predicament of diffusing the psychical energy of their
members. Georges Bataille (1988), reconceptualizing political economy along the lines
of a libidinal economy, referred to this as the problem of excess. Bataille argued that
economics mistakenly emphasizes scarcity as the fundamental economic problem,
suggesting that more pressing for societies’ survival is finding sustainable outlets for the
expenditure of excess energy. Given the fear of shame that governed the conscience
of individuals with the expansion of the civilizing process, the ability to expend excess
was severely delimited in indirect forms of expression through market exchange.
Not coincidentally, the century that experienced the most dramatic intensification
of the civilizing process also gave rise to what Polanyi ([1944] 1957) referred to as the
great transformation. It is debatable to what extent capitalism, of its own momentum,
fuelled the move towards the enclosure of the self, creating commodities of people
and of land in the nineteenth century. From a psychoanalytic point of view, it is
suggested that the anxiety and aggression provoked by the civilizing process helped
fuel the development of market civilization. The psychical drives, impeded from more
direct forms of arbitrating the inner–outer divide of the psyche, found substitutive
outlet in the staged performance of the market. The anxiety of maintaining self-control
made individuals receptive to self-commodification, allowing them to adhere to the
demands of emotional repression by mediating social relations through a ‘pristine’
market sphere.
So too, given the repugnance for violence that had been instilled with the civilizing
process, market expansion gave a means of dispelling excess aggression. Britain’s
imperialism of free trade and the United States’ westward expansion saw aggression
against others mediated through the ‘civilized’ practices of market sociality (Gallagher
and Robinson 1953). It gave not only a means of harnessing the self, but of imposing
discipline on others through engineering their dependence on an impersonal market.
Market discipline was spread, as Cain and Hopkins (1986) argue, by ‘gentlemanly
capitalists’.
A key issue in regard to the intensification of market-mediated social life, though,
was that it led to unsustainable levels of psychical repression, eventuating in catastrophic
social outbursts in the first half of the twentieth century. As Karl Polanyi recognized,
as market civilization tore asunder the existing social fabric, reconstituting societies on
the basis of fictitious commodities, it created fertile conditions for the rise of fascism
and world war (1957). With most people having limited possibilities of attaining
narcissistic fulfilment through market sociality, anxieties mounted and aggression found
sublimated expression in zealous nationalism and invented notions of racial superiority.
Drawing on psychoanalysis in analyzing the historical trajectory of capitalism, the
members of the Frankfurt school, notably Adorno, Horkheimer, Fromm and Marcuse,
suggested that it was heightened internalized repression that fuelled the attachment
to fascism.
For these theorists, fascism was akin to a societal neurosis, deflecting the tension of
an inner torment onto social others. Neurosis is a condition where symptoms or
behaviours that are potentially harmful to an individual’s social being manifest themselves
uncontrollably. For the neurotic, the source remains consciously unknown. As Freud
theorized it, neurosis represents a type of psychical rebellion against the internal authority
of the super-ego. To avoid contradicting the dictates of the super-ego in the pursuit
of an unconscionable desire, libido finds substitutive expression in seemingly unrelated
symptoms. The symptom itself may work to subvert compliance with super-ego demands;
as Freud ([1919] 1955b) argued regarding cases of neuroses faced by soldiers during
wartime, they were driven by a repressed desire to escape the threat to their lives in
the face of the super-ego demands of patriotism, manliness and ambition. For the
fascist, the hatred of those perceived as weak or inferior is but a projection of an
unconscious recognition of their own weakness onto those who are different (Adorno
and Horkheimer 2002). As Fromm (2002) argued, fascism was in fact an unconscious
hatred of the self, a self that sought to annihilate its own free will by submitting to
another.
In the post-war era, though, Western societies would take steps that would attenuate
the internal repression of the civilizing process by re-embedding economic relations
within the social economy. In what Polanyi (1957) referred to as the double movement,
society acted to protect itself from the ravages of the self-regulating market. It created
systems of social security to alleviate the fears of isolation and ruin that governed the
lives of millions of precarious wage workers. State intervention helped to restore a
semblance of reciprocity in economic relations, and lowered the thresholds of shame
in accepting social support. The entrenched idea that welfare was a form of charity
that sapped motivation and moral rectitude, inducing a perpetual pauperism, was
wrested from the public perception. In its stead, welfare was reconceived as a right of
citizenship, a form of security no less important than the physical security provided by
the police and military. The resulting ‘golden age’ of the welfare state, premised on
Keynesian notions of full employment that aimed at elevating the dignity of the worker,
diminished the emulative pressures of self-control that had deepened self-enclosure and
atomized society.
One of the key aspects of the Fordist-era compromise was that it partially addressed
the problem of excess, providing many an enhanced basis for narcissistic fulfilment. In
the United States, the compromise between business and labour that allowed the nation
to successfully execute the war effort continued in the Cold War era. An ideological
consensus formed around notions of ‘Americanism’ – the moral, spiritual and economic
superiority of the US way of life (Rupert 2000). The balancing of mass production
with mass consumption, which allowed citizens in the West to garner respectability
through home ownership and the purchase of automobiles and ‘white goods’, created
conditions for the attainment of prestige and the dissipation of excess. Organized
consumption, with inbuilt obsolescence and a regular turnover of fashions driven by
the advertising industry, corrected a crucial imbalance of nineteenth-century capitalism
(Baudrillard 2004). For many white working-class men, it provided a basis for sovereign
enjoyment, with them trading their obedience in the workplace for gainful wage
employment that allowed them to maintain patriarchal dominance in the home.
In addition to reinforcing the gendered division of labour, Fordism enshrined the
privileges of whiteness. Both internationally and domestically, it promoted a division
of labour that saw racialized groups undertaking the most precarious forms of social
production. In the engineering of the post-war international architecture, colonies and
newly independent nations were relegated to the role of raw commodity production
to support the industrial West. In the domestic sphere, racialized minorities in North
America and Europe engaged in occupations that conferred less stability and pay than
those of white workers. Guest workers in Europe provided expendable labour, excluded
from neo-corporatist wage bargaining agreements. In the United States, where returning
soldiers gained access to higher education through the GI bill of 1944, as well as access
to low-interest housing loans that spurred suburbanization, black soldiers were largely
excluded (Sacks 1997; Smith 2009).
It was the visible inequalities of the Fordist era that helped fuel the civil and equal
rights movements in the 1950s and 1960s, which in turn transformed the dynamic of
the civilizing process. With the US federal government pursuing desegregation, and
with governments on the other side of the Atlantic seeking to quell disquiet among
recent immigrants, new codes of shame began to develop regarding the public display
of feelings of superiority (Wouters 2004). Colour blindness and race neutrality were
psychical adaptations to the tensions that were brewing, with individuals repressing the
recognition of racial distinctions in order to abide by the new codes of shame. Drawing
on the civil rights movements, second-wave feminism in the late 1960s and the 1970s
began to impress upon society the need for greater gender neutrality.
Though Fordism’s demise is often ascribed to purely political economic factors,
psychical tensions and the problem of excess played an under-appreciated role. Though
external factors complicated the continuation of Keynesianism, monetary autonomy
and social wage bargaining, support for this mode of accumulation was undermined
as the masculinist and racialized worldview upon which it was founded was destabilized.
The move towards equality heightened the tensions of the civilizing process, with the
repression of established conceptions of gender and racial superiority contradicting the
aesthetic of Fordism. At an unconscious level, rather than accommodating the new
affective demands on sociality, a resistance developed in the form of disidentification
with others, a growing resentment of their encroachment on the sovereign enjoyment
that had been promoted through the Fordist compromise. Disidentification, entailing
a distancing from others, a rise of a coldness or aloofness in social relations, was a
reversal of the relative conformism of the golden years. Without recourse to the
expression of superiority in gendered and racial terms, the only valid outlet for excess
was through one’s market performance.
The excess of psychical energy found expression in an anxious hyper-individualism
and an aggressive neo-liberalism that subverted equality. The double movement had
been reversed, as the market again became an increasingly disembedded sphere of
social life. Through market discipline, a type of revenge was exacted on those who
had inflicted a narcissistic injury and caused an increasing sense of powerlessness. The
market, and particularly finance, though in theory race- and gender-neutral, worked
to dispossess racialized minorities and women of the gains for which they had fought.
Meritocracy and colour and gender blindness would be used to dissimulate a type of
structural violence against those groups with whom equality, at an unconscious level,
was unacceptable.
The re-emergence of global finance
By understanding the historico-affective conditions that contributed to the collapse of
Fordism, we can come to appreciate the libidinal dynamics that resonate in contemporary
global finance. Though global political economy (GPE) scholars have recognized that
global finance’s re-emergence was born of volition rather than spontaneous market
forces, the motivations ascribed to this transformation have largely been of the rational
pecuniary sort (Helleiner 1994; Cohen 1996). Escaping the attention of GPE analyses
has been the means through which finance has been invested in by homo narcissus as a
means of sovereign expression, a means of re-attaining stasis. Finance, far from simply
acting as a veil over the economy, has worked to displace aggression against a world
of external objects that challenge engrained conceptions of superiority. From the
perspective of libidinal political economy, financialization has restaged the psychic
economy, deflecting onto others the narcissistic injury resulting from the contestation
of a masculinist, racialized and hierarchical social order.
Early on, the role of finance as a conductor of the economy of affect was evidenced
in the recirculation of petro-dollars from OPEC countries to developing countries in
the 1970s, and the ensuing debt crisis. Though free-flowing commercial banking seemed
rational from the perspective of lenders and borrowers, the disaccumulation that would
result in the global South by the 1980s would reveal unconscious wish fulfilment. The
pursuit of profit was certainly a driving force, but predatory lending to unaccountable
governments also marked an unconscious aggression. Just as the gentlemanly capitalists
of nineteenth-century Britain established discipline over others through market coercion,
the extension of credit by international lenders in the 1970s created precarious conditions
that undermined aspirations for autonomy and social development. The debt crisis and
the subsequent restructuring of the effected economies reimposed an exacting and
racialized hierarchy within the strictures of formal market, sovereign and racial equality.
The episode would serve as a precursor to what was to be a systemic turn to finance
as a means of violent displacement and dissipation of excess.
Belying the supposed informational efficiency of financial markets is the way in which
they, in the past 40 years, have frequently deranged productive efficiency in the
functioning of the global political economy. Though the return to deregulated markets
was heralded by some as advancing market completion, the post-Fordist era has been
pocked by regular financial crises. In ‘emerging markets’, for instance, the number of
crises rose from 16 over the entire Fordist era to 96 between 1973 and 1997 (Bordo
and Eichengreen 2002). These crises have often resulted in jarring conditions of structural
unemployment of productive resources that offset any ostensible gains from financial
deepening and informational efficiency. A 2008 database covering 42 systemic banking
crises from 1970 to 2007 in 37 countries reveals the severe economic toll of such
episodes. The fiscal costs of crisis management alone averaged approximately 13.3 per
cent of gross domestic product (GDP), reaching as high as 55.1 per cent (Laeven and
Valencia 2008: 24).
Though financial crises from a rationalist point of view could be conceived of as the
unintended consequence of a normally optimizing mechanistic process, from a libidinal
perspective, we can see a non-rationalist and unconscious volition at work. Recurring
financial crises resonate with what is seen in instances of compulsive neurosis, whereby
the negative consequences of repetitive and aberrant behaviour are expressive of illicit
desire. The process of financialization can in turn be compared to the neurosis of
compulsive gambling. Though Freud ([1928] 1961a) saw gambling as a type of self-
castigation, and aggression turned against the self (masochism), at the same time, it
can be conceived of as an aggression directed outwards. Gambling not only affects
gamblers, but undermines their personal relationships and destabilizes the lives of
those who depend on them. Gambling represents an invidious rebellion against the
toil of productive work, a form of aggression against the other players, and an aggression
against responsibility and commitment. The recurrence of financial crises similarly can
be seen as a means of violent displacement against the productive economy, hazarding
the lives of disparaged others within the global political economy. Just as the promise
of the big payoff rarely materializes from gambling, so too the promise of market
completion via financial deepening is constantly undermined by socio-economic regress
and dislocation.
The expanded role of finance has channelled aggression against the productive sphere
where the majority toil. At base, explosive financial expansion constitutes a direct
detraction from real economy activity and the basis upon which invidious sovereignty
and a limited stasis are attained by few. In 1980, the global financial stock stood at
US$12 trillion, roughly equal to global GDP. By the end of 2010, the value of financial
assets reached US$210 trillion, with financial depth – the stock of debt and equity
outstanding divided by global GDP – standing at 356 per cent (McKinsey 2011). The
shifting ratio provides a proxy measure of the extent of redistribution to finance in the
form of returns to credit. The unconscious aggression transmitted through the expansion
of finance manifests in the secular decline of both wages and GDP growth. Indeed,
the rhetoric of optimization attached to a promise of market completion veils an
aggressive disciplinarity against labour and the commonweal. Per capita income
growth in Latin America, for instance, fell from 3.6 per cent between 1966 and 1973
to 0.4 per cent between 1974 and 1990 (Crotty 2000). The combined annual income
growth rate of the G7 countries fell from 25.2 per cent between 1960 and 1979 to
7.9 per cent between 2000 and 2004 (Palley 2007). In turn, average world real GDP
growth similarly declined from 4.9 per cent between 1951 and 1973 to 3.3 per cent
between 1980 and 2009 (Skidelsky 2009).
Behind a veil of scientific neutrality that legitimates the process of financialization
and elevates its agents are conditions of narcissistic neurosis. As Freud theorized, a
narcissistic neurosis arises with a severe conflict between the ego and the super-ego
([1924] 1961b: 152), a disjunction between the self-image and social demands. In a
world that embraces the rhetoric of meritocratic equality, finance surreptitiously subverts
these demands and indulges narcissistic desires for superiority. This superiority has
been mounted on the basis of libidinal investment in the promise of finance theory. A
new-found ability to price the future, to transform all future uncertainty into the
complete market of Arrow and Debreu (1954) provided a convincing account of a
novel capacity to map and control the world beyond the endemic sphere of market
practitioners. Contra an orthodoxy asserting the incommensurability of risk and
uncertainty (Knight 1921; Keynes 1973), new pricing technologies, financial derivatives,
lent their purveyors, the high priests of the markets, a sense of omnipotence. This
highly persuasive facade masks behind a veil of calculative precision the real deleterious
consequences of financial innovation; waste and violence fulfil unconscious desires for
social distinction.
Financial derivatives marked a novel form of property that abnegated ties to the
underlying materiality of the real economy, affording their proprietors an invidious
prerogative of indifference and a privilege of destructive aggression. On the one hand,
the possibility to trade in solely the performance of assets enabled buyers of derivatives
to gain from negative or positive performance and build complex positions bearing, at
best, a convoluted relation to the ‘underlying economy’. On the other hand, derivatives
provided a technique to replicate synthetically any underlying asset. In consequence,
derivatives offered purveyors and users the opportunity to divorce themselves from the
materiality to which finance supposedly refers and break through conventional limits
on credit production.
The derivative technology most directly implicated in the ongoing crisis, the credit
default swap (CDS), encapsulates well the affective and psychical dimension of finance
that we highlight here. Credit default swaps afford market participants the opportunity
to take a position on the performance of a debt. Simplified, the derivative provides
that the seller gains if the debt is repaid and the buyer, who purchases ‘insurance’1
against non-payment, gains if the borrower fails to pay. The aggression sublimated in
the market manifested itself in a powerful innovation that took place at J.P. Morgan.
In ‘structured credit’, the bank discovered how to increase lending to customers (thus
increasing aggregate risk) and pass on the risk that the loans would not be repaid into
a broader universe of investors. International regulation (BCBS 2004) afforded banks
utilizing this technology lower levels of capital reserves and hence a competitive
advantage (Wigan 2010). Consequently, by severing the ties between risk and
responsibility, derivatives afforded the most sophisticated market participants indifference
to, and indeed enjoyment of, the destructive consequences of then unbounded credit
growth. On a systemic level, this marks a more predatory, non-rational financial
system, elevated beyond the strictures of the productive economy.
It was in the context of the 2007 ‘sub-prime crisis’ that the extent and character of
violent predation became widely apparent. Behind the veil of derivatized precision lay
wilful and vengeful abandon. One Wall Street money manager commented; ‘I did
subprime first. I lived with the worst first. These guys lied to infinity. What I learned
from that experience was that Wall Street didn’t give a shit what it sold.’ Clear of the
repercussions of Wall Street’s practices, he adds: ‘The very first day, we said, “There’s
going to come a time when we’re going to make a fortune shorting this stuff. It’s going
to blow up. We just don’t know how or when”’ (Lewis 2010). 2 Goldman Sachs profited
from selling and warehousing mortgage-backed securitizations and various credit
derivative products. When the credit inflation showed signs of fatal fatigue, the bank
reversed the direction of its bets, laying off the risk of systemic implosion with American
International Group (AIG). Far from the hyper-rationality derivatives at first promised
to confer on the financial system, the combination of asset price inflation and financial
innovation hosted systemic abandon and sublimated aggression.
For libidinal political economy, it is not incidental that the limited stasis afforded to
a financial elite at the centre of global capital markets was closely bound up with
aggressive predatory lending against racialized minorities in America’s sub-prime
mortgage markets. Mortgage securitization facilitated the expansion of the borrower
base, bringing previously excluded groups into the market, at the cost of subjection to
predatory loan rates, fees and penalties. A survey of racially targeted predatory sub-
prime lending in Baltimore found that African Americans were more than twice as
likely to be in the sub-prime market as whites at the same income level and debt burden
(Wyly et al. 2006). Between 2004 and 2006 the ratio of black-to-white and hispanic-
to-white sub-prime share stood at 2.44 and 2.07. By 2006, the majority of African-
American borrowers had been pushed into the sub-prime market (Wyly et al. 2009; cf.
Dymski et al. 2011). Mortgage loan foreclosures between 2007 and 2009 followed this
racialized pattern, affecting 8 per cent of African Americans and Latinos and 4.5 per
cent of non-hispanic whites (Gruenstein Bocian et al. 2010).
Just as Fordism relied upon an aggression displaced onto the gendered and racialized
other, the violence of the crisis has widely impacted upon those least enfranchised in
the neo-liberal era. As the IMF (2010) estimated banking system write-downs in the
economies hardest hit by the crisis at US$2.3 trillion, the burden of fiscal, welfare,
private sector and credit retrenchment fell on the shoulders of those least able to sustain
it. In the United States, though there was talk of a ‘man-cession’ in 2008, with men’s
unemployment increasing faster than women’s, the gender pay gap increased. Women’s
employment during the recession was disproportionately maintained in low-paid
occupations (ILO 2009: 8–10). Also in the United States, increased unemployment hit
African Americans and Latinos significantly harder than white Americans. From the
beginning of 2007 until the end of 2009, unemployment for Americans increased from
4.2 per cent to 9 per cent for whites; from 7.9 per cent to 16.2 per cent for African
Americans; and from 5.8 per cent to 12.8 per cent for Latinos (Bureau of Labor Statistics
2012). In 2009, according to figures from the Pew Research Center, the median
wealth of white households was 20 times that of black households, and 18 times that
of Hispanic households. These ratios were roughly twice the size of those in 2005, and
the most lopsided in the quarter century since such figures were recorded (Pew Research
Center 2011).
This differential impact was felt globally. Not only did the expansion of the informal
sector that comes with retrenchment, rising unemployment and falling remittances
disproportionately impact upon women, but stimulus packages have privileged sectors
where men dominate the workforce (Elson 2010; Ruggieri 2010). So too, recent falls
in global trade disproportionately have an impact on women working in the labour-
intensive export sectors of developing economies such as textiles and clothing. In 2009,
Cambodia’s textile and clothing sector, where women account for 90 per cent of the
workforce, shed 38,000 jobs. It is likely that many of these women shifted into the sex
industry, in which up to 100,000 Cambodian women already worked (Otobe 2011).
As in the Asian crisis of 1997, the recent crisis also witnessed a marked increase in the
global gender earnings gap (World Bank 2011: 87).
Conclusion
The vast majority of analysts of the political economy of finance and the crisis begin
from a clear commitment to a rationalist perspective. In consequence, analysis seeks
to explain market dynamics and crisis as more or less adhering to the rational promise
of orthodox finance theory. In this imaginary, financial markets are much akin to
machines, albeit machines which can be badly designed and run awry.
In this chapter, we have sought to complement critical analyses of markets with a
global political economy lens that avowedly eschews the rationality postulate (cf.
Thompson 2011). All economies are marked by a strongly non-rational dimension,
with individuals attempting to negotiate a semblance of identity foreclosure and the
recovery of the stasis of primary narcissism. As these psychical operations unfold, with
the untold pressures of super-ego demands that obstruct the realization of ego coherency,
individual drives can take catastrophic expression.
This chapter, then, has argued that political economy should be wary of instrumental
accounts of financial markets and seek a broader social theorization that transcends
functionalist dichotomies between stability and instability, hedging and speculation,
and rationality and irrationality. Such accounts, necessarily immersed in dominant
discourses of finance, cannot generate the broader social theorization we seek. There
is an affective underpinning to the operations of modern economies which predetermines
these second-order concerns.
Ultimately, a libidinal political economy, harking back to the considerations of
traditional political economy, takes not as its aim optimal efficiency and wealth
generation, but rather societal well-being. It offers not technical solutions to market
failures, but a means of understanding complex psychical pressures that precipitate
internecine social practices. Akin to the psychoanalytic approach of Freud himself, who
sought not to cure his patients, but to make them conscious of their unconscious torment,
libidinal political economy offers a therapeutic analysis. It allows us to understand
better the narcissistic injuries that beleaguer the social economy with anxiety and
aggression, and which forestall the realization of more just social relations.
Notes
1 That credit derivatives are not classified as insurance directly facilitates their proliferation. In
contrast to CDS, a buyer of insurance is legally compelled to have a direct exposure to the thing
that is insured. This distinction enabled the commoditization of credit risk and provided for a
trade only constrained by ‘risk appetite’.
2 An analyst in a rating agency wrote to a senior manager that they were creating ‘an even bigger
monster – the collateralized debt obligation (CDO) market. Let’s hope we are all wealthy and
retired by the time this house of cards falters’ (SEC 2008: 12).
Part III
Emerging issues in
contemporary Global
Political Economy (GPE)
16 From environmental to
ecological political economy
Simon Dalby, Ryan Katz-Rosene and
Matthew Paterson
Introduction: the nature(s) of the ecological crisis

Like all species, homo sapiens shapes its surrounding environment while drawing the
materials required for sustenance from those same environs. Given that we inhabit,
cultivate and traverse a considerable portion of the planet (and even, in a very minimal
sense, outer space), the impact of our species is undoubtedly global in scope. Since
the 1970s, in part due to discussions of the ‘Limits to Growth’ (Meadows et al. 1972)
and widespread concerns about the effects of many forms of pollution on industrial
societies, there has been a growing recognition of the interconnectedness of human
affairs and their environmental consequences. Narindar Singh opened the preface to
his Economics and the Crisis of Ecology, published in 1976, with the simple statement that
‘In an eroded ecology today, we face a global crisis of unprecedented gravity’.
Since that statement, the situation has only got worse. The crisis can be seen in a
number of ways. More or less all natural ecosystems are in decline as human habitats
encroach on them. The populations of vertebrate species, for example, declined by 30
per cent between the 1970s and 2007 (WWF 2010: 7). Soil erosion and fertility,
freshwater availability, deforestation, fish stocks, greenhouse gas emissions, rates of
species extinction, production of toxic chemicals, have all accelerated as problems in
this period. Overall, aggregate human demands on the planet’s resources have doubled
since 1970, and according to a global footprint analysis, humanity started consuming
more than the earth’s capacity to sustain it indefinitely in the mid-1970s, and is now
consuming about 1.5 earths per year (WWF 2010: 7). As a consequence, just to take
one of the above problems, around 1.8 billion people are expected to be living in areas
with absolute scarcity of water by 2025 (UNEP 2007: 11).
These various acute problems can be summarized as involving two types of
fundamental problem. They are either problems of ‘additions’ – of pollution and other
contaminants to air, water and land; or of ‘withdrawals’ – of non-renewable resources
(Schnaiberg 1980). In other words, central to the generation of these crises is the
organization of the global economy. While many ancient civilizations crumbled as a
result of the interplay of ecological and social forces (Diamond 2005), today (2012) the
civilization under threat is global. As a consequence, the ecological crisis is of central
concern to the study of global political economy (GPE), and conversely, the global
political economy is a fundamental force influencing the ecological crisis.
But while the character of the challenges that contemporary societies face is widely
accepted, how they are to be conceptualized in economic, or political–economic terms,
is nevertheless the focus of considerable debate.1 A distinction is usually made between
220 S. Dalby, R. Katz-Rosene and M. Paterson
environmental economics and ecological economics,2 as the two principal schools of
thought on this question. Broadly, the distinction can be taken to mean one between
those approaches that start from the analytic tools of (neo)classical economics and apply
them to environmental issues as they arise; and those that attempt to generate novel
economic concepts and analysis taking certain biophysical characteristics of the economy
as the starting point. We start this chapter with an elaboration of these two perspectives,
and then turn to how the debate between and within them has evolved since the 1970s.
We then explore what is involved in politicizing these economic discourses, before
examining how they help us to understand the predominant responses to the
environmental crisis.
From environmental economics . . .

The core concepts in environmental economics can be traced back to two traditions
in economic thought. The first is the notion of externalities, a key idea in welfare
economics. Pigou’s The Economics of Welfare (1929) is the key starting point here. The
economic notion of externalities refers to those costs or benefits associated with a specific
product that are not incorporated into its market price. Externalities are therefore a
specific sort of market failure. Pollution or resource depletion was always taken in this
tradition as a classic example of an externality – the costs, for example, of dumping
pollutants into a river are not incorporated into the price of the goods produced by
the paper mill or chemical plant, and are thus externalized either onto specific people
downstream (farmers, the nearby town that depends on the river for drinking water)
or more abstractly, onto society as a whole.
As with other market failures, the logic of externalities within environmental economics
is that the appropriate function of the state is to create regulatory measures that
internalize these externalities. While in principle, a range of possible measures might
fulfil this condition, the dominant argument within environmental economics has been
that fiscal policy is the most appropriate instrument. In other words, the state should
act to internalize negative externalities (such as pollution) by taxing the activities that
generate the externalities.
This instrument design is preferred for three interrelated reasons. First, it means that
the market price of a good reflects its full social costs, thus providing incentives to
economic actors (producers, consumers, investors) to reduce the level of such activity
to the socially ‘optimal’ level. Second, since economic actors know better than regulators
what the most cost-effective means are of reducing a pollutant, it makes sense for the
state simply to set broad incentives (through the price mechanism) while specific
production decisions remain at firm level, thus minimizing the overall costs of meeting
a given environmental goal. Third, if the case in hand is one where the environmental
costs fall on specific individuals or communities, the tax mechanism provides for a
resource with which to compensate them – meaning that the overall impact of the
regulation can be Pareto optimal, i.e. no one can be made better off without someone
else being made worse off.
But the logic of internalizing externalities has its critics within environmental
economics. The alternative starting point might be called a property-rights argument.
The key figure in this tradition of thought is Ronald Coase, especially his article ‘The
problem of social cost’ (1960). The essence of the argument is that the origins of
environmental problems are to be understood in terms of inadequate attribution of
Environmental & ecological political economy 221
property rights. Where a resource is held in common, there is too much ambiguity
about who has what types of right to use the resource, and a mismatch between the
ways that individuals experience their capabilities to use a resource and the consequences
of the misuse or overuse of the resources (this sort of argument was popularized most
effectively in Garrett Hardin’s ‘Tragedy of the commons’ [1968]). In Coasian terms,
the externalities arise not because of a market failure, but because of an institutional
failure adequately to assign property rights so that those who use a resource have
adequate incentive to conserve it, or those whose rights are violated by others’ pollution
have institutionalized redress through the legal system.
The policy consequences of this argument are thus not that the state should act as
an institution correcting market failures, but rather that it should simply go about its
proper business (for market liberals) of enforcing property rights and contracts. Thus
where specific environmental problems arise, the task of the state is to identify which
property rights need creating and enforcing, and to create institutional means for
assigning such rights. In cases of resource depletion, this might be a relatively
straightforward matter of making sure that rights (to mineral resources, land, water,
and so on) are clearly defined. In cases of pollution, it is often then a matter of creating
a set of property rights in the medium of the pollution (land, water, air) that establish
a limited set of such rights consistent with the capacity of the environment to deal with
the pollution at hand. This set of ideas has thus brought about the emerging markets
for ‘ecosystem services’ of a range of types, from rights to emit sulphur or carbon
dioxide emissions, to rights to use wetlands.
The second type of environmental economic argument is more clearly ‘Lockean’ in
its origins, while the former is more ‘Keynesian’ in spirit. Whereas the Keynesian
narrative is often referred to as ‘environmental economics’, the Lockean variant is
sometimes termed ‘free market environmentalism’. However, both share a core
assumption and claim, that properly designed markets are an institutional form that
has the capacity to help rather than hinder in the search for a sustainable economy.
Both agree that the key project is to align the incentives that economic agents face
with the environmental constraints faced by society as a whole.
Both also agree that the goal of policy should be to minimize the economic costs of
pursuing environmental policies, and to aim for ‘Pareto optimal’ results. Environmental
taxes and emissions trading systems both (in principle) satisfy this condition. They
simply alter the incentives of all actors (through a price shift, or taxation, or through
the introduction of scarce property rights in emissions) with respect to the polluting
activity, leaving individual agents with the decision as to whether to limit emissions,
pay more tax, or purchase more permits. Those who find it cheapest to reduce emissions
will do so up to the point that the costs of further reductions exceed the costs of paying
more tax or purchasing more permits (or the benefits of selling surplus permits), meaning
(again, in principle) that all actors will face the same marginal costs of emissions
abatement.
Both approaches also agree that whether and how much to reduce pollution should
be determined by overall welfare impacts, where environmental impacts of pollution
need to be compared with the other benefits of economic activity (through what is
called ‘cost–benefit analysis’, a key method in welfare economics). There is therefore
an ‘optimal rate of pollution’, for such perspectives.
Environmental economics is the conceptual underpinning behind much environmental
policy. Certainly in terms of rhetoric, policy makers, international organizations, expert
groups, and even many environmental non-governmental organizations (NGOs)
routinely invoke the market logic behind these arguments.
. . . to ecological economics
But these arguments face powerful objections coming from perspectives that are broadly
called ‘ecological economics’. The central claim from this point of view is that the
economy must be conceptualized in terms of the material throughput of natural
resources, and the consequences of these flows; and environmental economics is unable
to account for these flows and thus the character of the ecological crisis.
There are long traditions of insisting on this starting point. For Marx and Engels, for
example, ‘The first premise of all human history is, of course, the existence of living
human individuals. Thus the first fact to be established is the physical organisation of
these individuals and their consequent relation to the rest of nature’ (Marx and Engels
[1846] 1970: 42). Alongside Marx, there is Polanyi’s central focus on the commodification
of land to his ‘double movement’ ([1944] 1957), or the Physiocrats’ emphasis on the
embedding of the economy in biophysical processes (Barry 1999; Cleveland 1999), or
Braudel’s meticulous histories of capitalism as a socio-ecological system (Helleiner 1997),
or ‘world system theory’-inspired rethinkings of environmental history (Hornborg et al.
2007). These are all suggestive in different ways of what we take to be central and
distinctive to an ecological approach to GPE: that it insists on the centrality of this
material appropriation of ‘nature’ to the reproduction and contestation of global capitalism.
But while there are these longer lineages that we could trace, it is really in the 1960s
that a number of writers began to develop ecological analyses of the economy that
understood it as a series of physical and biological flows. Central to this emerging field
of ecological economics was the work of two writers, Nicholas Georgescu-Roegen and
Herman Daly. Georgescu-Roegen argued, especially in The Entropy Law and the Economic
Process (1971), that the economy should be understood thermodynamically – as a series
of processes that transformed energy, necessarily entailing a degradation of the availability
of usable energy over time. This thermodynamic approach has become central to
ecological economists’ work, which focuses largely on how the various flows and processes
in the economy – production, consumption, investment, trade, and so on – all entail
specific types of transformation of physical energy, within specific sorts of ecological
contexts and with ecological consequences.
Daly extended Georgescu-Roegen’s work by modelling the economy in biophysical
terms which started an explicitly ecological approach to economics. Daly focused on
the contradiction between the finite character of the earth and the continually growing
nature of the economy. It is exemplified in his figure of the economy (1999) as a
subsystem of the ecosystem (see Figure 16.1). This contradiction was also key to the
much discussed Limits to Growth report (Meadows et al. 1972). While the work of Meadows
and her team work outlined how a series of trends – in population, industrial production,
and so on – would hit planetary limits, Daly’s contribution is to think this through in
terms of the specific processes of the economy that generate growth. Daly’s notion of
a ‘steady-state economy’ (1973, 1977) became central to the normative project of
ecological economics – to articulate an account of the economy that might live within
the limits set by the planet’s ‘carrying capacity’. Ecological economics therefore provides
us with a set of concepts and analyses that are crucial stages in elaborating an ecological
approach to GPE.
Solar Energy Empty World

Recycle
Matter Matter
Economy
Energy Energy
Heat
Ecosystem economic services
welfare
Natural capital
Manmade capital
ecosystem services
Solar Energy
Full World
Recycle
Matter
Matter
Economy
Energy Energy
Heat
economic services
Ecosystem
welfare
ecosystem services
Figure 16.1 Herman Daly on the economy and the ecosystem

Source: Daly (1999).
In the 1970s, ecological thinkers elaborated how the trajectory of contemporary

societies – in particular the growth in population as well as in industrial and agricultural
production – was in the process of hitting limits both in terms of the availability of
resources and the ability of the planet to absorb the waste products of the economy’s
myriad processes. Critics suggested that technological change could create an ever-
growing economy. However, for ecological economists, while technological change can
reduce the environmental intensity of the economy per unit of gross domestic product
(GDP), these improvements are almost always outstripped by overall growth in the
system. Partly this is because of a process known as the ‘Jevons paradox’ (Jevons 1865),
or more recently the ‘rebound effect’ (Schipper 2000), whereby efficiency gains generate
further productivity growth and thus overall growth of the system.
Evolving debates on the economy and the environment

Since their initial articulation, debates within and between these perspectives have been
fierce, and the overall ideological framing of environment/ecology as an economic
question has evolved accordingly. These debates have also been strongly affected by
their broader political implications.
In the 1970s, the emerging ecological approach seemed to be becoming embedded
in the way people thought about the environmental crisis. Fears of pollution and resource
shortages, especially in the global North, seemed to add credibility to claims about
limits to growth. States responded by curtailing pollution and trying to deal with
potential shortages by improving efficiency, which by cutting waste, also sometimes
reduced pollution. The 1970s oil crisis, where members of the Organization of the
Petroleum Exporting Countries (OPEC) dramatically hiked petroleum prices, confirmed
for many the sense of a new era of ecological scarcity. The dominant framing in the
1970s pitted economic growth against environment. Nature preservation, attempts to
‘protect’ certain places from encroaching urbanization, industrialization and resource
extraction portrayed development as the problem to be tackled by constraining and
limiting its reach.
In the global South, however, such discourses were widely viewed with suspicion,
seen as a Northern project that endangered Southern aspirations to development and
the affluent lifestyles that industrialism and urbanization promised. Simultaneously,
Northern elites started to realize that curbing economic growth would be politically
unpalatable. As a consequence, during the late 1970s and the 1980s, global elites
pursued a compromise that would become known as ‘sustainable development’. This
discourse assumed that ecologically friendly modes of economic growth were possible
(World Commission on Environment and Development 1987). Broadly, it presented
an environmental political economy that focused on the capacity of a ‘green
Keynesianism’ to deliver a global grand bargain for shaping investment and managing
the global economy to meet the goals of growth, sustainability and redistribution of
wealth.3 At the more technical level of economic discourse, environmental economics,
with its language of market mechanisms, cost–benefit analysis, and so on, was becoming
the dominant language of environmental policy making, at least rhetorically.
But sustainable development failed really to explain how growth could be made
consistent with sustainability (Sachs 1999). The discourse of ecological modernization,
which emerged in the 1990s, attempted to fill this void. Mostly Northern European
scholars argued that a new set of policy tools, innovation strategies by companies, and
firm–state relations were starting to make it possible to reconcile growth and sustainability
(Weale 1992; Mol 1996, 2001). They suggested that such a shift could occur through
radical technological innovation and systemic shifts in investment practices. But they
also couched this argument in an explicit new institutionalist political economy (at
times invoking both Schumpeter [1943], on ‘gales of creative destruction’, and the
literature on comparative capitalisms), suggesting that this capacity was only really
available in countries with corporatist policy styles that enabled states and corporations
to co-ordinate the ecological modernization of the economy closely; states with more
free-market ideologies might be less able to pursue this approach.
While sustainable development was ‘evolving’ into ecological modernization, the
broader ideological agenda was already shifting towards what we now refer to as neo-
liberalism. This shaped environmental–economic discourse into what Bernstein (2001)
refers to as ‘liberal environmentalism’; others refer to it as ‘market environmentalism’
(Bakker 2004). This discourse accepts sustainable development’s rhetoric that growth
and sustainability can be reconciled, while rejecting its Keynesian heritage, arguing
instead that states should focus less on regulating companies and directing investment,
and more on creating the institutional underpinnings for the market to deliver
sustainability itself. In other words, it is a shift within environmental economics discourse
from Pigou to Coase, from welfare economics to property rights. Neo-liberalism has
thus transformed the environmental ideological agenda, towards one where the state’s
role is not to be ‘market restricting’, but instead to be ‘market enabling’ and even
‘market creating’ (Paterson 2009).
But at the same time as environmental economics was becoming entrenched as the
key discourse in environmental policy debates, elsewhere, ideas drawing on and
developing ecological economic insights were gaining currency. While this has various
elements, we introduce three key ideas here.
One particularly influential update to the limits idea is the notion of ‘ecological
footprint analysis’ (Wackernagel and Rees 1996), which models the ecological impacts
of specific entities (it can be applied from individuals up to the entire global economy)
in terms of the land required to sustain that entity’s total consumption. Using this
analysis, the annual Living Planet report produced by the World Wide Fund for Nature
argues that we passed the overall capacity of the planet’s ecosystems to renew themselves
in around 1975, and currently (by 2009) exceed the planet’s capacity to sustain us
renewably by around 50 per cent (WWF 2010: 7). Projections of future global economic
growth suggest that in coming decades we will need the equivalent of three or four
planets to provide resources for civilization and absorb the wastes. However, while the
idea of ecological footprints revives questions about the sustainability of growth, ecological
economists continue to be divided on the issue of limits to growth, with some, such as
the New Economics Foundation, asserting clearly that ‘growth isn’t possible’ (New
Economics Foundation 2010; see also Jackson 2009), while others (Ekins 2000; Hawken
et al. 2010) assert that growth could be made green.
Second is a resurgent eco-Marxist account of ecological economics (see e.g. Martinez-
Alier 1987). An important contribution here has been to historicize the processes that
ecological economists identify as the principal elements in the unsustainability of
contemporary societies. Some authors refer, for example, to a ‘metabolic rift’ (Foster
2000), suggesting that there was a key historical shift in the way economies were
organized materially, from those powered by animal and human energy, to those based
on fossil fuels and other non-renewable resources. It was this unleashing of fossil fuel
energy that made possible the exponential growth that ecological economists identify
as the central problem of sustainability. Such a reorganization involved a shift from
circular processes where all ‘waste’ becomes an input to other processes, to linear
processes of throughput where waste becomes a problem.
A third way that ecological conceptions of the global economy have been revived
is through the notion of the Anthropocene (see The Economist 2011a). This concept was
developed by earth scientists to emphasize that the extent of the human transformation
of the planet has gone so far that we are now literally living in a new geological age
of our own making (Steffen et al. 2007). Any once vaguely tenable proposition that
some sort of ‘nature’ exists, autonomous from human social processes, is thus no longer
remotely plausible. Every single molecule, organism or resource flow, in the atmosphere,
oceans, even the lithosphere, is now shaped in part by human economic processes.
Consciously or otherwise, any project to shape the future of the global economy is thus
also simultaneously a project to shape the ecological face of the planet (cf. Harvey
1993; Smith 1984).
Putting the politics in ecological political economy

So far we have discussed how economists have understood the environment as a
problem. But how might we add in questions of politics to turn this into a specifically
political economy? Neither environmental nor ecological economics deals with this
adequately. For example, ecological economics might take seriously the way that all
economic processes both depend on the continuous appropriation of ‘nature’,
engendering the crisis we outline in the introduction, but it says little about political
economy as such. This can be illustrated by looking again at Figure 16.1 (above). Daly’s
figure puts ‘the economy’ into a black box, obscuring the social conflicts and power
relations surrounding humanity’s use of the natural world – core themes in a properly
political economy.
We outline three important elements to this sort of ecological political economy.
First is a focus on the decision-making processes that shape economic institutions.
Second is emphasizing the role of imperialism in the history of capitalist development
and environmental politics. Third is an analysis of the way that ongoing global
inequalities shape the outcomes of environmental debates and negotiations.
The politics of decision making

How social life is organized, who decides on what gets produced, how, where, and
with what consequences are all a matter of politics. As Dryzek puts it: ‘This emerging
field [of environmental political economy] covers work concerned with the structure,
organisation and operation of political-economic systems (that is, mechanisms for making
collective choices) as they confront environmental problems’ (1996: 27). Making
environmental matters central to political economy requires us to think about the social
structure(s) that produce decisions, the institutions and patterns of life that result in
things getting made, and who benefits from these actions. How decisions are made, in
whose interests, and with what social consequences make for a specifically political
economy.
As Marx (and others) remind us, production processes incorporate nature; they
involve extracting food, fibre, fuel and numerous minerals from ‘the environment’ and
then producing both useful commodities and frequently much pollution and waste that
is returned to that same environment. The profits accrued from such commodities are
reinvested into new cycles of production, thereby feeding into an ever-intensifying
‘treadmill of production’ which requires further ecosystem inputs (Gould et al. 2008).
But this treadmill is not only the result of myriad decisions by consumers, investors
and companies, as economists would assume. Its character is fundamentally shaped by
political decisions about tax rates, regulatory regimes, corporate and union lobbying,
state support for investment or research and development, and the political conflicts
and cultural norms that shape such decisions.
Imperialism and environmental politics

But not all states get to make such decisions on an equal basis. The ecological integration
of the world has occurred principally through imperialism, where some states and their
allied economic elites have come to shape socio-ecological conditions across the planet.
Understanding the power relations that this entails is thus central to politicizing ecological
economics.
By the time of the metabolic rift, when coal-powered industrial capitalism accelerated
in the nineteenth century, materials were coming from all over the planet in the long
transportation routes of the European imperial system. The expansion of European
empires was about trade and conquest, but also as Alfred Crosby (1986) puts it, a
matter of ‘ecological imperialism’. Not only plantation agriculture but a much wider
set of ecological changes came as a result of European expansion – horses and wheat
to North America, rabbits to Australia, potatoes from South America to Europe and
numerous other ecological changes.
The integration of the Americas into the imperial system engendered a huge range
of exploitative flows from Latin America, in particular, to Europe and the emerging
United States (Galeano 1973). Elsewhere timber, ivory and plantation agriculture
expanded the reach of European trade, and with the subsequent introduction of
steamships and refrigeration, it became possible for the US, Australia and New Zealand
to ship meat to Europe (Cronon 1991). The appropriation of resources and the huge
ecological disruptions of empire enriched Europe and North America, and subsequently
Japan, while causing ecological ‘shadows’ abroad; in the case of Japan, most noticeably
in deforestation in South East Asia (Dauvergne 1997). Now such patterns are much
more diversified, and with the rise of China and India most recently, resource flows
are changing yet again.
These patterns of global exploitation are important principally because they have
made people mutually vulnerable to each other’s socio-ecological conditions. Ecology
and economy became linked into a global system where in the nineteenth century,
‘Suddenly the price of wheat in Liverpool and the rainfall in Madras were variables
in the same vast equation of human survival’ (Davis 2001: 12). Food prices in parts of
Asia became increasingly determined by global markets. This both disrupted traditional
modes of food storage that allowed for survival when crops failed due to bad weather,
and made poor populations dependent on price fluctuations beyond their control.
Famine in the late nineteenth century was in part due to these new vulnerabilities, and
these interconnections have only intensified since.
Global inequalities
The historical backdrop of imperialism also provides a powerful shaper of the conditions
within which societies attempt to deal with the environmental crisis. As we saw above,
the broad shifts in economy–environment discourses have occurred in part because of
North–South politics. Behind this are deep normative claims for justice and redistribution
arising out of background inequalities and exploitation. Recently a number of scholars
have focused on these patterns in terms of ecologically unequal exchange: ‘While exports
are indeed shifting, trade relations remain extremely unbalanced and unfair because
poorer nations export large quantities of under-priced products whose value does not
include the environmental (and social) costs of their extraction, processing, or shipping’
(Roberts and Parks 2009: 389). Since the 1950s the prices of commodities have dropped
while the volume of commodities exported from peripheral states to industrial consumers
has increased, exacerbating the trends. Understood in these terms then the global
South is owed an ecological debt by the North (Simms 2005).
This argument has also been made regarding climate change. While the consumption
of carbon-based fuels has made some parts of the planet wealthy, the hazards of increased
storms, other weather disruptions and rising sea levels frequently fall on the poor and
marginal populations of the world who have done little to cause these disruptions. Such
an understanding of the politics of climate change has led to numerous calls for climate
justice, and arguments that Northern states have to compensate Southern ones by helping
them to adapt to climate change, while also helping to fund innovative technologies that
ensure that poverty alleviation in the South is not constrained by limits placed on the
use of carbon fuels (Roberts and Parks 2007). It has also produced novel political bargains
with important impacts on the global economy, such as the Clean Development
Mechanism (CDM) which has produced significant flows of new energy technologies to
(some) developing countries (Newell and Paterson 2010: chapter 5).
So a focus on global inequalities central to an ecological political economy concerns
not only the flows of resources, but the unequal distribution of the ecological impacts
of growth. The question of who suffers from the risks of industrial transformation and
who pays the price are a highly contested part of contemporary politics in what Ulrich
Beck (2007) has long called ‘the risk society’. Ecological politics is about the distribution
of risk; the engagement by numerous environmental groups in decision making is part
of the struggle over this distribution. In many cases, the dirty industries and the most
disruptive environmental processes now occur at a distance from the metropolitan
centres of the global economy in places where environmental regulations or the political
opposition to their establishment are weakest.
Overall, this politicization of ecological economics suggests that what is central is a
series of processes of distantiation and displacement. The ‘globalization’ of the economy
entails the separation of production and consumption over increasing geographical
scales which aggravates environmental degradation both directly through the
consumption of fuel involved, and indirectly through the way it renders the degradation
produced invisible to the decision maker (Saurin 1996). These spatial distantiations
also increase ecological feedback loops and render effective social decision making
increasingly difficult (Dryzek 1987). Distantiations enable strategic actors to offload
socio-ecological costs onto others through industrial relocation, and allow the wealthy
to insulate themselves from the consequences of environmental degradation (Bullard
1990). Distance also enables actors to engage in efforts to displace responsibility for
dealing with environmental problems as they arise – either onto other countries (as in
the US–China chicken game over climate change) or away from political actors as in
the shift to ‘green consumerism’ (Hay 1994). These displacement strategies also greatly
complicate attempts to deal with environmental collective action problems.
Governing an (un)sustainable economy

Given the unavoidably political character of environmental and ecological economics,
how should we understand the ways that actors in the global political economy have
responded, individually and collectively, to the environmental crisis?
First, it is clear that the conceptualization and governance of the environmental crisis
have been profoundly shaped since the early 1990s by environmental rather than
ecological economics, in what Bernstein accurately characterizes as ‘liberal
environmentalism’ (2001). This is most obvious perhaps in responses to climate change.
Responses to this problem have been closely designed to be market enabling – to create
new sorts of opportunities for cycles of investment, commodification, profitability and
thus accumulation. Global climate governance in particular is organized around the
creation of a series of markets in rights to emit (or in promises not to emit) greenhouse
gas emissions (Newell and Paterson 2010; Paterson 2009). The trace of Ronald Coase
is easily identifiable; climate change is thus conceptualized as a problem of inadequately
assigned property rights. At the same time, this takes ecology to the heart of the global
economy: carbon markets are currently the fastest growing financial derivative markets,
and many anticipate them to be worth around US$3 trillion by the 2020s. They also
show how capital is able to deploy ecological crises to its advantage and to illustrate
the possible means by which the growth process might be ‘greened’.
Other dominant responses have similarly focused on maximizing the freedom of
action of private sector actors. Various economic governance institutions, such as the
World Bank or the World Trade Organization (WTO), have become embroiled in
projects to ‘green’ their activities. The World Bank’s new vision of ‘environmentally
sustainable development’ has helped in the construction of ‘transnationalized
environmental states’, new forms of ‘eco-governmentality’ and environmental rationalities
that have reshaped the nature of capitalist expansion (Goldman 2001). These responses
are focused on making sustainability consistent with liberal environmentalist principles
as outlined above.
Private sector actors themselves have also started to act in ways consistent with a
liberal environmentalist agenda. Transnational corporations (TNCs) have developed a
series of strategies to cope with demands on them to address their ecological impacts.
Often under the rubric of Corporate Social Responsibility, most corporations obviously
need to respond to the legitimacy demands from environmentalism (see e.g. Gendron
2006; Begg et al. 2004). Institutional investors have developed a series of private
governance activities (the best known is the Carbon Disclosure Project [CDP]; see Kolk
et al. 2008) that attempt simultaneously to shore up their own legitimacy (especially in
the wake of recurrent financial scandals) while starting to chart a path by which they
protect the profitability of their investments from the potential future risks from
environmental change itself (increased sea levels or extreme weather events, for example)
or from environmental policy responses (regulatory measures to reduce greenhouse gas
or other emissions).
These processes show that ‘environment’ is not some add-on extra to the global
economy but integral to the dynamics of global capitalism, and thus, as ecological crises
produce legitimation crises and undermine the conditions for accumulation, the
managers of the global economy must increasingly integrate these political–economic
dynamics into their practices. These actors, such as the World Bank or TNCs, in many
cases seek simply to ‘greenwash’ their activity (e.g. Karliner 1997). But this greenwashing
often itself produces further management problems for dominant economic actors, by
drawing attention to the contradictions within corporate and World Bank discourse
and practice.
Indeed, these aspects show that while informed rhetorically by environmental
economics, these practices are also fundamentally about the attempt by dominant actors
to legitimize their power. Opposition to carbon markets, for example, is widespread,
as commodification of the atmosphere is seen as unjust and exploitative or simply
ineffective (Paterson 2009; Lohmann 2006; Bachram 2004). The World Bank or TNCs
are often simply reacting to protest about the damaging socio-ecological effects of their
actions rather than proactively pursuing a sustainability agenda.
Furthermore, while environmental economics is rhetorically dominant, the responses
of many actors reflect a realization of the limits of that approach and the need to think
more systemically, in ways more consistent with an ecological economics approach. At
national levels, most states now have environmental ministries and a range of basic
environmental regulations covering air, water and land quality. Many have much more
ambitious ‘sustainability strategies’. Even in relation to the hard case of climate change,
many actors have started to engage in large-scale planning for a ‘decarbonization’ of
the economy.
But at the same time, thinking ecologically about these processes highlights the many
remaining tensions between political–economic imperatives and the search for
sustainability. In a number of areas, actors are still engaged in a very traditional scramble
for resources, now reframed as a question of ‘environmental security’ (Dalby 2002).
The paradigm is perhaps the renewed search for novel sources of oil, whatever their
ecological repercussions, as can be seen in the political attention to stability in the Gulf
region, or the discussions of peak oil, the Canadian tar sands, or the scramble for
Arctic oil. In these cases, both states and corporations are acting in ways that demonstrate
that the world has not yet internalized the lessons of ecological economics, while at
the same time it demonstrates the relevance of that approach.
While perhaps not quite as politicized, other sectors show similar dynamics. World
food supplies, expanded rapidly by various Green Revolution innovations in fertilizer,
crop breeding and more recently genetic engineering, have once again become a
matter of concern. Agricultural lands are now being bought internationally in tropical
regions in particular, as China and other states seek to ensure supplies of food in the
global marketplace. This in turn has rekindled debate about the role of international
trade in essential foodstuffs and poses the question of the importance of controls on
who decides what is produced and where. If crops are grown for commercial activities,
and as a source for bio-fuels such as ethanol, while food is short elsewhere, questions
of economic and ecological justice become very pressing indeed.
Conclusion
From all this it becomes clear that the central processes in GPE are now intimately
tied to questions of environmental change. Today (2012) there exists a panoply of
diverse issues – such as the new geopolitics of resources in the Arctic emerging because
of climate change; fluctuating food prices and related political crises in the Middle East
and elsewhere caused in part by fuel price rises and the shift in crop production in
favour of growing bio-fuels; the extraordinary growth of financial markets in trading
carbon emissions as a climate-change response strategy; and the economic strategies
of states trying to find niches to take advantage of new supposedly environmentally
friendly products such as solar panels and wind turbines – all of which demonstrate
that the environment is integral to contemporary capitalism.
This all also connects to the practical daily life of contemporary consumers, whose
purchasing decisions are shaped by marketing strategies that draw on narratives of
environmental virtue and link them to the cultural production of numerous ideological
preferences. Environmental citizenship is now connected to discourses of personal
morality and simultaneously to invocations of the responsibility to act in ways that
prepare the neo-liberal subject to deal with life’s contingencies. This individualization
is a direct consequence of the dominance of environmental over ecological economics,
as the economy is conceptualized as the aggregation of individual decisions rather than
systemic flows.
An ecological political economy thus also raises key normative questions about the
trajectory of the global economy. Is it possible to rethink economics in ways that shift
the emphasis from growth to matters of sufficiency and justice, as eco-feminists have
been suggesting (Salleh 2009)? If growth and sustainability are in contradiction, then
from an ecological political economy point of view, capitalism is called into question,
but in a different way to previous critiques. No longer are we facing a crisis of
underconsumption, but rather one of overconsumption. Climate change is a product
of too much petroleum rather than too little. Who gains and who suffers in these new
circumstances is a key political question of justice. Whether the distantiation that has
shaped ecological political economy as cheap fuel facilitated the great acceleration of
the last couple of generations can be overcome; and whether a Fair Future (Sachs and
Santarius 2007) will emerge from the technological transformations currently in motion
are also key concerns for global politics in the coming decades.
Precisely because it has become clear that the global economic–ecological system is
changing in rapidly and largely unpredictable ways now, the discourses of sustainable
development are being nuanced by new innovations from ecological sciences. Fears of
what the ecological future holds have generated imperatives to construct resilient
economies and citizens in the face of coming disruptions. This notion of ‘resilience’
both emphasizes the flexibility of market systems and reinforces the ideological power
of neo-liberalism’s offloading of responsibility onto individuals who have now to be
ready to adapt to new opportunities that may arise from catastrophic disruptions
(Gunderson and Holling 2002). This takes us back to the basic point that an ecological
political economy has to be understood materially, as a set of throughputs of materials
that engender a range of environmental degradations and their political contestations,
but which, through the temporary resolution of these in turn, present the new material
circumstances for the next round of production to take place.
The material basis of political economy in the new artificial circumstances of the
Anthropocene era matters greatly. The crucial point for global political economy is to
recognize that the ecological transformations that capitalism has set in motion are
changing humanity’s material circumstances. The technological transformations and
the massive changes brought directly and – as climate change accelerates – indirectly,
mean that we are quite literally making the future. How decisions are made about
what is produced (and by what processes) is determining the future configuration of
the biosphere and hence the material conditions for future human endeavours. Ecological
matters are not an externality, or a marginal consideration for political economy; they
are the context in which all the other matters of power, labour, authority, states, justice
and economy function.
Notes
1 There are other ways that these ideas might be divided up, for different purposes. Castree (2001)
divides them into broad ontologies regarding society–nature relations: technocratic, eco-centric
or social. Clapp and Dauvergne (2005) distinguish between four ideologies of political economy:
market liberal, institutionalist, social green, and bio-environmentalist. There are overlaps between
these categorizations and ours. We adopt the typology here because it is rooted in the explicit
divides within the discipline of economics.
2 As will be obvious, the distinction between environmental and ecological is not a totally clear
one. Broadly, we use the former here to mean those approaches that separate humans from
‘nature’, while ecological implies that humans are irrevocably part of the natural world and
focuses on the interconnections between all sorts of organisms that make up an ecosystem. But
the terms are sometimes nevertheless used interchangeably.
3 After the financial crisis of 2008, these themes have been revived as a ‘green new deal’ (New
Economics Foundation n.d.).
17 The rise of China and the
future of the international
political economy
Mark Beeson
Napoleon Bonaparte famously said, ‘let China sleep, for when she wakes, she will shake
the world’. Whatever your preferred metaphor, it is fair to say that China is at the
centre of world affairs in precisely the way Napoleon predicted. However, he was
wrong in one crucial respect: this is not so much a belated awakening as a re-emergence.
For most of recorded human history, it was China not the West that was at the forefront
of political, economic and technological development; Europe remained a feudal
backwater, while the Americas waited to be ‘discovered’ or developed. What we are
witnessing, therefore, is China reassuming its position as the dominant force in regional
affairs and as a major actor on the global stage. It remains to be seen whether China’s
remarkable redevelopment will be accompanied by the dangers and tensions that
Napoleon and many contemporary observers have feared (Mearsheimer 2001), but
some believe it is only a question of time before China’s growing economic weight
gives it a concomitant political and strategic presence that allows it to ‘rule the world’
(Jacques 2009).
One of the principal intentions of this chapter is to provide a sketch of China’s
economic development and its growing integration with the rest of the global economy.
However, if we want to understand the significance and implications of China’s
astounding, historically unprecedented recent economic development, we need to place
it in historical context and pay attention to the political – even the geopolitical –
circumstances in which it occurred. This is always a useful exercise in my view, but it
is essential in China’s case as its contemporary leaders take history seriously and want
to ensure that China regains what they see as its rightful place at the centre of world
affairs following the traumas of the nineteenth and twentieth centuries (Deng 2008).
An historically informed analysis also helps us to understand the forces that can encourage
or constrain development, as well as the historical legacies such processes can impart.
Consequently, the first part of the chapter is taken up with a very brief snapshot of
some of the more significant aspects of Chinese economic (and political) history, before
I consider how modern China’s economic development is transforming both China
itself and the wider world in which it is an increasingly consequential part.
China’s ‘opening’ in historical context

Until as recently as the middle of the nineteenth century – and from the perspective
of Chinese history, this is recently – China was the biggest economy in the world
(Maddison 2007). True, the sort of global interaction we take for granted in 2012 may
The rise of China 233
not have existed, but China has dominated what we now think of as East Asia for
hundreds of years and established complex trading relations with its neighbours as far
back as the T’ang (AD 618–907) and Sung (AD 960–1279) dynasties (Kang 2010).
China’s dominance was reflected in the ‘tribute system’ in which neighbours
acknowledged the superiority of Chinese culture and its place at the top of a remarkably
stable regional hierarchy of power. Some scholars argue that even a thousand years
ago, China’s significance extended far beyond East Asia and actually provided the
critical spur for the beginning of a process we might now describe as ‘globalization’
(Modelski and Thompson 1996).
The idea that China may actually have been at the centre of the world’s economic
development rather than its periphery for most of history is a relatively new one. It is
one that stands in marked contrast with the Eurocentric viewpoint that has dominated
our collective thinking about historical economic development (Blaut 1993). Revisionist
scholars like Andre Gunder Frank (1998: 277) dismiss the idea that the Europeans
invented capitalism and argue that the rise of the West came about because of the
exploitation of the Americas through which ‘Europeans bought themselves a seat, and
then even a whole railway car, on the Asian train’. But whatever the merits of this
argument, the historical reality is that the country that arguably pioneered proto-
capitalism and crucial technological innovations such as paper money, gunpowder,
printing and navigation became caught in what some have described as an ‘equilibrium
trap’ (Elvin 1973), and on the wrong side of the ‘great divergence’ that saw European
economies take off and leave China behind (Pomeranz 2000).
Comparative economic decline when combined with political crisis inaugurated
China’s ‘century of shame’, and the once hegemonic Middle Kingdom found itself
humbled first by the Europeans and then by the Japanese. The resulting civil war and
chaos was only brought to an end by the communist revolution and China’s isolation
from a global economy that was dominated by its principal ideological opponent – the
United States – in the period following the Second World War. It is important to bear
in mind that China did not benefit in the same way as its capitalist neighbours from
American aid and the general recovery of the global economy (Stubbs 2005). Although
industrialization and economic development did occur under Soviet tutelage (White
1993), episodes like the Maoist-inspired ‘great leap forward’ were largely unsuccessful
and – we now know – accompanied by untold suffering on the part of the rural poor
in particular (Dikotter 2010). It was not until Mao had gone and a rehabilitated Deng
Xiaoping took over the leadership of the Chinese Communist Party (CCP) that the
preconditions for China’s astounding recent development were established.
Given the world-shaking, game-changing nature of China’s economic renaissance,
Deng may turn out to be the most significant person of the twentieth century. After
all, millions of people have been lifted out of grinding poverty, a reality that was marked
in 2010 when China overtook Japan as the world’s second biggest economy measured
in market prices. China is on track to become the biggest economy in the world in
the 2020s or 2030s and has already eclipsed the US as the largest source of manufacturing
output, accounting for around 20 per cent of the world’s total – leading some Asian
commentators to suggest that China has much to teach the West about successful
economic development (Mahbubani 2011). Be that as it may, a more tangible
consequence of China’s economic expansion and the growth of its exports has been
to exert downward pressure on inflation throughout the world. This benign effect may
be ending, however, as rising inflation, food insecurity and even labour shortages drive
234 Mark Beeson
up China’s domestic costs (Barboza 2011). The increasingly global impact of China’s
economy is a reminder of just how far the country has come in less than 40 years.
It is important to remember that when Deng began the process of opening up the
Chinese economy as recently as the late 1970s, China was still a poor, peripheral
economy known primarily for its export of revolutionary ideology rather than
sophisticated manufactured goods. The subsequent transformation is one of the wonders
of the world and – for all its problems – largely a cause for celebration. The desire to
end poverty is, after all, one of the platitudes espoused but not always realized by the
‘international community’ and its developmentally oriented institutions like the World
Bank. One of the reasons that China’s rise is so significant is that it represents an
alternative to the neo-liberal ‘Washington Consensus’ of market-driven development
in which the state ‘gets out of the way’ of the private sector (Zhao 2010).
But before we consider whether China has any potential as a role model for other
states keen to replicate its success, it is important to spell out how China’s political
elites have overseen the country’s remarkable economic expansion, all the while
maintaining the polite fiction that it remains a ‘communist’ country. It is worth
emphasizing what an important political achievement this remains: when Deng oversaw
the first tentative steps towards economic liberalization and integration with an
international economy that remained dominated by capitalist powers, there were many
in China who doubted its wisdom: what for some was admirable ‘pragmatism’ on
Deng’s part was seen by others as a betrayal of the socialist values that had defined
the country since its reunification under Mao. Nor is this simply an historical curiosity.
Prominent members of a new generation of Party officials are currently seeking to
revive some socialist principles as China’s political elites seek to justify their role and
unite the Party (Hille and Anderlini 2011).
The circumstances confronting China’s Party leaders in the late 1970s were very
different, however, and the imperative to address declining economic productivity,
especially in the countryside, was overwhelming. The decollectivization and
marketization of the agricultural sector brought dramatic improvements in output,
making China self-sufficient by the early 1980s – no small achievement for a country
whose history was periodically punctuated by apocalyptic famines.
Simultaneously, township and village enterprises (TVEs) began to spring up as
capital accumulated and labour was freed up, allowing TVEs to play what Naughton
(2007: 270) describes as ‘the catalytic role in transforming the Chinese economy from
a command economy to a market economy’. Emboldened by the success of the rural
reform programme, key policy makers like premier Zhao Ziyang began to turn their
attention to reforming, liberalizing and eventually privatizing parts of the economy
and the command-era institutions within which they were embedded.
The trick for China’s policy makers was to facilitate economic reforms that would
galvanize the economy without undermining the role of the CCP or its place in planning
China’s overall development. Given the stakes involved in the economic changes and
nervousness about their impact and success, it is hardly surprising that initial efforts
to open up were confined to the sort of special economic zones (SEZs) that had been
successfully developed elsewhere in Asia, which remained relatively unconnected to
the rest of the country. Despite the success of SEZs like Shenzhen, which was transformed
from a sleepy fishing village to become the fastest growing city in China and a major
manufacturing centre with a population of some 14 million in the space of 40 years,
the impact of wrenching economic change was not welcomed by all in China.
Conservative opposition to the reform and liberalization process was not decisively
defeated until 1992 and Deng’s celebrated tour of Southern China. Although Deng
had officially retired, he still commanded sufficient respect in the Party and among
the people to push for the continued development of a ‘socialist market economy’
(Breslin 2007).
Even though the reform movement was in the ascendancy by the 1990s, there were
still major structural and ideological challenges confronting the CCP ruling elite which
was notionally supposed to be acting as the vanguard of the proletariat. Many of China’s
workers were employed in state-owned enterprises (SOEs) that were often bywords for
inefficiency and incapable of competing in the global market to which they were
increasingly exposed (Yusuf et al. 2006). Even as late as the mid-1990s, something like
70 per cent of China’s workers were employed by SOEs (Naughton 2007: 106).
Privatization was bound to have far more than symbolic importance as millions faced
the prospect of losing hitherto secure employment. Nevertheless, the SOE share of
national output declined from 77 per cent in 1978 at the time of China’s initial opening,
to less than 50 per cent by 1998 (Li and Putterman 2008). But despite this decline,
and recent figures that suggest that the state’s share of industrial output had further
fallen to 27 per cent by 2009, this disguises a more important reality that in some ways
defines the contemporary Chinese state and the distinctive form of capitalism it has
overseen. As James Miles points out:
[T]he government has been muscling in on business in a variety of ways. It has

been tightening its grip on some industries it considers ‘strategic’, from oil and
coal to telecommunications and transport equipment. It has been devising market-
access rules that favour state firms. And to the chagrin of private businesses, it has
allowed state companies to remain active in a surprising range of palpably non-
strategic sectors, from textiles and papermaking to catering.
(Miles 2011: 14)
For all its apparent embrace of the market, the reality is that China’s ruling elites
and its population more generally are continuing to do so in distinctive ways that are
at odds with the Western experience and expectations. This is nowhere clearer that in
the role of the state and its symbiotic relationship with business.
China’s state capitalism

Across East Asia the story of the region’s ‘miraculous’ post-war development has been
one in which the state has played a central role. While the idea that the state might
be important in a notionally ‘communist’ country like China may come as no surprise,
it merits emphasis, nonetheless, because the entire East Asian experience is so noticeably
at odds with Western expectations – or the version of Western history promoted by
influential actors and agencies promoting neo-liberal reform, at least. For as Ha-joon
Chang (2002) has pointed out, the historical reality is that all successful industrializing
and developing countries have done so with state assistance. What distinguishes China
is that the state’s role remains an unambiguous empirical reality that China’s political
elites have done little to disguise.
When the 15th Party Congress in 1997 endorsed a policy of ‘grasping the large and
letting go of the small’, it captured the underlying attitude of the Party towards the
236 Mark Beeson
market (Lau 1999). Strategically important elements of the SOEs would continue to
be controlled by the state, while less significant enterprises would be hived off to the
private sector. In other words, despite the apparent penetration of market forces and
principles in China, the reality has been rather different. However, while ‘the state’
remains important in China, it is a less coherent and clearly demarcated entity than
that phrase might suggest. Unlike Japan, which – in its heyday during the 1950s to
the 1970s, at least – had a powerful, competent and generally effective state capacity,
the state in China is a good deal more fragmented and its capacity to implement the
sort of industry policies that underpinned Japan’s economic renaissance is generally
less developed (Moore 2002).
While the structures of economic governance and the centres of political power in
China are a good deal more opaque than in the West, or much of the East Asian
region for that matter, it is plain that China’s state has some distinctive characteristics
and its elites face some unique challenges. The sheer size of China geographically, to
say nothing of the demographic and developmental challenges it has had to deal with,
present enormous problems for any central administration, but they are made more
difficult by internal political competition. China’s complex governance structures have
been variously described as ‘fragmented authoritarianism’ (Lieberthal 1992),
‘polymorphous’ (Howell 2006), and a ‘negotiated’ state (Saich 2000); but whatever label
is attached, it remains one where power is contested and subject to contradictory
centralizing and decentralizing pressures. Given all of the challenges that confront
China’s governing elites, the surprise is, perhaps, that things work as well as they do.
Significantly, China’s central government enjoys high levels of popular support (Kennedy
2009).
Perhaps the most striking and consequential paradox of contemporary China is that
while much of the economy has been modernized and transformed, the state and the
role of the CCP within it remain largely unreformed. McGregor (2010: 26) argues that
‘the Party’s genius has been its leaders’ ability in the last three decades to maintain
the political institutions and authoritarian powers of old-style communism, while
dumping the ideological straightjacket that inspired them.’ Despite some signs of a
renewed interest in socialist rhetoric (if not practice) in China (Holbig and Gilley 2010),
the principal preoccupation of policy makers and the population more generally remains
economic development. The remarkable success of this endeavour means that there is
far more wealth to be distributed, and corruption and predation have become
increasingly serious problems even as political power is decentralized (Mertha 2005).
Corruption not only undermines the efficiency of governmental processes, but the state
itself becomes a vehicle for rent-seeking and patronage (Ding 2000).
As a result, some observers think that the Chinese state is becoming increasingly
bloated, corrupt, predatory and –most worryingly, perhaps –inefficient (Pei 2006: 169).
Whatever the merits of this view, it is fair to say that – other than a widespread concern
about corruption (Pei 2006) – the state is coming under surprisingly little pressure for
political reform from China’s rising capitalist class. On the contrary, one of the other
noteworthy features of the Chinese developmental experience, which is also at variance
with the West’s, is that indigenous economic actors are generally happy to co-operate
closely with a state that provides social stability and the freedom to make money. As
Tsai (2007: 4) puts it, ‘China’s capitalists are pragmatic and creative but they are not
budding democrats.’ However, it is also important to recognize that the extent of
genuine indigenous private sector activity is still comparatively limited. Huang (2008:
18) suggests that ‘to the extent that the Chinese economy is capitalistic, it is based on
foreign capital, not on indigenous private capital’, something that helps to explain
China’s particular role in regional and global production structures, as we shall see.
The role of the state consequently remains pivotal and this manifests itself in important
and revealing ways. Significantly, as Shih (2008: 14) points out in his detailed study of
China’s financial sector, ‘the state continues to have the same enormous leverage over
the distribution of capital that it had in 1978’. The embrace of the market has been
qualified, and China’s growing economic resources have become a vital element of
internal factional politics and struggles for ascendancy within the governing elite. As
Shih makes clear, despite the fact that China has a growing cadre of skilled technocrats
within economic ministries, policy is frequently hostage to political decisions. This
could be a potential problem at any time, but when three of the world’s ten largest
banks are now Chinese, and when there are growing concerns about non-performing
loans and non-transparent lending practices, then the impact of any domestic banking
problems may become an international issue (Barboza 2010). The close control that
continues to be exercised by the CCP over the largest banks in China explains both
the nature of many lending practices within China and growing concern about the
implications of ‘state capitalism’ on the part of some of China’s trade and investment
partners (Bremmner 2009).
While the idea of a ‘China Inc.’ that this suggests does not accurately reflect the
complex internal architecture and factionalism within the Chinese state, the primacy
of political calculations does explain the continuing support of SOEs by Chinese banks.
A broader set of geopolitical calculations also inform the strategic nature of the foreign
investments that have been undertaken as part of the ‘going out’ policy that China
initiated in 1999. Many foreign governments have become concerned about the
investment policies of China’s recently established sovereign wealth funds, but Shih
(2009) argues that long-term strategy may be less important than short-term factional
politics in deciding investment strategies. In any case, the initial losses incurred by the
China Investment Corporation in 2007 and 2008 suggest that the utilization of China’s
enormous reserves will not be without risk (Anderlini 2009). Be that as it may, the
sheer scale of China’s reserves and a growing preoccupation with securing long-term
access to critical resource and energy supplies mean that its investment decisions will
inevitably have significant impacts around the world (Tudor 2011). For a country such
as Australia, which has strong strategic ties with the United States, the idea that its
major trading partner is a ‘communist’ country that may operate by very different
rules and rationales raises difficult questions of public policy (Wilson 2011). It is
emblematic of a more general challenge that faces other countries as they try to adjust
to China’s economic impact.
China’s economic impact

Even though China’s history demonstrates how tightly economic and political processes
are intertwined and the necessity of considering them as mutually constitutive, for
heuristic purposes it is convenient to distinguish between them when thinking about
China’s global and regional roles. Doing so also highlights the differing conceptual
frameworks that tend to obtain in International Relations, (where relatively unproblem-
atic notions of ‘China’ and the unitary state still prevail), and international political
economy, where scholars are sensitive to the perils of the ‘territorial trap’ (Agnew 1994),
238 Mark Beeson
and the potential disjunctures between political and economic space (Cameron and
Palan 1999). The potential importance of such analytical sensitivities is especially evident
when we think of ‘China’s’ economic integration with the rest of the world.
One of the most important illustrations of the potentially limited purchase of the
idea of ‘China’ as a discrete economic entity can be seen in the emergence of ‘greater
China’, or the intensification of economic links between mainland China, Hong Kong
and Taiwan. Hong Kong has played a ‘pivotal’ role in the mainland’s opening up and
engagement with the world (Sung 2005: 2), and it is no coincidence that recent economic
development on the mainland occurred along the coastline adjacent to the island
entrepôt. It is also worth noting in passing that, just as admirers of liberal interdependence
theory might expect (Keohane and Nye 1977), the often fractious, strategically fraught
relations between China and Taiwan (which the People’s Republic of China [PRC]
still regards as a renegade province) have steadily improved as their economic ties have
become more important to both countries. Indeed, some in Taiwan fear that China
is becoming too important, given Taiwan’s US$90 billion investments and 800,000
nationals on the mainland and the possible political leverage this confers (The Economist
2011b).
The PRC’s relationship with Taiwan also illustrates other important aspects of China’s
rise. First, many observers have drawn attention to the distinctive characteristics of
‘Chinese capitalism’ and the diaspora of some 250 million ethnic Chinese who live
outside China in other parts of East Asia (Cheung 2012). However, while there is no
doubt that people of Chinese heritage have assumed a disproportionately prominent
role in business activity in Southeast Asia in particular (Studwell 2007), this has not
necessarily been to the benefit of the mainland. On the contrary, China’s diplomats
have had to work hard to overcome the reputation the country acquired as a destabilizing
anti-capitalist force during the Cold War – something that explains the assiduous
application of its ‘charm offensive’ in the region (Kurlantzick 2007).
The second feature of China–Taiwan ties that has wider resonance is the importance
of foreign direct investment (FDI). The conventional wisdom has it that ‘in the modern
history of economic development, no other country has ever benefitted, and continues
to benefit, from FDI as much as China’ (Xing 2010: 309). While there is clearly
something in this – unlike Japan in its high growth period, ‘China’ has been open to,
and benefited from, FDI – the picture is more complex than Xing’s broad-brush
characterization implies. For a start, no one really knows with any certainty just how
much FDI China actually receives, partly due to the fact that indigenous capital is re-
routed through Hong Kong, the British Virgin Islands and the Cayman Islands to take
advantage of investment incentives or to disguise illegal capital flight (Breslin 2007:
110–12). More importantly, perhaps, by some estimations, FDI has only contributed
about 5 per cent to overall capital formation in China (Bergsten et al. 2006: 21). In
other words, China’s formidable domestic savings have financed the overwhelming
majority of internal investment. Yet even before the global financial crisis of 2008
caused China’s policy makers to initiate a massive programme of domestic spending
and development, concerns were raised about a possible ‘over-accumulation’ crisis in
China, where a lack of domestic demand and investment opportunities meant that
China became ever more reliant on foreign markets (Hung 2008).
China’s trade surpluses have been the most visible signs of this external orientation
and a constant source of friction with the US. But even here, the situation is rather
more complicated than some of the overheated rhetoric about the ‘China threat’ might
suggest. In reality, ‘the US’ is one of the biggest investors in China and some 60 per
cent of ‘Chinese’ exports to the US are actually produced by foreign- owned firms,
undermining the credibility of simplistic sloganeering about the trade deficit (Hughes
2005: 94). In reality, American consumers have arguably been some of the biggest
beneficiaries of Sino–American trade ties as China’s cheap labour drives down prices
and raises living standards. The impact on ‘China’ is more complex than it seems at
first glance, too. Certainly foreign investment has played an important role in the
modernization of the economy, but it has not been the unalloyed benefit some claim
(Lei 2007). On the one hand, FDI has tended to concentrate on China’s more accessible
coastal regions, exacerbating growing, politically problematic, economic inequality. On
the other hand, the value added that actually occurs within China has generally been
‘extraordinarily low’ (Breslin 2005: 743).
Despite China’s reputation as an all-powerful economic behemoth, some of the more
productive and valuable parts of the economy are actually embedded in global
production networks controlled by foreign-owned multinational corporations that are
driven by a global logic (Moore 2002). This means that China largely ‘acts as the
world’s factory, assembling imported intermediate goods for re-export to the rest of
the world’ (Kim et al. 2011: 34). Consequently, China has suffered from some of the
same problems as a number of other developing economies in the region, with limited
industrial upgrading and technology transfer in the economy as a whole (Lemoine and
Unal-Kesenci 2004). However, the picture is starting to change as China’s own ‘national
champions’, such as Huawei, emerge in manufacturing, and cashed-up resource
companies like Chinalco and China National Offshore Oil Corporation (CNOOC)
make the sorts of strategic investment that cause concern amongst foreign governments
and corporate rivals. The complex, multidimensional and uneven nature of China’s
economic development makes it difficult to generalize, but what we can say with
confidence is that the sheer scale of China’s economic development has given it the
weight to move markets and make it an increasingly significant player in shaping global
economic and political outcomes.
China’s political impact

One consequence of China’s historically unprecedented growth has been its changing
relationship with its immediate region and with the rest of the world. In East Asia,
China has rapidly become the most important trade partner for all its neighbours and
this is influencing the tenor of bilateral relations (Das 2009). Even long-time rivals and
former enemies such as Japan are being forced to come to terms with China because
of its sheer economic weight. As for China, the region offers an important testing
ground for its new global role. However, translating economic weight into political
influence has not been straightforward even in its immediate neighbourhood, and there
are many different views within China about what its foreign policy should look like
as a result (Beeson and Li 2012). Although Chinese policy makers have attempted to
use their economic leverage and the prospect of favourable trade deals to win over
neighbours (Ravenhill and Yang 2009), these efforts have been undermined by their
increasingly assertive territorial claims in the South China Sea region (Alford 2011).
Managing China’s foreign relations is proving even more challenging in the international
arena where the stakes are even higher and the issues even more complex. Indeed, the
immediate consequences of China’s rise cannot be separated from the wider, historically
240 Mark Beeson
determined geopolitical and strategic context in which they are embedded. For many
observers – especially in the US – the primary impacts of China’s rise are strategic, as
they assume that its growing economic and strategic weight will inevitably destabilize
the extant international order as China seeks to challenge a US in decline (Mearsheimer
2001). This is why the change in the relative economic standing of the US and China
assumes such importance for many American strategic analysts: without the ability to
underwrite its own grand strategy and military posture, the US will find China increasingly
difficult to contain. Even for those who doubt the inevitability of any hegemonic transition
or conflict (Beeson 2009), there is no doubt that the current relationship between a rising
China and an apparently declining US is fraught with tensions and contradictions that
make the consequences of China’s rise particularly portentous.
From an IPE perspective, the central source of tension is that the US increasingly
relies on China to pay its bills. Paradoxically, China’s enormous trade surpluses with
the US, and the dollars accumulated by China’s ‘manipulation’ of the value of the
yuan, ultimately help to fund US government expenditure. China’s massive infrastructure
spending notwithstanding, there are limits to the amount of investment that can be
absorbed within China itself, and authorities are obliged to recycle surpluses back to
the US. As a result, China now holds nearly half of all US treasury bills, and about
65 per cent of China’s US$2.5 trillion of reserves are in dollar-denominated assets
(Eichengreen 2011: 135). What former US Treasury Secretary Larry Summers (2006)
has aptly described as the ‘balance of financial terror’ means that, while both sides
derive significant benefits from the relationship, they are also hostage to the actions of
the other with potentially catastrophic consequences. In the event of a budget default
in the US or American policy makers deciding to inflate away their external obligations,
for example, China’s extant investments would take an enormous hit. Likewise, should
the Chinese indicate that they are losing confidence in the dollar and in American
debt, this could precipitate a major crisis in the US in particular and the international
system more generally.
Given its stake in the hitherto US-dominated system, China’s leaders are predictably
seeking to ensure that their interests are not damaged by the way the system operates.
However, there appear to be limits to what Chinese policy makers can do, despite the
concerns of some American observers who fret that China could use its economic
power to pressure the US over issues such as Taiwan’s continuing independence (Altman
and Hass 2010: 30). Daniel Drezner’s (2009) detailed analysis of China’s economic
statecraft suggests that despite China’s economic importance, its political leverage over
the US on a bilateral basis remains limited and not capable of significantly influencing
US policy. The limits of Chinese influence were revealed once again as its diplomats
were reduced to pleading with the US to act responsibly and protect the value of
China’s investments during the United States’ recent budget crisis (Wassener and
Saltmarsh 2011). One of the paradoxes of the United States’ economic position is that
the scale of its indebtedness is so enormous, and the importance of its debt markets is
so pivotal, that it enjoys a structural leverage over other participants in the international
political economy (Seabrooke 2001). From a Chinese perspective, the great worry is
that the US will do what it has done before, privileging domestic concerns over its
presumed role as a system stabilizer and acting unilaterally to protect its own position
(Beeson and Broome 2010).
A striking feature of China’s response to its new ambivalent position as an increasingly
consequential economic power – but one that is still vulnerable to the actions of the
US in particular – is to use international institutions and diplomacy to bolster its
position. For a state that was until recently an outlier in the international system, this
is a remarkable turn of events. The great hope of many in the West was that China’s
incorporation into an international order dominated by the US would ‘socialize’ it into
good behaviour. At one level it has: not only have the Chinese elites become accustomed
to operating in international fora and playing by the existing rules, but this has clearly
been a major historical shift in China’s relationship with the world (Johnston 2008).
In other words, the demise of the PRC as a major ideological challenger to the West
and its incorporation into a world order designed – and still largely dominated by –
the US can be seen as a ‘victory’ of long-term historical significance.
And yet while China’s accession to the World Trade Organization (WTO) may have
occurred on terms that were determined by the US, the long-term consequences have
been less predictable. Accession to the WTO has allowed Chinese political elites to
overcome domestic opposition to market-oriented reform, accelerating the process of
economic integration with the wider international economy (Bell and Feng 2007). The
spectacular growth of China’s trade suggests this has been a highly productive move
and one that has ironically undermined US dominance. Equally importantly, Schweller
and Pu (2011: 54) argue that ‘when China makes concessions to join a major international
institution such as the World Trade Organization (WTO), it seeks not short-term
economic gains but a seat at the bargaining table to influence the rules of the game.’
Nor is it only the WTO through which Chinese policy makers are increasingly attempting
to exercise long-term influence. In the G20, the International Monetary Fund (IMF)
and more regionally oriented institutions such as ASEAN plus Three (APT), China is
seeking to have its views heard and its ideas about economic governance taken seriously.
As Chin and Thakur point out, what makes China’s rise so significant, especially in
conjunction with the other ‘BRIC’ economies, is that
China (along with Brazil and India) does offer potential development lessons from
the last three decades for other states. All three countries are strong proponents
of purposive state intervention to guide market development and national corporate
growth, rather than relying on self-regulated market growth . . . The guiding logic
behind state intervention is protecting, as much as possible, sovereign national
development, or ‘economic sovereignty,’ even while seeking integration into the
world economy.
(Chin and Thakur 2010: 124)
Even without the relative decline of the US economy and the increasingly dysfunctional
nature of its domestic politics, the rise of new centres of economic power would have
presented major adjustment challenges for the international system generally and the
United States in particular. Not only has the US been at the epicentre of recent crises,
but its ability to respond to them compares unfavourably to that of China. Despite
concerns about China’s over-reliance on investment as a source of growth, the Chinese
government was able to react much more decisively to the financial crisis of 2008 than
its American counterpart (McKissack and Xu 2011). China not only had the money,
it had institutional mechanisms with which to enact policy rapidly and without political
opposition. As a result of China’s decisive actions, it maintained its own breakneck
growth, helped to stabilize the global economy, and reinforced its position as a crucial
actor in the international system.
242 Mark Beeson
China and the future of the international political
economy
The scale, rapidity and – thus far, at least – success of China’s recent development
have led some observers to claim that it represents a new model of economic and
political organization that is distinct from, and unencumbered by, the sort of difficult
governance reforms that were associated with the so-called ‘Washington Consensus’.
Although claims about the existence, never mind the impact, of a ‘Beijing Consensus’
are wildly overstated at times (Halper 2010; cf. Huang 2011), there is no doubt that
China’s recent history does represent an alternative developmental trajectory to that
of the West – or at least to the stylized account that has been propagated by much of
the economics profession and the institutional manifestations of what passes for global
economic governance. But whether this amounts to a paradigm shift in the way the
world works is less clear.
At one level, the Beijing Consensus is characterized primarily by pragmatism and
does not provide the sort of package that – whether they liked it or not – other developing
economies often found themselves being offered (or force fed) by the United States and
the international financial institutions it largely created (Hurrell 2005). Equally tellingly,
the Chinese government has been strikingly reluctant to promote the idea of a China
model and has avoided using the term Beijing Consensus (Suzuki 2009a). More
fundamentally, perhaps, while the Washington Consensus may have had many problems
of practical application and relevance, as an ideal type it was based on a presumed
positive sum logic that saw mutual gains for all. In short, it provided a developmental
vision and rationale that provided the ideological glue to hold together a US-dominated
geopolitical order. By contrast, many see the logic underpinning China’s developmental
model as zero sum and inherently antagonistic (Holslag 2011).
China’s ability to offer a grander vision or to play the role of system stabilizer that
– notionally, at least – the US has played until recently, is likely to be undermined by
domestic constraints as much as it is by other actors. True, the US is likely to resist
having its unipolar position undermined, but the desire to maintain domestic political
stability and continuing economic development in the face of growing economic
inequalities and implacable environmental problems is likely to exercise an even greater
influence on the thinking of Chinese policy makers. In other words, the domestic
priorities of the major powers are likely to shape external policy with potentially negative
consequences for our ability to resolve international collective action problems
(Bremmner and Roubini 2011). The great irony of China’s undoubted economic
achievements is that after overcoming earlier developmental traps, after largely re-
establishing itself at the centre of international affairs and recovering from its century
of humiliation, it may have little to offer other than further development at all costs.
Understandable as this may be in a country in which much of the population remains
poor, and where the legitimacy of the ruling elite is determined by little else, there is
a danger that one of the principal consequences of China’s rise will be self-absorbed
nationalism.
An historical perspective reminds us that nationalism and a Sino-centric world view
have always been powerful forces in China, and there is little reason to suppose that
things will be different in the future (Zhao 2004). In this regard, China is hardly any
different from the US or other great powers that have taken themselves seriously when
in the ascendant. What is different now, of course, is that the highly interdependent
nature of the international political economy and the transnational nature of problems
like climate change mean that states have little option other than to co-operate if some
of the more alarmist predictions of future world orders are to be avoided. The historical
record suggests that a strong China can be a force for stability rather than conflict.
We must hope that historical patterns repeat.
18 Globalizing globalization
A worldist intervention
L. H. M. Ling
Introduction
Globalization has transformed the world, but we still retain old concepts and methods
to understand it. Like realists in International Relations (IR), globalizers in International
Political Economy (IPE) recite Thucydides’ mantra about power and weakness, now
supplemented by wealth and poverty: ‘the strong [and wealthy] do what they can, the
weak [and poor] suffer what they must’. Postcolonial and feminist critics further reveal
the racial and gender undertones to this mantra. They show that the strong and
wealthy come in the form of the masculinized, Western ‘Self’; and the weak and poor,
the feminized, non-Western ‘Other’. And if the Other fails to comply to this colonial,
patriarchal order – or worse, an outright violation occurs – then its rules allow the Self
to discipline the Other. In 2012, bankrupt Greece and Italy, no less than occupied
Iraq and Afghanistan, provide current or recent examples. Many talk of ‘soft power’
(Nye 2004), ‘democratic peace’ (Gartzke 2007), and ‘liberal prosperity’ (Ikenberry and
Slaughter 2006) to soften the blow. But none can obscure the stark presumption that
the Self must dominate in world politics, if not the global economy, despite its desires
for and intimate dependencies on the Other (Marchand and Runyan 2010). No scarier
scenario can arise for the realist-globalizer, then, than to find the Self ‘losing’ to the
Other.
In their latest book, Thomas Friedman and Michael Mandelbaum (2011) voice such
a nightmare scenario for the US, especially with China as its latest competitor and
rival. They quote an impassioned plea from a letter posted to The New York Times as
emblematic of the times and their concern. The letter writer laments America’s decline
from fearless pioneerhood, one which ‘embrac[ed] challenges, endur[ed] privation,
throttl[ed] our fear and str[uck] out into the (unknown) wilderness [to] span the continent
with railroads, construct a national highway system, defeat monstrous dictators, cure
polio and land men on the moon’, now dilapidated into effeminate dotage, where ‘we
text and put on makeup as we drive, spend more on video games than books, forswear
exercise, demonize hunting, and are rapidly succumbing to obesity and diabetes’ (Eric
R., quoted in Friedman and Mandelbaum 2011: 6). The authors suggest a variety of
strategies to return to these glory days of action, thrust and growth. They fail to mention,
of course, all the murder, theft, enslavement and rape that made such muscular
adventures possible.
This approach to the world is unsustainable, not just morally, but also practically.
Realist-globalizers cannot handle the complexities and multiplicities generated by
globalization itself, despite undergirding it with hegemony (Ling 2005). It simply produces
Globalizing globalization: worldism 245
more of the same. Why should we not respond in kind, Others reason, given such
inequities? Some resort to global terrorism, but sentiments for retribution resound,
also, among ‘allies’.1 Even domestic populations within the West, like the Occupy Wall
Street movement (http://occupywallst.org/), are mobilizing against similar obstructions
to financial and economic fairness. Because realist-globalizers cannot address any of
these concerns analytically, they leave the world practically in constant conflict and
fear. In effect, realist-globalizers normalize world politics into a condition of inconsolable
hopelessness or ‘tragedy’ (Mearsheimer 2001), despite a seeming optimism for capitalism’s
capacity for ‘creative destruction’.
We need not despair, I argue, for the world has not always been so. Mixings have
made us historically more multicultural and multilingual than realist Self–Other
exclusions suggest. The Silk Road, for instance, not only exchanged goods and capital,
people and ideas, but it also hybridized whole religions and societies for 15 centuries
(Whitfield 1999; Devahuti 2002; Sen 2003; Tan and Geng 2005). Walter Mignolo
(2000) finds the ‘gnosis’ of thought and action, Self and Other, reflecting centuries of
border crossings that signify Latin America. Even what we know as ‘the West’, John
Hobson (2004) and Dipesh Chakrabarty (2000) remind us, results from cumulative
interactions with ‘the non-West’.
Access to these Other histories requires an intellectual journey. We must exit the
familiar sovereignty of realist-globalization and enter what seems like a strange world
of worlds informed by postcolonialism and feminism. These ‘multiple worlds’ of race,
gender, class and nationality are filtered through various traditions of who and what
we are (ontology), and why we relate to others the way we do (epistemology) (Ling
2002; Agathangelou and Ling 2009). Only by recognizing these ontologies and
epistemologies – and how they have mixed over time – could we make the transition
from realist-globalization to a more fluid, humane and sustainable approach to global
relations.
Literature aptly conveys such multiple worlds. Fictional storytelling offers a window
into multiple ways of thinking, doing and being without losing any of their complexity.
Literature also tries to make sense of all those elements that operate at the core of
world politics, but are often neglected or dismissed by social scientists: for example,
race and gender, class and ambition, love and war.2 Here, I draw on two literary
sources: Graham Greene’s The Quiet American ([1955] 2004) and Luo Guanzhong’s
Romance of the Three Kingdoms (Sanguo Yanyi) ([fourteenth century] 2005). The former
illustrates realist Self–Other relations in 1950s Vietnam; the latter, the multiple worlds
of third-century Chinese politics. This worldist comparison contextualizes realism by
identifying it as one of a vast array of possibilities for relations between selves and
others, even under conditions considered ‘realist’.
The critical reader might protest: these are not comparable, perhaps even
incommensurable! The Quiet American is a short novel written a mere half-century ago
and centres on three main characters; whereas, Romance of the Three Kingdoms dates back
seven centuries, consists of 95 chapters, and exhibits a cast of hundreds. Such disparity,
I would respond, demonstrates in kind the differences between realism and worldism.
Realism claims a lineage from the fifth century BC, when Thucydides wrote The History
of the Peloponnesian War, but its philosophy is as straightforward and spare as The Quiet
American. Likewise, worldism as an analytical project may be just a few years old, but
it refers to processes that have long been memorialized in histories outside the
Western/Westphalian canon, like those found in Romance of the Three Kingdoms.
246 L. H. M. Ling
Let us begin with worldism’s intellectual origins: postcolonialism and feminism. Each
contributes to two key aspects of worldism: voicing the subaltern and identifying an
alternative analytical platform.
Postcolonial and feminist insights
Subaltern politics
Postcolonial scholars emphasize the fact that not only can the subaltern speak (Spivak
1988), but s/he also thinks, acts and relates to the world in a variety of ways (Ashcroft
et al. 1995; Lewis and Mills 2003). Subalterns survive globalization today (2013) like
they did colonialism or imperialism yesterday; that is, with strategies of ‘simulacra’,
‘mimicry’, ‘hybridity’ and ‘border crossings’ on an intimate and daily basis, privately
and publicly, politically and economically (Chowdhry and Nair 2000). Subalterns
embody globalization’s ‘intimate Other’ (Chang and Ling 2000). They enable the ever-
present, hailed and (hyper)masculinized ventures of global capital and technology with
submerged, privatized, and (hyper)feminized labour and other resources. Note, for
example, the ‘maids’ and ‘madams’ of the global reproductive economy in IPE (Chin
1998; Agathangelou 2004), or the relationship between ‘area studies’ and ‘theory
building’ in IR (Agathangelou and Ling 2004; Chowdhry and Rai 2009). In recognizing
that civilizational encounters render no single people, culture or state wholly dominant
or wholly subjugated, postcolonial scholars blur the distinctions between ‘colonizer’
and ‘colonized’, ‘master’ and ‘servant’, ‘perpetrator’ and ‘victim’. But postcoloniality
also bears a catch; that is, even though race, gender, class and nationality shape the
postcolonial condition, these exclusionary conventions alone do not ‘make our world’
(Onuf 1989). That is, the colonial encounter ultimately engenders processes of change
that elude prediction and control (Ling 2011).
In this way, postcolonial studies re-centre Others and their contributions to this
world. For example, Bolivia’s first indigenous president, Evo Morales, presents the
Andean philosophy of ‘living well, not just better’ as an alternative to consumerist
(neo)liberal development (Gauding 2010).3 Jack Weatherford (2004) documents how
markers of modernity like paper money and management of a continental economy
actually pre-date Europe’s industrial revolution; in fact, these trace back to the so-
called ‘barbaric’ rule of the Mongol Empire. Similarly, Amitav Acharya (2011: 628)
observes that ‘a long history of commerce and flow of ideas’ prevailed in Southeast
Asia and the Indian Ocean ‘without unity by conquest’, offering a rich resource for
IR theorizing.
Yet postcolonial scholarship remains, paradoxically, captive to its own critique. Claims
of otherness and difference notwithstanding (Inayatullah and Blaney 2004), postcolonial
scholarship rarely indicates what will take place after ‘decolonising’ (Jones 2006),
‘decentering’ (Nayak and Selbin 2010), and/or ‘provincialising’ (Chakrabarty 2000)
the status quo, especially after excavating layers of colonialism and imperialism accreted
in the postcolonial soul (Nandy 1988). Roland Bleiker (1997, 2009) urges us to ‘forget’
IR theory altogether, so we can embark freshly, perhaps with a ‘linguistic’ or ‘aesthetic’
turn. Though this is helpful, we still need a vision, an understanding, or a state of
being to treat the subaltern’s historical ailment: ‘postcolonial anxiety’ (Krishna 2008).
Distinct from, though linked to, the nightmare scenario of realist-globalizers (like
America’s decline), postcolonial anxiety internalizes the colonizer’s indoctrination that
the Other is never ‘good enough’. The native, as Frantz Fanon (1965) once wrote,
always crouches in angry, unquenchable envy at the settler’s possessions: his house, his
food, his bed, and the wife in the bed.
Postcolonial-feminism intervenes critically at this juncture. Focusing on globalization’s
structural intimacies, postcolonial-feminists show the stitching together of race, gender,
class and nationality in the colonial experience and its impact on current socio-economic
and political conditions (Kempadoo 2005; Banerjee 2006; D’Costa and Lee-Koo 2009;
Marchand and Runyan 2010). Postcolonial-feminists also highlight Eurocentrism as a
process of knowledge production and consumption, especially its perpetuation of
boundaries, binaries and categories in methods and methodologies. Evidence abounds
in first-world ‘development’ for third-world ‘deficiencies’; systematic omission or
devaluation of pre-colonial histories; and prevailing methods of social control –
administrative, discursive, epistemological and ontological.
As a research platform, postcolonialfeminism offers eight analytical guidelines
(Chowdhry and Ling 2010). Together, these aim to access Other worlds in relation to
the hegemonic Self, and not as mere reflection or appendage or mimic. These eight
guidelines comprise:
• Intersectionality, representation and power: ‘not all is what it seems’;

• Materiality: ‘what produces the body and all its senses?’;
• Relationality: ‘who benefits from what, for whom, and at whose cost?’;
• Multiplicity: ‘I am master and slave, colonizer and colonized’, ‘masculine and
feminine’;
• Intersubjectivity: ‘you are in me and I in you’;
• Contrapuntality: ‘core and periphery together produce colonial power’;
• Complicity: ‘no one is innocent’; and
• Resistance/accountability: ‘we are all responsible’.
These guidelines help to reframe our world politics. In integrating intimate constructs
like colonizing (hyper)masculinities with colonized (hyper)femininities, postcolonial-
feminism takes us beyond familiar divisions based on Self versus Other. Instead, we
appreciate how Self and Other are co-constituted and stitched together in their histories,
structures, and practices, even discourses and ideologies, especially among diverse
patriarchies that collude over time and across space (Nandy 1988). Colonial power
relations may hide the dependence of ‘centre’ on ‘periphery’, but never completely.
Contrapuntality, as Geeta Chowdhry (2007: 105) points out, helps to historicize ‘texts,
institutions and practices [by] interrogating their sociality and materiality [and] the
hierarchies and the power-knowledge nexus embedded in them’. From this process,
we come closer to attaining, in Edward Said’s words, ‘non-coercive and non-dominating
knowledge’ (Chowdhry 2007: 105). Indeed, resistance in postcolonial-feminism stipulates
against complacency, even after hard-won battles, intellectual or otherwise.
Accountability in postcolonial-feminism demands no less.
Still, postcolonialfeminism lacks a social ontology. Critiques and guidelines tend to
scatter and lose momentum without an overarching rubric to account for them. We
need to name it if we are to act on it.
I turn now to worldism.
248 L. H. M. Ling
Worldism
Description and analysis

First, it is important to distinguish worldism-as-description and its analogue, worldism-
as-analysis. Worldism-as-description reflects the postcolonial and feminist insight that
we all make history and through mundane, daily activities in the kitchen and the
nursery, or the brothel and the factory, and not just the battlefield and the boardroom.4
Worldism-as-description finds selves and others mixing and flourishing together over
extended periods of time, constructing subjectivities that reflect yet transcend typical
divides like race, class, language, religion or ideology. Hybridities, creolizations, and
melanges emerge (Ashcroft et al. 1995; Lewis and Mills 2003). Though unequal power
relations restrict the degree of agency that could be exercised, postcolonial history
shows that trans-subjectivity occurs within the powerful as much as within the powerless,
the colonizer as well as the colonized (Todorov 1984). That is, peoples and cultures
have been complicit with one another informally more than elites would care to admit
formally.
Cherrie Moraga and Gloria Anzaldua (1983), for example, discuss the postcolonial
condition of ‘borderlands’. Typically, they point out, women of colour from the South
must bear the biggest burden of negotiating the multiple worlds of power shaped by
language, culture, class and gender, in order to survive white-majority society in the
North. The very asymmetry of the situation highlights the resilience and creativity of
the subaltern to sort through hegemony, not simply surrender to it. Indeed, Ashis Nandy
attributes Gandhi’s success in gaining independence for India to his strategy of engulfing
Britain within a complex of gender and power relations, drawn from India’s classical
mythology and now distilled into a doctrine of non-violence (Nandy 1988). Gandhi
did not overthrow the British Empire with military might, Nandy argues; rather, he
displaced it by making British imperial hypermasculinity irrelevant. Even the colonial
Self, as Ann Stoler (2002) demonstrates, could not sustain the official fiction of superiority
to and exclusion of ‘natives’ as the latter daily serviced ‘whites’ in their barracks, their
offices, their homes and their beds.
Ultimately, worldism compels us to conclude that our mutual embeddedness makes
us mutually accountable. One cannot escape from the other. This responsibility provides
an opportunity as well; i.e. it expands our repertoire of problem-solving strategies
beyond realist-globalization’s narrow confines, with their inevitably violent outcomes,
to a broader, more inclusive and sustainable vision of, and approach to, world politics
and global economics.
To demonstrate, I turn first to The Quiet American, followed by Romance of the Three
Kingdoms.
Graham Greene’s The Quiet American

The Quiet American opens with a murder. Pyle, an American ‘advisor’ in Vietnam, is
found at dusk floating face down under a bridge in Dakow. The French police call in
Fowler, an erstwhile friend of Pyle’s and long-time British journalist stationed in Saigon,
to find out what happened. Pyle was last seen near or in Fowler’s house. The story
unfolds with flashbacks narrated by Fowler.
He recalls his first meeting with Pyle. The 2002 film version of the novel, also titled
The Quiet American, conveys the scene poignantly.5 We hear Fowler’s voice-over as Pyle
sets sight, for the first time, on Fowler’s Vietnamese mistress, the beautiful, exotic
Phuong: ‘He was one of those men who believed that saving a country and saving a
woman were the same thing.’ A war may be raging between the communists in the
North and the nationalists in the South but it serves as a backdrop only for this love
triangle. In their collusion, the two men compete against each other personally,
professionally, nationally and internationally.
The characters remain self-enclosed and unitary despite intimate interactions: Phuong
as the lover of the two men, and the two men in their travails on the frontlines of the
war. We are never privy to what Phuong thinks or feels. Fowler characterizes her as
‘wonderfully ignorant’, much like a precious but dumb animal (Greene [1955] 2004:
4). ‘[T]o take an Annamite to bed with you,’ he tells Pyle, ‘is like taking a bird: they
twitter and sing on your pillow.’ (Greene [1955] 2004: 5). Phuong initially resists Pyle,
but later moves in with him after discovering that Fowler had lied about his impending
divorce. When Pyle ends up dead in the river, Phuong returns to Fowler, as if she had
never left.
Similarly, Pyle stays the same throughout. He is ‘unmistakably young’ and ‘unused’
(Greene [1955] 2004: 9), despite a deepening involvement in Vietnam’s civil and
international wars. Only Fowler changes slightly and at the end. He regrets Pyle’s
death but will secrete that sentiment – and his role in the event – to the grave. ‘Everything
had gone right with me since he had died,’ the book’s last sentence reads, ‘but how I
wished there existed someone to whom I could say that I was sorry’ (Greene [1955]
2004: 180). All three operate on self-interest, but where Fowler and Pyle compete for
Phuong, she is a passive object of desire, never an agent of change or action.
The novel clearly separates the ‘Western Self’ from its ‘Oriental Other’. Alliances,
coalitions, and exchanges occur, but Fowler and Pyle, and their associated characters,
stay on their side of the cultural divide, while Phuong and her people keep to the other.
There are no cross-overs in perception, sensibility or understanding. ‘Phuong’ negates
‘Fowler’ and ‘Pyle’: she is femininity to their masculinity, object to their subject, pitiful
decline to their presumptive power. Only the white, masculine, heterosexual Self, like
Machiavelli’s Prince, can sweep the third-world princess off her feet and away to
paradise.
Even among one’s own sort in this realist-globalized world, competition never ceases.
Though bound by a common culture, language, race/ethnicity and national interests,
Fowler and Pyle still joust for all there is: the girl, the country, the war, the world.
Note, for example, the character of Granger, a US military man stationed in Saigon.
He makes a move for Phuong upon first meeting, forcing Fowler to assert his ownership
right away:
[Granger] leant over to Phuong and said, ‘Here. You. Have another glass of orange?
Got a date tonight?’
[Fowler] said, ‘She’s got a date every night.’
(Greene [1955] 2004: 17)
Phuong, as usual, remains inscrutably, utterly silent.

No mere artistic convention, this realist rendition of Self and Other plays out all-
too familiarly in world politics. In their study of the US military and governmental
discourse on the Vietnam war, Jennifer Milliken and David Sylvan (1996: 337) found
an engendering of all parties involved that roughly corresponds with those in the novel:
250 L. H. M. Ling
i.e. South Vietnam is feminized and infantilized into an object of desire that is passive
(‘lacks leadership skills’), unreliable (‘schizoid identity’, ‘spasmodically violent’), and
desperately in need of rescue (‘diseased’) by its powerful American protector (‘rich’,
‘white’, ‘educated’) against the distasteful masculinities of North Vietnam/the Viet
Cong (‘disciplined’, ‘fanatics’, ‘hard core’). Sexual undercurrents pull at the US discourse
on Vietnam: e.g. ‘[The North Vietnamese strategy is] to make the US look impotent
and foolish . . . [The American strategy is to give a] demonstration of Communist
impotence . . . [A high level emissary for opening negotiations would] add credibility
to our seduction effort . . .Well, I guess we have to touch up those North Vietnamese
a little bit . . .[A bombing halt is when] I halt and then Ho Chi Minh shoves his trucks
right up my ass’ (Milliken and Sylvan 1996: 335). These preconceptions, Milliken and
Sylvan suggested, led to self-defeating policies that cost support within South Vietnam
as well as neighbouring countries like Laos and Cambodia.
America’s history with Vietnam beclouds this realist-globalist fairy-tale, though never
displacing it. Note this cautionary note from a senior advisor to those drafting the
constitution in Iraq: ‘Elections’, he declares, ‘can seduce with the promise of release’
given that they ‘hold out the hope of successful consummation, the seed of democracy
implanted and the door opened for subsequent withdrawal’ (Feldman 2004: 95). The
occupier must watch out, he warns, for ‘the grip’ of the occupied on the occupier can
be ‘both pleasurable and terrifying’:
In the imagined ‘successful’ scenario, the occupier builds and leaves. When things
go wrong, he [sic] cannot get out but is sucked into what American vernacular
calls ‘the quagmire’ – a situation from which he cannot extract himself, but in
which he cannot remain without suffering unmanning damage.
(Feldman 2004: 95)
For the occupied, he adds, democracy may be a disturbing wet dream. The occupied
could wake up in sweaty disillusion to find ‘that there is no nation there at all, just a
collection of divergent interest groups who lack the common vision to make a government
that will endure’ (Feldman 2004: 95).
Others have had enough and some decide to respond in kind. In Iraq, assassinations
and bomb attacks increased daily, endangering US security forces in the country (Moore
and Oppel 2008). Neither did insurgency in Afghanistan abate. ‘In the spring of 2006’,
The New York Times reported, ‘the Taliban carried out their [sic] largest offensive since
2001’, resulting in a quintupling of suicide bombings and a doubling of roadside
bombings (Rohde and Sanger 2007: 1). ‘All told’, the report continued, ‘191 American
and NATO troops died in 2006, a 20 percent increase over the 2005 toll’ (Rohde and
Sanger 2007: 13). Osama bin Laden may be dead, but his declaration on 7 October
2001 still haunts: ‘[w]hat the United States tastes today is a very small thing compared
to what we have tasted for tens of years’.
Meanwhile, the realist Self suffers mightily and begins to unravel.
‘I hate this country!’ [the young sergeant] shouted. Then he smiled and walked
back into the hut. ‘He’s on medication,’ Kearney said quietly to me. Then another
soldier walked by and shouted, ‘Hey, I’m with you, sir!’ and Kearney said to me,
‘Prozac. Serious P.T.S.D. from last tour.’ Another one popped out of the HQ
cursing and muttering. ‘Medicated,’ Kearney said. ‘Last tour, if you didn’t give
him information, he’d burn down your house. He killed so many people. He’s
checked out.’
(Rubin 2008: 42)
For Friedman and Mandelbaum (2011), however, Others cannot wait to become
the new century’s ‘new Americans’:
By helping to destroy communism, we helped open the way for two billion more
people to live like us: two billion more people with their own versions of the
American dream, two billion more people practicing capitalism, two billion more
people with half-a-century of pent-up aspirations to live like Americans and work
like Americans and drive like Americans and consume like Americans. The rest
of the world looked at the victors of the Cold War and said, ‘We want to live the
way they do.’ In this sense, the world we are now living in is a world we invented.
(Friedman and Mandelbaum 2011: 15–16)
We need to consider alternatives – desperately.
Luo Guanzhong’s Romance of the Three Kingdoms

The fourteenth-century epic, Romance of the Three Kingdoms (Sanguo Yanyi), centres on
third-century Chinese politics. I focus on one specific episode titled, ‘Seven Times
Caught, Seven Times Released’ (qiqin qizong). It refers to the decision of Zhuge Liang,
prime minister of the Shu Kingdom and renowned in Chinese history for his strategic
acumen in war, to release Meng Huo, king of a southern ‘barbaric’ tribe in what is
today’s Yunnan province, despite the latter’s capture seven times. Here, it is important
to note, the Chinese designation of Others as ‘barbarian’ (man) does not have the same
fixity in role or meaning as in the West.6 The word man indicates geographical and
cultural distance from the Confucian centre; it is not an objectified condition.7 Those
whom Confucians label man do not lose their cultural integrity even though they are
seen as beyond (Chinese) acculturation (huawai).
Meng Huo would not accept Shu rule ‘in his heart’ (xin fu). For this reason, the
prime minister frees him after each capture – until the seventh time. Caught alive,
Meng is, as usual, accompanied by his wife and other relations. He enters the prime
minister’s tent in chains only to find before him a fine meal of meats and wine. A
soldier unshackles Meng and his group. Zhuge’s trusted general announces to the king:
‘The Prime Minister feels ashamed to meet you in person. He commands me to let
you return home, to battle us another day. You may leave as soon as you like.’8 The
king is so moved tears begin to flow. ‘I may be a person outside of Chinese culture
(huawai zhi ren)’, the king weeps, ‘but I still know what’s right and proper (liyi). How
could I [alone] be [so] shameless (xiouchi)?’ As legend tells us, Meng Huo finally accepts
Shu rule.
Meng Huo, Stephen Chan (forthcoming) has written, could serve as a metaphor for
Africa’s relations with China. By this, he means that Chinese history and culture have
long treated the Other as a target of opportunity and reform, to be attained not through
direct conquest per se, but by a strategy of patience to wear down the opposition.9
Chinese superiority in virtue and intelligence invariably wins. ‘With great chivalry’,
Chan (forthcoming) writes, ‘Zhuge sets Meng Huo free.’ And Meng falls for the ploy:
252 L. H. M. Ling
‘On his seventh capture, Meng finally realises he is being (consistently) defeated by
someone who is not only superior militarily, but superior in virtue. When he realises
this, as in a sudden long-delayed revelation, he immediately capitulates.’
Chan elaborates on the significance of this metaphor for Africa:
China is prepared to work on Africa, despite any setbacks, for a very long time to
come. This patience is reminiscent of Mao’s favourite revolutionary ballet, Taking
Tiger Mountain by Strategy. Sometimes, frontal assault does not work. You can’t just
get it over and done with. Sometimes, it’s never quite done with. The televised
epic I saw in Beijing never did have Meng Huo overcoming his taste in wine and
concubines. Barbarians, even those adopted as younger brothers, never quite cease
being barbarians.
(Chan forthcoming)
Chan seems sceptical, if not pessimistic, in this reading of the episode (dramatized
in a television serial he saw in Beijing in 1994).10 He suggests that neither China nor
its perception of the Other change, despite intensive interactions with someone like
Meng Huo. The Middle Kingdom retains a sense of ‘superiority’, if not ‘virtue’ then
‘chivalry’, towards Others. For this reason, African countries would do well to approach
China with caution.
‘Virtue’ or ‘chivalry’ alone, I contend, does not account for Zhuge Liang’s actions
regarding Meng Huo. Rather, a mix of Confucian, Daoist, and Legalist philosophies
as well as the realpolitik of the day frame the prime minister’s worldview (Hwang and
Ling 2009), producing three specific principles:
1 target ‘hearts and minds’ as military strategy (gong xin);

2 draw on local talent as governing policy (wei chen); and
3 seek harmony as ethnic policy (wei he) (Li 2008).
Capturing and releasing Meng Huo begins the process only. Zhuge furthers the
other principles with subsequent actions. After Meng Huo accepts Shu rule, Zhuge
Liang withdraws all his troops and puts in charge local men of talent and capability,
including Meng Huo himself. (The ‘barbaric’ king later becomes a high-ranking official
in the Shu court) (Li 2008: 9). Zhuge also orders his men to transfer important technical
knowledge regarding agriculture and construction, salt and metals. In this way, he
improves the material lives of the local people. Yet he leaves alone their customs and
traditions, lifestyles and religions. The local people thus prosper on their own terms
rather than those of the outsiders.
The epic underscores respect for the ‘natives’ in other ways as well. Unlike Greene’s
exoticization of Phuong and rendering her as ‘dumb’ of Phuong, Romance of Three
Kingdoms includes a stirring passage on the martial arts and leadership of Meng Huo’s
queen, Madame Zhu Rong (zhurong furen). Three times she leads her troops to fight
Zhuge’s men. Three times they feign defeat (zhabai). She prudently refrains from chasing
after them – until the third time. Seeing their retreat, she cannot resist and orders
pursuit only to find herself trapped. Zhuge’s men bring her to the prime minister. He
orders her release in exchange for two generals whom Meng Huo has captured. The
southern king cannot refuse. Zhuge Liang and Meng Huo then enter another round
of battle.
The epic closes this episode with Zhuge Liang’s explanation for his actions:
It would not be easy (yi) [to colonize the southern tribes] for three reasons. Stationing
outsiders would require a military occupation, but there is no way the troops could
feed themselves [here], that’s one difficulty. The barbaric peoples have suffered
much, losing fathers and brothers [on the battlefield]. If I were to station outsiders
here without troops, it would be a disaster in the making. That’s a second difficulty.
The barbaric peoples have murdered and killed, naturally they harbour suspicions,
especially of outsiders, and that’s a third difficulty. [For these reasons], I don’t
leave anyone behind and I don’t transport away any supplies, [thereby] allowing
us to remain in mutual peace and without incident (wushi).11
Would that George W. Bush had had such wisdom regarding Iraq and Afghanistan!
The US would not have been saddled with two wars and two occupations, with
multiple insurgencies daily sacrificing the blood and treasure of the masses for the
interests and security of ruling elites. Whether Zhuge Liang actually achieves such a
happy scenario in the South of his time is subject to empirical, historical analysis –
and not of concern here. For me, the significance of Zhuge Liang’s approach to Meng
Huo lies in its radical difference from the more familiar, Western model of colonial
Self–Other relations, as detailed in The Quiet American.
Equally significant is Zhuge Liang’s method. Although framed by Confucian principles,
Zhuge nonetheless draws on the locality’s specifics to develop appropriate strategies
and policies. Appreciating the South’s rich resources and understanding the fierce sense
of independence of the local people, he aims not to crush the Other into submission,
but to win its acceptance. In this way, Zhuge Liang develops a sustainable relationship
with the southern tribes who honour him to this day (Li 2008).
The story of Zhuge Liang and Meng Huo bears another kind of significance:
Self–Other relations can be transformed. From the start, Zhuge Liang resists eternalizing
his relationship with Meng Huo as ‘I conqueror, you subject’. Rather, Zhuge seeks
Meng’s acceptance to eliminate conflict on the borders between their kingdoms by
fostering a new sense of community between the Shu Kingdom and Meng Huo’s people.
As mentioned, Meng Huo later becomes a high-ranking official at the Shu court. In
both cases, the Shu court and Meng Huo – as well as their respective kingdoms –
evolve as a result.
Conclusion
We would all do well to activate the Zhuge Liang within: that is, expand our analytical
imaginary for what is both possible and practical. The prime minister’s release of Meng
Huo seven times eventually captures the southern king culturally, not just militarily,
to their common peace and prosperity. The Self of Zhuge Liang and the Other of
Meng Huo did not stay shackled to mutual opposition, but rather, both became
transformed. Perhaps Meng Huo changed more than Zhuge Liang as an individual in
the short run, but certainly the peoples of their respective kingdoms reaped significant
benefits in the long run from their reformulated relationship.
Worldism alerts us to the fact that a much grander vista of human possibilities exists,
and we had better learn from it. As postcolonial-feminists point out, the mutual
embeddedness of our multiple worlds points to an inescapable conclusion: no one is
254 L. H. M. Ling
innocent, we are all responsible. From worldism, we realise that perhaps ‘Phuong’ in
The Quiet American knows more than a single-minded, hypermasculine realist-globalizer
like Graham Greene could conceive. Her very ability to adapt and survive under
colonial patriarchy in her own country is instructive enough. In contrast, ‘Fowler’
cannot understand himself, let alone another, no matter where he may be, thereby
truncating his own rich legacy of multiplicity, reflexivity and complexity.
Indeed, changes are taking place within the core of realist-globalization. Contrary to
Friedman and Mandelbaum’s assumption, many people seek not a return to hegemony’s
former glory days, but an alternative to it. The Occupy Wall Street movement is only
the latest instance. More systemic transformations include: demands for justice that
transcend the state and the Westphalian system that produced it (Fraser 2009); the
spread of ‘slow cities’, ‘slow food’, and ‘slow living’ in urban planning and design
(Parkins 2004; Petrini and Waters 2007);12 ecological sensitivities that revolutionize
how we dispose of waste and use resources, from individual households to corporations
to industries (although clearly, more needs to be done) (World Economic and Social
Survey 2011); popularization of alternative health regimens to supplement, and
sometimes replace, conventional medical treatment (Silcoff 2011); and a focus on
‘happiness’ for national development (Bok 2010).
Colonial desire, in short, does not have to drive globalization nor how we theorize
about it. Histories from outside the Western/Westphalian canon can offer alternatives,
if only we allow our minds to access them. In this struggle lies the future of IR and IPE.
Notes
1 ‘Never again!’, for example, resounds in post-crisis East and Southeast Asia, recuperating with
new institutional firewalls against future invasions by Western venture capitalists and neo-liberal
financial institutions like the International Monetary Fund (IMF). See Ling (2008).
2 For example, Designing Social Inquiry (King et al. 1994), a leading manual on methodological
training in IR, instructs accordingly:
From the perspective of a potential contribution to social science, personal reasons are neither
necessary nor sufficient justifications for the choice of a topic. In most cases, they should
not appear in our scholarly writings. To put it most directly but quite indelicately, no one
cares what we think – the scholarly community only cares what we can demonstrate.
(King et al. 1994: 15)
3 I thank Carolina de Martins Pinheiro for this reference.

4 Hobson and Seabrooke (2007b) call this ‘everyday IPE’, although they do not come from a
postcolonial-feminist perspective.
5 Directed by Philip Noyce, the film starred Michael Caine as Fowler and Brendan Frazier as
Pyle. Vietnamese actress Do Thi Hai Yen played Phuong. Her relative obscurity compared to
these two Hollywood blockbuster stars further underscores Phuong’s unknowableness in the book
and the film. Michael Caine received the Oscar for Best Actor in 2003 for his role in The Quiet
American.
6 For greater elaboration on the Chinese concept of ‘barbarian’ and its appropriation by the West,
see Liu (2004).
7 In this sense, Confucianism qualifies as a non-universalistic doctrine. SeeZhang (2009).
8 Chapter 89 of Sanguo Yanyi, translation by L. H. M. Ling.
9 Called the huairou policy, it is translated as ‘cherishing men from afar’. See Hevia (2002).
10 Interestingly, a recent remake of the epic in 2010, again in TV serial form, omits this episode.
11 Translation by L. H. M. Ling.
12 On the concept of and sites for ‘slow cities’, see the BMW Guggenheim Lab (http://
bmwguggenheimlab.org/, retrieved 21 September 2011).
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Index
accumulation 12, 67, 73, 86, 136, 140, 143, 72, 74, 75, 77, 78, 80, 87, 91, 92, 145, 146,
144, 146, 149, 152, 155, 161, 163, 165, 147, 149, 151, 152, 155, 160, 161, 163,
166–8, 171, 181, 182, 209, 211; over- 238; 180, 187, 196, 217, 218, 222, 227, 231,
regime of 144, 206 232, 233, 235, 238, 240, 241, 249, 258,
acquisitive individual 213 269, 271, 277, 286, 287, 288, 292, 295,
actors 6, 12, 29, 57, 92, 94, 95, 99, 101, 118, 298, 300, 301; American 41, 58; casino 64;
121, 122, 123, 126, 127, 134, 185, 195, gentlemanly 219; varieties of 137, 270, 280
198, 199, 200, 201, 204, 221, 229, 236; CCP 239
exogenous 9; non-state 19, 163 CDO 214
advantage, comparative 47, 122, 133, 181; China 23, 24, 31, 52, 54, 55, 69, 71, 77, 78,
competitive 37, 39, 42, 43, 44, 214 80, 81, 82, 86, 91, 102, 136, 142, 151, 159,
AFL-CIO 53 160, 161, 163, 168, 198, 228, 232–43, 244,
Africa 21, 22, 23, 26, 77, 80, 81, 84, 159, 160, 251, 252, 253
163, 177, 251, 252 civil society 30, 170, 172, 173, 174, 175, 182
African Americans 214–15 class 3, 6, 7, 9, 10, 44, 48, 49, 54, 57, 58, 83,
agency 12, 41, 54, 186, 187, 205, 207, 248; 84, 86, 88, 91, 92, 141, 146, 152, 162, 163,
and structure 163 167, 169, 170, 172, 173, 174, 175, 176,
aggregate demand 65 177, 185, 189, 195, 216, 218, 239, 249,
Aglietta, Michel 143, 147–9, 152, 160, 166 250, 251, 253, 282, 292, 295, 296, 297;
agriculture 91, 97 ruling 9, 48, 170, 172, 175
Americanism 220 Coase, Roland 35, 36, 37, 38, 122, 125, 220,
ASEAN 241 224, 229, 272
authoritarianism 79, 86, 239, 278, 287 Cold War 49, 54, 56, 187, 199, 200, 218, 240,
257, 295
Bank for International Settlements (BIS) 16, collective good 119
192, 266, 268 colonialism 8, 185, 187, 190, 250, 266
banking system 61, 62, 65, 71, 153, 212, 215, commercial banks 41, 85, 90, 145
237; European central bank 179; insurance commodification 8, 155, 169, 213, 217, 222,
69, 121, 154, 214 229, 231, 265
Baran, Paul 167, 183, 264 Commons, John 10, 11, 12, 273
behaviouralism 117 Communism 55, 151, 160
Beijing consensus 82, 242 competition 19, 26, 40, 93, 130, 134, 137, 142,
Brazil 20, 22, 50, 53, 80, 86, 159 144–7, 155, 215, 216, 239, 254
Bretton Woods 8, 147; post Bretton Woods 68, cooperation 83, 92, 98
75, 170 Cox, Robert 49, 120, 124, 162, 163, 167, 169,
BRICs 20, 53, 76, 77, 80, 184, 241 170, 172, 173, 174, 175, 176, 177, 178,
business 3, 25, 40, 42, 43, 50, 51, 62, 63, 101, 178, 179, 180, 182, 190, 266, 271
235; civilization 3; international 29–33, 35, 37 crisis 78, 84–5; ecological 88, 219, 222; security
54, 57, 79, 233; slow 254
capital 8, 9, 10; intangible 3, 12 critical theory 14, 295
capitalism 2, 3, 5, 8, 10, 11, 12, 13, 14, 20, 28, culture 1, 13, 27, 39, 59, 74, 177, 183, 185,
30, 31, 32, 35, 37, 38, 39, 41, 43, 45, 46, 195, 196, 198, 210, 234, 249, 252, 253,
47, 54, 55, 60, 63, 64, 66, 67, 68, 69, 71, 257, 292
Index 299
debt 49, 50, 62, 65, 66, 72, 76, 109, 141, Freud 2, 214, 215, 217, 218, 220, 223, 216,
154–60, 212, 213, 214, 240; crisis 49, 56, 275
82–4, 143, 153, 212 functionalism 185, 190
decision theory 91, 92
demand management 67, 189 G7 177, 192, 222
democracy 9, 19, 23, 32, 88, 90, 196, 255, 262, G8 192
276, 290, 292 G20 192, 245, 305
dependency theory 84, 90, 185, 186, 187, 190, game theory 1, 11, 91, 93, 103, 104, 113, 295;
192, 194, 196, 197 Nash equilibrium 113; Prisoner’s Dilemma
deregulation 82, 88, 90, 91, 96, 153, 155, 188 17, 91, 93, 94, 95, 96, 98, 99, 104, 112,
discourse analysis 190, 194, 195, 199, 208 113, 125, 299; two-level 9, 102, 281
distribution 9, 28, 30, 34, 63, 84, 114, 125, GATT 16, 53, 125, 151
144, 148, 149, 150, 152, 153, 169, 229, 239 gender 1, 14, 55, 56, 57, 83, 177, 191, 192,
division of labour 49, 50, 222 194, 219, 223, 247, 248, 249, 250, 252,
292, 297
economics: heterodox 6, 59, 63, 65, 66, 75, 77, geopolitics 231
80, 214; homo economicus 214, 218, 219; Germany 32, 58, 92, 141, 143, 169, 178, 187,
libidinal economy 2, 219; macroeconomics 273, 282, 292, 304
65; neoclassical 185; new institutional Giddens 194, 277
economics 120–32, 198, 199, 203 Gilpin 8, 98, 278
economies of scale 38, 40, 202 global governance 10, 55, 207
elite 21, 22, 23, 26, 27, 29, 49, 51, 136, 160, 177, Globalization 5, 6, 7, 11, 12, 13, 17, 22, 81,
210, 212, 215, 228, 237, 239, 245, 279, 304 85, 87, 89, 92, 94, 97, 144, 145, 147, 149,
EMU 16, 180 151, 149, 151, 154, 157, 159, 161, 163,
epistemology 12, 68, 165, 194, 195, 197, 200, 188, 195, 201, 247, 269, 276, 279, 280,
204, 209, 212, 248 282, 286, 290, 293, 297, 299, 303
equilibrium 7, 10, 13, 34, 60, 61, 62, 65, 75, Gramsci 168, 171, 173, 174, 181, 183, 264,
80, 93, 94, 95, 96, 113, 114, 121, 122, 129, 267, 268, 272, 275, 277, 278, 292, 295,
133, 134, 144, 145, 234, 263, 282, 297 296, 298, 303, 305
Equity 150
ethnomethodology 198 hegemony 10, 95, 125, 159, 168, 169, 172,
European Commission 156 174, 175, 177, 178, 180, 187, 189, 191,
European Union 16, 50, 83, 92, 114, 126, 169, 194, 195, 196, 247, 252, 260, 268, 271,
215, 266, 273, 280, 282, 287, 293 280, 284, 297; counter-hegemony 192;
Evolutionary institutionalism 1, 2 hegemonic stability theory 16, 125
existentialism 197 hermeneutics 197
exploitation 2, 3, 21, 34, 43, 54, 56, 58, 95, Hobbes, Thomas 145, 183, 282
136, 176, 187, 228, 234, 274, 297 Human development 189, 191, 192, 198
fascism 217, 218 ideology 6, 10, 87, 121, 171, 178, 181, 185,
Federal Reserve 192 186, 196, 235, 254, 267
feminism 193, 219, 248, 249, 250, 270 IMF 11, 16, 9, 50, 51, 62, 63, 81, 84, 85, 90,
financial innovation 59, 66, 67, 68, 71, 73, 74, 91, 95, 124, 151, 161, 177, 186, 192, 196,
76, 77, 79, 153, 222, 223, 269 209, 210, 224, 245, 261, 267, 269, 271,
Financial Instability Hypothesis 66 282, 283, 285, 294, 304, 305
financialization 59, 69, 70, 71, 72, 74, 75, 77, immigration 156
80, 83, 90, 91, 96, 157, 215, 222, 223, 275, imperialism 49, 165, 167, 177, 183, 223, 227,
285, 291 228, 249, 276, 280, 283
food 226, 227, 230 India 12, 16, 20, 22, 29, 31, 32, 33, 55, 56, 83,
Fordism 33, 40, 72, 144, 148–53, 169, 215, 219, 88, 89, 91, 93, 159, 160, 183, 188, 228,
220, 221–3, 267, 286; post-Fordism 71, 72 245, 254, 267, 269, 275, 284, 296, 303
foreign policy 11, 242, 267, 278, 293 individualism 7, 78, 222
formal model 114 Indonesia 56, 85, 88, 93, 271
Foucault 12, 175, 195, 201, 275 industrial policy 189
Frankfurt school 218 institutionalism 1, 6, 2, 4, 9, 10, 13, 14, 120,
free trade 91, 92, 93, 94, 95, 96, 97, 99, 104, 122, 123, 125, 127, 129, 130, 131, 132,
196, 217, 276, 277 201, 202, 278, 286, 301
300 Index
interdependence 161, 169, 174, 217, 240 NAFTA 17, 54, 55, 126, 274, 298
international political economy 1, 5, 7 14, 18, narcissus 213, 217, 220
29, 47, 91, 96, 100, 102, 117, 162, 163, neo-mercantilism 91
193, 198, 237, 244; GPE 1, 3, 4, 5, 6, 9, 10, new constitutionalism 178
11, 13, 14, 15, 48, 132, 134, 135, 136, 137, new economic policy 189
139, 140, 141, 142, 143, 220, 217, 219, non-tariff barriers 33
222, 232
internationalization 175, 295, 296 OPEC 17, 220, 224
international relations 16, 49, 50, 54, 98, 114, outsourcing 44, 86, 142
120, 124, 162, 163, 171, 173, 178, 179,
183, 191, 265, 267, 269, 272, 273, 277, Pareto optimality 94, 113, 144, 145, 220, 221
278, 279, 282, 289, 295, 297, 305, 306 path dependency 43
patriarchy 220, 247
Japan 10, 16, 33, 40, 59, 88, 114, 128, 141, phenomenology 192, 193, 201
153, 151, 153, 155, 156, 158, 160, 183, Pijl, Van Der, Kees 48, 142, 161, 167, 169,
228, 234, 238, 240, 242, 267, 273, 274, 170, 172, 174, 175, 176, 178, 179, 180,
275, 288 182, 280, 294
pluralism 196, 207, 210, 287
Keynesianism 53, 59, 60, 66, 69, 77, 80, 149, Polanyi, Karl 182, 217, 218, 222, 268, 294
151, 188, 191, 220, 221, 224, 265, 271, Ponzi, Carlo 65, 71, 72
285, 288 positivism 164, 165, 204, 209
Korea 22, 52, 88, 89, 151, 292 postcolonialism 250, 252, 254, 261, 262, 272,
Krugman, Paul 6, 7, 94, 156, 286 275, 287
post-modernism 9, 191, 204, 282
labour 1, 13, 3, 4, 8, 10, 19, 26, 30, 43, 48, 49, Poulantzas, Nicos 9, 167, 169, 172, 183, 295
50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 64, privatization 81, 82, 160, 188, 285, 287
69, 83, 85, 88, 89, 92, 112, 136, 137, 139, psychoanalysis 212, 213, 215, 217, 216
140, 141, 148, 149, 152, 151, 152, 155, public good 91, 93, 94, 95, 96, 104, 118
156, 161, 169, 181, 186, 191, 192, 217,
221, 222, 224, 226, 232, 234, 235, 242, race 1, 56, 248, 249, 250, 252
250, 264, 267 rational choice 91, 104, 118, 120, 121, 123,
law of diminishing return 9 129, 130, 135, 198
Lenin, Vladimir 167, 183, 285 realism 4, 180, 248, 296
liberalism 4, 54, 83, 92, 97, 160, 175, 177, 178, regulation theory, 144
179, 183, 189, 191, 192, 198, 199, 222, Ricardo, David 10, 48, 186, 296
224, 232, 294, 299, 306; neo-liberalism 189, Russia 16, 20, 23, 54, 81, 85, 118, 159, 173,
191, 224 264
libido 215, 217, 220
Schumpeter, Joseph 20, 27, 180, 224, 268, 298
Malaysia 59, 82 Singapore 12, 151, 298, 299
Marxism 1, 4, 8, 9, 10, 12, 13, 14, 170, 177, Smith, Adam, 10, 44, 48, 263
178, 182, 185, 186, 190, 192, 193, 267, social forces 54, 56, 149, 169, 171, 173, 178,
268, 273, 284, 286, 287; historical 186, 219
materialism 6, 17, 162, 164, 166, 168, 169, socialism 80, 165, 291, 294
171, 173, 174, 176, 177, 178, 180, 181, South Africa 16, 20, 54, 81, 85, 263
182, 184, 263; neo-Marxism 191 sovereignty 14, 92, 150, 212, 221, 244, 248,
mergers and acquisitions 16, 41, 42, 46, 152, 271
167 Soviet 17, 21, 54, 126, 127, 165, 175, 187,
Minsky, Hyman 63, 65, 66, 68, 69, 77, 78, 80, 199, 234, 263, 272, 284, 285, 300, 301
265, 268, 271, 274, 285, 289, 291, 303, 305 State: nation 144, 147, 150, 165, 17;
money 21, 22, 26, 27, 28, 31, 34, 35, 38, 39, welfare 13, 18, 54, 93, 148, 150, 154,
40, 42, 51, 57, 60, 61, 62, 63, 64, 66, 67, 189, 221
68, 74, 82, 86, 91, 106, 107, 110, 112, 116, structural adjustment 50, 57, 80, 81, 94,
136, 146, 147, 149, 150, 149, 150, 156, 151, 183, 193
171, 198, 214, 215, 217, 225, 234, 238, structuralism 4, 13, 185, 193, 194, 195
245, 250 Sweezy, Paul 167, 183, 264, 265, 301
multinational corporation 17, 30, 31, 33, 34, 35 symbolic interactionism 197, 206
Index 301
Taiwan 12, 22, 151, 240, 244, 303 225, 228, 234, 239, 243, 244, 245,
Tax havens 26 255, 269, 271, 292, 298, 297
Turkey 85, 187
Veblen, Thorstein 12, 13, 137, 219, 304
underdevelopment 187
UNESCO 17, 196 Washington Consensus 160, 235, 245
uneven development 167, 281 World Bank 10, 56, 83, 86, 94, 154, 160, 176,
United States 9, 10, 11, 12, 50, 53, 55, 191, 192, 209, 223, 231, 236,
56, 80, 84, 85, 86, 88, 89, 90, 98, 278, 293, 294, 304, 305, 297
126, 127, 128, 150, 151, 152, 153, WTO 17, 54, 85, 86, 87, 95, 104, 106, 177,
157, 169, 173, 186, 219, 220, 221, 192, 230, 245, 266, 293

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Global Political Economy

Ronen Palan is Professor of International Political Economy at City University,

ISBN: 978-0-415-69407-0 (hbk)

1 New trends in Global Political Economy 1

2 Late twentieth-century globalization: the evolution

3 The firm, the corporation and contemporary capitalism 29

4 Labour shapes the global political economy 46

5 Money and finance in a globalized economy 58

6 Globalization: a project in crisis 75

7 Game theory: international trade, conflict and

8 New directions for international political economy:

9 New institutionalism and International Relations 117

10 An evolutionary approach to global political economy 129

11 Globalization and theories of regulation 140

12 Transnational historical materialism: ‘neo-Gramscian’

13 Trends in development theory 177

14 Constructivism in International Political Economy 193

15 Libidinal political economy: a psycho-social analysis

16 From environmental to ecological political economy 219

17 The rise of China and the future of the international

1.1 Discrete mathematics 5

5.1 Holism: some crisis-related macro paradoxes 72

Mark Beeson is Winthrop Professor of Political Science and International Studies at

It is always rewarding to see a second edition of a publication come to life. Global

AFL–CIO American Federation of Labor and Congress of Industrial Organizations

• first: that an international economy which operates in an environment that is

• standard economics, sometimes referred to as neoclassical economics;

The epistemological foundations of orthodoxy

Figure 1.1 Discrete mathematics

Figure 1.2 Continuous mathematics

Where orthodoxy is heading to today: beyond

Marxian political economy

1 While new institutionalism views institutions as historically emergent solutions

The return of institutionalism

Towards post-rationalist GPE6

Between economics, political economy and

1 the rooting of political and military institutions in individual countries;

Fiscal sociology and political revenues

Political revenues and globalization

1 illicit political elite revenues;

Illicit political elite revenues

Point natural resource revenues

Sovereign wealth revenues

Property development revenues

Pirate sovereign revenues

jurisdictions that deliberately create legislation to ease transactions taken by people

Other sovereign revenues

Elites and weak states

Firms, international business and the global political

Theorizing the firm: whose ends are we talking about?

The capabilities view of the firm

Labour shaping IPE

Efficient market theory of finance (EMT)

Finance and heterodox political economy

[N]on-financial companies . . . were ‘forced’ into debt, initially, because of the

Understanding financial innovation

Table 5.1 Holism: some crisis-related macro paradoxes

Paradox of thrift (Keynes) Higher saving rates lead to reduced output

Interpreting the crisis