EXAM COMPARATIVE HISTORY
CHAPTER 7 - Deploying Governance
Consider two very different phenomena of the 1960s and 1970s. First, what many observers, and not just
those on the right, beheld as a disintegration of public order: strikes, student occupations, terrorist activity,
and growing demands for redistributing wealth and authority—an explosion of contentiousness acted out
throughout much of the world, developed and less developed. Second, just beginning, a change in political
language in the global west, more striking in retrospect than as it was occurring: the rapidly growing adoption
of the hitherto rarified term governance. In English-language books it revealed a point of inflection in the
mid-1970s and by the mid-1980s and 1990s would grow exponentially. This was no coincidence. Government
stability seemed threatened in the streets, and wealthy countries faced emphatic claims for a fairer
international distribution of wealth from poorer ones. “Governance” suggested an approach to
administration that promised to rise above the divisions and defuse the assault—rational rules and
procedures that guided private organizations and that, in the public domain, should command assent without
state enforcement.
“Governance” Takes Off
The realm of governance is a sphere governed by norms supposedly grounded in scientific, just, or utilitarian
considerations. It was steered by policy intellectuals and decision-makers who claimed to act on expert
knowledge, purportedly for the collective welfare rather than narrow partisan interests. This realm
encompassed diverse institutions such as political associations, public interest lobbies, and international
organizations, intending to tackle issues in forums beyond conventional state structures. Despite claiming
objectivity, ideological influences were deeply embedded within this domain.
This mode of public intervention finds its roots in history. Alexis de Tocqueville highlighted the inclination of
American democracy toward multilevel governance and autonomous organizations. Notably, the period
between the World Wars witnessed the establishment of bodies like the League of Nations and later the
United Nations, responding not only to humanitarian crises but also addressing broader societal concerns.
European counterparts drew from varying traditions: German jurisprudence emphasized local selfgovernance, while French laws governing associations aimed to defuse revolutionary tendencies by
empowering societal organization.
In France, thinkers and politicians across ideological spectrums advocated for society itself as a catalyst for
reform, drawing inspiration from Montesquieu's concept of "intermediate bodies." Post-1968, a distinct
"second left" emerged, distancing itself from both Marxist ideology and self-proclaimed liberalism. This
movement sought autonomous reform, leveraging associational efforts like forming new clubs to bypass
ideological clashes. However, the Socialist Party's shift in the mid-1970s towards a more traditional agenda
resulted in electoral setbacks in 1978. François Mitterrand's presidency in 1981 initially leaned towards
reform but had to backtrack due to economic concerns, disillusioning many of his supporters.
Key figures like Michel Rocard and Jacques Delors, previously aligned with the reformist Socialist movement,
redirected their efforts following these political transformations.
By 1980, governance had become multifaceted, increasingly embracing a neoliberal agenda. The spheres
included international bodies like the Bretton Woods institutions (World Bank and IMF), UN entities
(ECOSOC), and the OECD, all initially conceived in response to post-war strategies like the Marshall Plan.
These entities, despite claiming moral authority, were entangled in ideological divisions within their
structures.
Numerous other arenas contributed to this landscape: domestic foundations and non-governmental bodies,
such as the Council on Foreign Relations, Brookings Institution, Hoover Institution, and various esteemed
publications worldwide. These entities weren't inherently partisan but represented a perceived wisdom or
knowledge beyond party affiliations, backed by intellectuals advocating policies now in vogue.
Governments formed special commissions to tackle differing opinions or to gather decentralized experts.
Wealthy donors established foundations, aiming to be independent entities dedicated to specialized
knowledge areas. Private voluntary organizations (PVOs or NGOs) significantly aided developing countries,
albeit with fewer funds than public agencies or corporations. These organizations, even if partially funded by
first-world governments, often emphasized left-leaning social and political engagement.
From the 1960s onwards, new foundations and think tanks competed in claiming expertise. They varied from
long-standing, nonpartisan bodies like Brookings Institution to those representing specific interests, such as
business or labor unions. The realm of governance became a tool for political and economic elites to reshape
the discourse on entitlements and equality that had dominated the 1960s.
Under the banner of governance, experts aimed to quell the turbulence of the '60s and '70s, introducing
ideas that required the backing of political or economic powers for implementation. The question lingered:
would their ideas retain their nonpartisan essence or be manipulated by their backers? Social-democratic
intellectuals had previously raised concerns about capitalist interests stifling possibilities for social rationality.
These policy networks and intellectuals extended internationally, transcending borders in an era of
globalization. Some were established by national governments, others by international agreements, and
many claimed roles as NGOs. They focused not only on serving capital but also on addressing societal
concerns like public health, economic transactions, arms control, or the environment, aiming to command
respect for their inherently compelling solutions.
During the '70s, governance institutions proliferated vigorously, seeking legitimacy through both authorities
that established them and their appeal to a nonpartisan realm of values. The concept of "governance"
introduced a new framework for debates and policy discussions.
By the mid-1970s, the term "governability" was not as prevalent as "governance," but its usage experienced
rapid fluctuations. Google n-grams reveal a surge in the use of "governability," indicating a heightened
concern about the ability to effectively manage societal affairs without descending into chaos. Meanwhile,
"governance" appeared to diffuse steadily throughout the era, suggesting a continuous evolution of the
concept.
The Trilateral Commission, established in 1973 and financially supported by David Rockefeller, under the
direction of Zbigniew Brzezinski, played a significant role in shaping perceptions of governability. In their
influential publication "The Crisis of Democracy" (1975), governability was depicted as the capacity of a
political regime to resist being overwhelmed by the demands of its citizens. The Commission highlighted the
risk posed by an increasingly weakened state, unable to control the burgeoning demands of various societal
groups. Scholars such as Michel Crozier pointed out that European political systems were becoming strained
due to an overload of participants and demands, leading to bureaucratic inefficiencies and fostering an
environment of irresponsibility and consensus. Samuel Huntington echoed similar concerns, noting a shift in
societal values towards individualistic pursuits over public-spiritedness, eroding trust in leadership and
authority.
The societal upheavals of the 1960s amplified these worries. There was a perceptible shift in societal values,
moving away from work-oriented, public-spirited values to those emphasizing private satisfaction, leisure,
and self-fulfillment. This change was perceived as undermining the traditional authority structures, leading
to a delegitimation of authority and a loss of trust in leadership. The Trilateral Commission's concerns
aligned with broader societal apprehensions about the breakdown of social order and the erosion of
traditional hierarchies.
Critics of the 1970s, notably figures like Samuel Beer, identified a cascade of undisciplined special-interest
demands as a primary concern. These demands, rather than being driven by coherent class claims, appeared
as disparate groups vying for a larger share of the national product. Mancur Olson's observations reinforced
this notion, emphasizing that these demands lacked encompassing discipline, leading to inflation and public
service strikes. Beer used the term "populism" to describe this breakdown of organizational discipline,
highlighting a shift toward mass demands over exclusionary ethnic consciousness, a concept distinct from
present-day implications of populism.
The Trilateral Commission faced criticism, labeled by some as an elitist group, but its composition included
venerable liberals and conservatives alike. Trilateralism aimed to reclaim control from what was perceived
as the social and political excesses of the 1960s, representing a call for political maturity. In the US, it was
seen as a reaction against the dominance of issues like gender equality and lifestyle concerns at the 1972
Democratic Party Convention. Trilateralism sought to reassert a sense of responsibility and political initiative
among what they deemed as a more mature faction of society, contrasting it with what they saw as the
idealism of the '60s.
However, the Trilateral Commission's influence extended beyond domestic concerns. It was a platform for
responsible mobilization of experts for global economic governance, representing a significant portion of
global economic output. Yet, their response was also shaped by the redistribution of global power and
resources. With a focus on north-south relations and aid to developing countries, their policies aligned with
efforts to prevent the consolidation of power by groups such as OPEC and the Third World. These positions
were supported by influential leaders but faced criticism from emerging neoconservative voices who
perceived these policies as out of touch with reality, labeling them as "liberal chic."
Ultimately, the 1970s served as a battleground of ideas about governance and governability. It was a period
of intense debates regarding the ability of governments to manage societal demands amidst shifting values
and global power dynamics. The concerns raised during this era continue to resonate, shaping contemporary
discussions on governance and societal management.
International Redistribution?
In the wake of societal shifts, claims for rights and resources reverberated across various platforms, from
local communities to the grandeur of the UN General Assembly. These claims were articulated using the
language of rights, urging acknowledgment and restitution for transgressions. Political philosophers and
scholars delved into these claims, framing them as obligations. Throughout history, interest groups and classbased claims had been pivotal in driving political agendas within states. Now, post-colonial and developing
nations, emerging onto the international stage, waged similar struggles against the industrial powers of
Europe and America.
The United Nations emerged as a significant platform for articulating these claims. The General Assembly,
theoretically providing equal representation, granted voice and presence to the countries of the global south,
collectively representing their interests, which they struggled to assert individually or within the frameworks
of Bretton Woods-derived agencies like the OECD and the European Community. These ex-colonial nations
sought to strengthen recognition of their collective rights. The UN's ECOSOC and other institutions provided
avenues for socialist and non-aligned developing countries to voice dissent and critique the Western powers,
particularly the United States.
The UN Conference on Trade and Development (UNCTAD), arising from a 1962 gathering in Cairo, became
a critical forum for discussions. Its first conference in Geneva in 1964 drew participation from 120 countries.
Contrary to expectations, the ideas presented by UNCTAD leaned more toward liberalism than socialism.
Figures like Ernesto Che Guevara advocated for market access and an end to tariff barriers, crucial for thirdworld producers trying to penetrate first-world markets. However, accessing these markets was a daunting
challenge. Agricultural surpluses remained a pressing concern for the US, leading to protectionist measures
despite attempts at international cooperation. The European Union (EU), with its Common Agricultural
Policy, navigated its own internal agricultural challenges, acknowledging the need for tariff concessions for
African ex-colonies, albeit while safeguarding its own interests.
Yet, the focus on free trade alone couldn't resolve the global south's problems. Discussions at UNCTAD
persistently emphasized the need for a vague "structural adjustment." This concept stemmed from
challenges faced by the global south in the late 1940s and 1950s. The Prebisch-Singer thesis, formulated by
economists Hans Singer and Raúl Prebisch, highlighted the deteriorating terms of trade for agrarian
exporters compared to industrialized nations. This idea, despite contention, gained traction among
economists in the global south, shaping dependency theory. It underscored the continued exploitation of
the global south by the global north. Singer advocated for softer loan conditions, but this met staunch
opposition. The notion propelled the idea that import substitution and industrialization were pivotal for
third-world economic progress. The UN's call for a Decade of Development echoed these sentiments, but
differing perspectives and political divisions hindered its efficacy.
Amidst this ideological conflict, representatives from the global south advocated for redistribution, seeking
to address the entrenched disparities. The intricate dance between trade policies, economic theories, and
political agendas reflected the complexity of international relations during this era, illuminating the struggle
for recognition and resources within a rapidly evolving global landscape.
The 1950s witnessed a significant increase in the number of UN member states, swelling from sixty to one
hundred, many resisting alignment with either the East or the West. Under the leadership of General
Secretary Nikita Khrushchev, the Soviets intensified their efforts in economic competition. By 1966, Latin
American delegates secured a declaration of economic and social rights equivalent to classical political rights.
The 1972 UNCTAD meeting in Santiago, convened during Salvador Allende's Marxist presidency in Chile,
dedicated itself to a new international economic order. Accusations of neocolonialism rooted in dependency
theory became the core of third world grievances.
The divide within the third world between oil-producing and oil-consuming countries became pronounced,
especially with OPEC's dramatic intervention in oil prices. While OPEC members like Venezuela and Algeria
initially projected solidarity with the developing world, their subsequent quadrupling of oil prices strained
this solidarity. Despite this, the industrialized nations bore the brunt of the oil price hike, prompting
significant financial flows to aid institutions. Algeria, despite being a minor oil producer, played a crucial role
in this alliance.
The 1973-1974 crisis spotlighted three major groups: OPEC, the Western powers, and the Group of 77 (G77) within the UN. The oil majors faced criticism from the US Congress but remained passive players. The oil
price hike spurred individualistic pursuits among players, endangering the US-led international monetary
system. The US Treasury Secretary's denouncement of the price hike at an IMF meeting further accentuated
this tension. Kissinger's call for a conference among major oil importers aimed at multilateral coordination
but drew skepticism from nations like France, wary of American dominance.
Amid these power plays, the G-77 voiced concerns about trade conditions and the exploitation of raw
materials by industrialized countries. The G-77 proposed a New International Economic Order (NIEO) based
on principles of equity, cooperation, and sovereign equality among states. This program sought technological
sharing, fairer trade terms, debt forgiveness, and developmental assistance from developed nations.
The delineation between claims and rights in this context becomes an intriguing debate. The UN's declaration
of human rights in 1948 primarily encompassed liberal rights. However, in the post-war world, the distinction
between "demand" and "deserve" blurred. Despite the US administration's reluctance to prioritize these
rights, their blatant violations, particularly during the Biafran and East Pakistani crises, brought human rights
to the forefront of global attention.
The Biafran secession attempt and the emergence of Bangladesh following the East Pakistani campaign shed
light on the complexities of global power dynamics and the selective stance of major powers toward human
rights violations in different regions. These incidents marked crucial junctures where global attention pivoted
toward humanitarian concerns despite geopolitical complexities.
Let's delve further into the dynamics surrounding human rights, economic policy, aid, and global economic
interdependence during the 1970s, a pivotal era that witnessed complex geopolitical shifts and socioeconomic challenges.
During this time, despite immense human suffering prompting widespread Western sentiment for human
rights, the impact on state conduct remained limited. The "Never again" sentiment often arose too late to
prevent atrocities. However, in the mid-1970s, amidst negotiations for the New International Economic
Order (NIEO), the Soviets nominally endorsed "rights" in the Helsinki process, aiming to consolidate European
borders.
Jimmy Carter's 1976 presidential campaign and subsequent administration prioritized human rights in foreign
relations, albeit with limited influence, especially in the Americas. While state governments couldn't
guarantee these rights, the realm of governance provided platforms for defending these ideals. Surprisingly,
the human rights "basket" accepted by Leonid Brezhnev in 1975 aided Eastern European dissidents in their
success in the late 1980s.
Economic rights were a subject of debate, with differing perspectives on whether they were reparation for
the global north's exploitation of the third world or a tactic to impose guilt on developed nations. Economists
in influential Western countries pushed back against these claims, criticizing import substitution
industrialization and the NIEO.
Amidst OPEC's oil price hikes and the third world's moral offensive, regional trade agreements like the Lomé
Convention emerged. Signed by the EEC and African, Caribbean, and Pacific (ACP) countries, Lomé facilitated
market access but reinforced resource access for the European Council. Additionally, numerous regional
trade agreements were negotiated during this period, albeit with varying impacts.
Direct aid to the third world faced challenges. While bilateral aid from capitalist countries and multilateral
aid agencies expanded, the results fell short of expectations. The Marshall Plan, hailed as a success, was an
unsuitable model for aid to developing nations, which needed a different kind of support, particularly in
terms of human resources and structural transformation.
The complexities within the third world further complicated the notion of redistribution. Wealthy
Petrostates, notably Saudi Arabia and Libya, faced disparities between elites and impoverished citizens. Their
efforts to recycle dollars into Western economies via bank deposits contributed to credit extensions, albeit
with varying impacts on different segments of society.
Kissinger's response to the OPEC price hike included efforts to prevent Western European nations from
breaking ranks with the United States, leading to the formation of the International Energy Agency in 1973.
The intricate balance between economic policy, aid, geopolitical interests, and global economic
interdependence shaped the international landscape in the 1970s, underscoring the challenges and
complexities of addressing socio-economic disparities and human rights concerns on a global scale.
Throughout this period, the global stage was marked by a fervent yet often limited response to human rights
violations. Despite atrocities prompting a surge of Western sentiment for human rights, this outcry often
occurred after significant suffering had already taken place, rendering its impact on state conduct somewhat
limited. The phrase "Never again," unfortunately, more often than not, signified a response that arrived too
late to prevent the horrors that had already unfolded. However, amidst the negotiations for the New
International Economic Order (NIEO), there emerged a nominal endorsement of "rights" by the Soviets within
the Helsinki process. This endorsement aimed to consolidate European borders, highlighting the multifaceted
geopolitical aims intertwined with discussions about human rights at the time.
In the political sphere, Jimmy Carter's 1976 presidential campaign and subsequent administration placed a
substantial emphasis on human rights in foreign relations. Despite this focus, the practical influence of these
efforts, particularly within the Americas, remained somewhat constrained. Governments alone struggled to
guarantee these rights, yet the realm of governance provided essential platforms for the defense and
propagation of these ideals. A noteworthy surprise emerged from the human rights "basket" accepted by
Leonid Brezhnev in 1975, which inadvertently supported Eastern European dissidents in their eventual
success during the late 1980s, showcasing unexpected repercussions of these geopolitical maneuvers.
Meanwhile, the recognition and implementation of economic rights became a subject of intense debate.
Some argued that these rights represented a form of reparation for the exploitation of the third world by the
global north. Yet, in influential Western countries, economists pushed back against these claims, critiquing
economic policies like import substitution industrialization and raising skepticism toward the objectives of
the NIEO.
Henry Kissinger's response to the OPEC price hike included efforts to prevent Western European nations from
diverging from the United States' stance, leading to the establishment of the International Energy Agency in
1973.
This intricate tapestry of economic policy, aid initiatives, geopolitical interests, and global economic
interdependence significantly shaped the international landscape of the 1970s. It underscores the profound
challenges and complexities involved in addressing socio-economic disparities and human rights concerns on
a global scale during this transformative period.
A Decade of Inflation
The economic landscape of the 1970s was defined not only by the rising calls for the New International
Economic Order (NIEO) but also by a pressing concern within the first world: inflation or the phenomenon
termed "stagflation." This inflation, although not reaching the extreme levels witnessed after the World
Wars, endured longer and held more international ramifications than prior hyperinflations. In OECD
countries, inflation soared to an average of almost 10 percent per year between 1974 and 1979, compared
to a 4 percent average in the preceding decade. This period of inflation was coupled with continued
unemployment at an average of 5 percent, a stark contrast to the 3.2 percent recorded from 1960 to 1973.
The causes of this inflation were multifaceted. Central banks, facing demands to fund budget deficits,
accommodate labor movements, and counteract the consequences of OPEC price hikes, resorted to
increasing price levels and money aggregates. Indexation or cost-of-living raises built into wages and pensions
in certain countries, initially intended to align with inflation rates, inadvertently fueled a cycle of wage-price
spirals.
The persistence of stagflation sparked diverse analyses of democratic capitalism. On the left, some social
scientists anticipated a shift towards neo-corporatist structures, anticipating a transformation from market
capitalism to a more state-managed economy. In contrast, conservative commentators argued that the
democratic setup, striving to accommodate various interest groups, led to inflation and slower growth. Public
choice theorists posited that inflation tended to become chronic in democracies due to government actions
aimed at delivering welfare benefits or tax relief, without visible immediate repercussions.
This period saw a substantial rise in public expenditure in OECD countries. While some correlated this
increase with inflation, a direct and simple causation between government spending and inflation proved
elusive. Economists like James Tobin downplayed the significance of inflation, assuming that if earnings kept
pace with prices, its aggregate welfare loss was minimal. However, rising prices still engendered a sense of
dislocation, particularly among older citizens, and raised concerns about societal values and morality among
conservative analysts like James Buchanan and Richard Wagner. They perceived inflation as a symptom of
broader social decay, impacting people's perceptions of justice, fostering uncertainty, and altering their
outlook toward the future. The prevailing economic discourse of the era grappled with the complexities of
inflation, its underlying causes, and its societal repercussions, reflecting the multifaceted nature of economic
challenges during the 1970s.
During the 1970s, skepticism emerged regarding the efficacy of democratic governance, echoing sentiments
last heard in the 1930s. Some analysts argued that wage earners, especially when represented by labor
unions or left-wing political parties, no longer prioritized capital accumulation for investment but instead
demanded perpetually high wages and extensive welfare entitlements. This shift, critics contended, signaled
a departure from the savings-driven ethos that originally fostered wealth creation in modern capitalism. They
perceived a capitalist system more fixated on consumption than on long-term investment or savings, leading
to concerns about the eroding "moral basis" necessary for its functioning.
The moral foundations of capitalism were approached from different angles. Some viewed it through the
lens of Max Weber's "spirit of capitalism," emphasizing qualities like the work ethic and the willingness to
delay gratification for future gains. Others, like Joseph Schumpeter, referenced "animal spirits," signifying
the dynamism and entrepreneurial drive within capitalism. Meanwhile, liberals championed the concept of
equality of opportunity rather than equality of outcome, advocating for fairness in life chances without
advocating absolute wealth leveling.
John Rawls's influential Theory of Justice in 1971 introduced principles for social policy. He suggested that
any redistribution should prioritize improving the conditions of the most disadvantaged citizens, and
policymakers should act as if behind a "veil of ignorance," unaware of their social class or personal benefits.
Despite such ideals, debates persisted regarding the extent of redistributive corrections needed, particularly
concerning issues of humanitarian obligations, historical reparations, and the balance between equality and
the preservation of incentives for economic growth.
Earlier in the developed world, the prevailing belief was that economic growth would mitigate feelings of
inequality without altering the national distribution of income or wealth. However, critics lamented the
fading willingness of the masses to restrain their consumption or social welfare benefits to ensure economic
growth. Legislative bodies faced challenges in funding social programs without deficits, as such provisions
risked crowding out productive investments or fueling inflation.
Various remedies were proposed to combat persistent inflation, contingent on differing diagnoses of its
causes. Hayekian liberals blamed Keynesianism for inflationary tendencies and advocated against further
regulation, such as price and wage controls. A middle-of-the-road view, exemplified by the McCracken Report
commissioned by the OECD, attributed inflation to a series of unfortunate disturbances compounded by
errors in economic policy, advocating against extraordinary regulatory measures.
The influence of independent experts in shaping economic policy increased during this period, reminiscent
of their pivotal role in the 1920s and 1930s. Bodies like the OECD, serving as centers of expertise and
knowledge dissemination, claimed authority based on specialized knowledge and access to what was
deemed objective or scientific truth. The realm of governance, intersecting with economic policy, saw a shift
in the orientation of economic policies during the 1970s, largely guided by expert opinions and normative
frameworks.
Throughout history, various domains, including international affairs, public health, and economic
performance, have been influenced significantly by expert opinions. The increasing reliance on expertise in
governance underscored the influence wielded by experts across diverse spheres of societal functioning,
albeit with varying degrees of authority and institutionalization.
The politicization of claims to expertise and governance surged in a specific direction during the 1970s and
1980s, notably within organizations like the OECD. During this period, the OECD began to align with market
ideologies, perceiving social expenditures as impediments to growth and advocating for the privatization of
social services. Keynesian views, prevalent until then, were systematically phased out, giving way to a new
emphasis on bolstering competition, liberalizing international trade, reducing budgets, and advocating for
greater individual and familial responsibility while curbing social security benefits.
Import substitution, an earlier model advocated for less developed economies, began to wane, giving way
to admiration for the rapid development exhibited by the "Asian tigers." Reports from influential bodies like
the National Bureau of Economic Research highlighted the successes of Pacific countries, emphasizing their
progress based on exporting advanced electronic products and clothing items. As this transformation
unfolded, some countries faced a foreign debt crisis, necessitating structural adjustments, including
privatization and budget cuts, which became the governing principles for economic policies.
The mid-1970s marked a significant political turning point. The analysis of inflation led to criticisms of
redistribution, both nationally and internationally. Critiques emerged against the postwar project-state and
its social welfare systems, echoing through conservative ideologies and, later, embraced by New Democrats
in the U.S. and New Labour in the U.K. in the 1990s. Such critiques culminated in reforms at the turn of the
millennium, particularly targeting unemployment benefits and their perceived disincentive effects on seeking
employment.
This era witnessed a shift against redistributive policies, undercutting the momentum for a New International
Economic Order (NIEO). Although the call for greater equality held sway through the 1960s and into the
1970s, sentiments reversed towards the end of the decade, aligning more with anti-redistribution
narratives.
Despite impassioned appeals, foreign aid failed to offer a comprehensive solution for national
underdevelopment from the 1950s onward. Economists associated with the Mont Pèlerin Society, notably
Peter Bauer, challenged the development paradigm. Bauer vehemently criticized state-led assistance,
rejected the concept of a specifically underdeveloped world, and contested comparative national income
statistics. His arguments, echoed by others, aimed to defend the affluence of the already wealthy. Bauer's
later writings in Commentary reflected opposition to the effort by neutralist and NIEO states to condemn
Israel, indirectly attacking the very concept of the NIEO itself.
The critiques of the time extended beyond mere criticisms of flawed Keynesian policies or development
strategies. When the discussion revolved around redistribution, critics insinuated deeply rooted societal
flaws, sometimes suggesting racial pathologies. In the United States, debates around Daniel Patrick
Moynihan's analysis of the Black family in 1965, attributing dysfunctionality to the absence of male heads,
highlighted the political and intellectual hazards of ascribing issues to specific ethnic or cultural factors.
Similar discussions on an international scale implicitly critiqued societies in the global south.
Moynihan, appointed by Gerald Ford, openly clashed with Kissinger at the State Department. In 1975,
Moynihan published a scathing critique in Commentary, targeting third world ideologies and Western guilt
feelings that allegedly fostered them. He accused the State Department of appeasement when it should have
stood against what he saw as creeping socialism and anti-Zionism in the third world. Kissinger, largely
agreeing but more reserved in public, shared similar sentiments, feeling that weaker nations were holding
the industrialized world for ransom.
Issues surrounding race sometimes surfaced in these discussions, linking quasi-racial attributes to behaviors
resisting market rationality. Wilhelm Röpke, an ordoliberal, defended apartheid and criticized initiatives like
the New Frontier. He perceived foreign aid as a mechanism for spreading collectivist policies. Even
sympathetic anthropological analyses of third world communities often emphasized virtues that seemed to
confirm resistance to market logic, echoing earlier critiques by colonial officials that increasingly took on
racial undertones.
The critiques expanded beyond aid, questioning its role in reinforcing dependency and corruption. Political
scientist Stephen Krasner, later a key figure in George W. Bush's State Department, outlined the
confrontation in the mid-1980s, describing the clash between the West's adherence to market allocation and
capitalist rationality versus the third world's desire to wield state power reinforced by the UN regime of
Westphalian sovereignty. Krasner, adopting a realist perspective, highlighted the vulnerability of third world
nations despite economic growth, asserting that their challenges within international regimes were
legitimized by the principle of sovereign equality. He expressed pessimism, foreseeing a perpetual NorthSouth conflict, suggesting that certain problems might have no foreseeable solutions within the international
system.
A Governance Unicorn: The European Economic Community in the Years of Stagflation
Defining the nature of the European Union (EU) has been a perennial challenge. Scholars have grappled with
categorizing it as either an intergovernmental organization or a quasi-government. While not a state, it
performs functions akin to a state. Established by sovereign states, it possessed delegated powers but lacked
full sovereignty, although it participated in international agreements such as the Helsinki accords in 1975 and
the final act on German unification in 1990.
Initially conceptualized as the European Economic Community (EEC) in 1957, it consisted of a parliament
with limited powers, a nonpartisan commission aimed at objective politics, and a council of ministers
representing national preferences. The EEC's trajectory paralleled that of the Coal and Steel Community,
remaining subservient to the growing influence of the EEC. Despite member states theoretically retaining
sovereignty, they relinquished significant legislative authority. The EEC introduced common external tariffs
and worked on reducing internal tariff barriers. By the early 1960s, it established the Common Agricultural
Policy to protect high-cost producers, particularly in France, from intense competition. EEC Court decisions
highlighted the supremacy of Community law over national rules and extended the scope of EEC legislation
to encompass individuals and firms.
The year 1973 marked the first enlargement wave for the EEC, admitting the United Kingdom, Ireland, and
Denmark. British apprehensions toward a federal European structure persisted, reflecting a preference for
the "special relationship" with the United States. This relationship faced challenges during the OPEC oil
embargo and subsequent price rises, as Kissinger sought European alignment with Washington's stance
against Arab states. The European Council was established in 1974, enhancing effectiveness but complicating
precise definition.
In the 1970s and 1980s, the EEC presented itself as a unique governance organization. Schmidt and Giscard
agreed on a new European Council to convene heads of government and the Commission president every
few months. However, advancements toward a common foreign and defense policy were limited. The
European Parliament gained traction vis-à-vis other EEC bodies and began striving for influence over policies
and budgets. Direct elections for the Parliament were agreed upon for 1978.
Amidst monetary and institutional challenges, the EEC stood as a distinct entity for transnational governance.
Monetary coordination posed challenges given the ambitions for a common economic zone and European
currency. The European Monetary System (EMS) was established in 1978, aiming for coordinated exchange
rates and introducing the European Currency Unit (ECU). Subsequently, the Maastricht Treaty of European
Union in 1992 laid the groundwork for the euro, marking a subsequent phase in the EEC's evolution.
The 1970s were marked by two primary sources of European monetary tension: one between the EEC as a
collective entity and the United States, and another between strong-currency states, primarily Germany and
the Netherlands, and more inflation-prone nations, particularly France at that time. These tensions not only
revolved around national goals and sovereignty but also demanded governance solutions to maintain the
unity of the Community and restore stability in the money markets, necessitating compromises within a
multinational framework.
An early attempt in the 1970s to mitigate currency fluctuations and progress towards a currency evaluation
fund and common currency by 1980—the Werner Plan—was derailed by the inflow of American dollars in
1971 and the defensive revaluation of the deutsche mark. German policymakers were consistently pressured
to elevate their currency's exchange rate to counter the influx of American dollars being converted to
deutsche marks, stashed in German banks as a hedge against US inflation.
The United States, benefitting from the dollar's status as a reserve currency after Bretton Woods, faced
indications of the dollar's overvaluation against other currencies like the deutsche mark and yen. Costs
accrued from the Vietnam War, NATO commitments, American preferences for European and later Japanese
products, and businesses acquiring foreign subsidiaries led to European firms accumulating dollars, adding
to domestic inflationary pressures. The US, facing escalating pressure on its reserves, suspended the
convertibility of dollars into gold in 1971 and imposed a temporary tariff and wage-price freeze. The resulting
Smithsonian Agreement in December 1971 among European countries and the US aimed to stabilize fixed
rates by sharing adjustment costs, leading to currency devaluations and agreements to maintain currency
bands.
Efforts by European Central Bank governors at Basel in April 1972 aimed to better coordinate currencies,
leading to the establishment of the EEC snake within the Smithsonian tunnel, an endeavor to link currencies
within specific limits. However, currency turmoil persisted, leading to the abandonment of fixed exchange
rates. The oil price rise of 1974, driven by OPEC demanding payment in dollars for oil, temporarily offset the
dollar's weakness. European currency turbulence persisted until France, under President Giscard d’Estaing,
decided to rejoin the snake in May 1975.
European policymakers sought alternatives to the dollar as a reserve currency. Discussions floated various
proposals such as a European unit based on a basket of EEC currencies, a weighted average of exchange rates,
or even the introduction of a parallel currency, the Europa, alongside national currencies. Despite aspirations
for monetary union, concrete progress remained elusive.
Intermittent progress and setbacks characterized European negotiations. By 1977, policies of stabilization
were initiated in France, while Germany, under Chancellor Schmidt, urged France to collaborate in combating
inflation. The discussions on economic and monetary union were reignited in late 1977, raising hopes for
progress dependent on political decisions at a Community level.
In June 1978, EEC finance ministers proposed a system encompassing all Community currencies, despite
unresolved disparities in inflation rates and balance of payments. This proposal led to the agreement to
create a European Monetary Fund (EMF) to support currencies under pressure, indicating a commitment
from Germany to assist the franc. However, convincing national banks to support the EMF remained a
challenge, emphasizing the urgency of the institution for France's return to a snakelike arrangement and
Germany's need for an efficiently functioning common economic market due to its historical vulnerabilities.
The intricacies of European monetary policy in the 1970s were underscored by the delicate balance between
national interests, international dynamics, and the pursuit of a cohesive European monetary framework.
The late 1970s saw the European Council reaching an agreement on a new European Monetary System (EMS),
although the proposed fund did not materialize. Each participating country committed to intervene if its
currency diverged more than 2.25 percent from the European Currency Unit (ECU), a notional currency based
on a weighted average of currencies in the scheme. This system confirmed German dominance and required
deficit countries to adjust their spending, reflecting an implicit rule akin to the postwar American-led
capitalism. Negotiations were arduous both between and within countries. Germany's industry opposed the
tolerance for French devaluation, while Giscard faced opposition within France. Britain declined to join, and
Ireland broke its peg with sterling to join the system. Italy also reluctantly signed on after seeking greater
commitments.
However, challenges persisted due to subsequent OPEC oil price hikes, the Iranian revolution, and surges in
inflation. By 1983, adjustments to currency values had been triggered several times, primarily affecting the
deutsche mark and the French franc.
The EMS faced a pivotal moment when French President Mitterrand, elected in 1981 on a left-wing platform,
confronted choices between aligning with the EMS or implementing austerity measures. Ultimately,
alignment with Germany prevailed, signaling the influence of capital and governance over the left's policies.
While the monetary challenges of the 1970s showcased the EEC's fragility, they also underscored the
emergence of linked currencies as a framework for European governance. This period revealed the
intertwining of governance activities, state intervention, and capital interests. The EMS's history highlighted
the question of how governance could effectively serve economic welfare without simultaneous intervention
by states and capital. Moreover, it raised concerns about governance representing the diverse societal strata
it aimed to serve.
The EMS demonstrated the potential and limitations of governance, fostering a community based on shared
interests and knowledge. It aimed to move beyond competing sovereignties toward unity and order but
grappled with the issue of democratic deficit. The legitimacy of its institutions was questioned, highlighting
persistent debates about the relationship between governance, politics, and aspirations for statehood within
the European Community. These questions remain relevant even today.
When Governance Did Not Suffice
In the tumultuous aftermath of the civil rights movements and feminist mobilization, the 1960s saw an
emerging culture of rights across the Western world. This cultural shift championed open homosexual
relationships, disability rights, and pushed for legal recognition of divorce and abortion, even in traditionally
conservative regions like Italy and Spain. Alongside these societal transformations came the acceptance of
nonviolent mass political action, notably exemplified by figures like Mohandas Gandhi, Martin Luther King
Jr., and influential voices within the African National Congress in South Africa.
Yet, while nonviolent approaches had succeeded in some movements, they had not always led to desired
outcomes. Cases such as Algeria's struggle for independence, the overthrow of the Batista regime in Cuba,
and China's transformation showed that nonviolence did not universally guarantee success. Out of the
societal turbulence of the 1960s, emerged pockets of radicalized intellectuals and workers who grew
disillusioned with nonviolent methods, believing that mass action without violence was futile.
The 1970s saw the rise of small groups convinced that bourgeois society, with its bureaucracy and privilege,
was beyond reform through peaceful means. They propagated the belief that the assassination of capitalist
leaders and alleged government servants was a legitimate tactic to overturn what they saw as a repressive
capitalist system. These radicalized factions, stemming from movements like Italy’s Hot Autumn and
Germany’s radical students, resorted to terrorism as a means to challenge what they perceived as deeply
entrenched societal structures.
In Italy and Germany, secretive radical groups like the Red Brigades engaged in a wave of assassinations and
violent actions, targeting prominent figures and leading industrialists. Italy faced a tumultuous period with
multiple assassinations, kidnappings, and shootings, including the kidnapping and subsequent assassination
of Christian Democratic Prime Minister Aldo Moro. Germany dealt with the Baader-Meinhof gang, whose
members committed suicide in prison following their arrest. The intensity of terrorism tested the strength of
the postwar liberal institutions in these countries, resulting in arrests, trials, and imprisonment of
perpetrators.
Simultaneously, the 1970s witnessed vibrant protest movements focusing on race, gender, and workingclass representation. These movements challenged existing political structures and parties. Even in the
United States, the Democratic Party faced vulnerability to left-wing mobilization, exemplified by the chaotic
1968 Chicago convention and George McGovern’s decisive defeat in the 1972 presidential election.
Amidst these societal upheavals and protest movements, conservative forces in various countries,
particularly in Latin America, resorted to military intervention to counter perceived threats of social
revolution and economic radicalism. Brazil, Chile, Argentina, Uruguay, and Paraguay experienced military
takeovers, leading to harsh dictatorships characterized by brutal repression against suspected left-wing
elements.
While the 1970s witnessed significant strides in societal rights and protest movements, it also showcased the
rise of radicalized factions resorting to violence to challenge what they saw as deeply rooted injustices
within capitalist societies. This period saw a clash between liberal institutions and radical ideologies, testing
the resilience of postwar governance frameworks and posing critical challenges to traditional political
structures.
In the 1970s, the challenge of dissent within one-party ruled Communist countries resurfaced with
significant force. Despite initial leniency toward dissenting voices and ideas aimed at modifying central
planning in Brezhnev's Soviet government, crackdowns on dissenters like Andrei Sakharov escalated. Similar
crackdowns targeted dissenters in Prague (Charter 77) and East Germany. The single-party monopoly in these
states left little room for alternative voices, intensifying crackdowns on any opposition.
China, under Chairman Mao's leadership, experienced a radical convulsion during the Great Cultural
Revolution of the late 1960s and early 1970s. Mao, discontented with the party's bureaucratic routine,
mobilized activists to challenge entrenched hierarchies. The revolution led to the denouncement,
terrorization, and removal of millions of professionals, causing economic damage that proved unsustainable.
As the excesses became evident, more moderate voices gradually reclaimed power and re-established
hierarchy.
India, the world's most populous democracy, saw a departure from its inherited British parliamentary
institutions. Jawaharlal Nehru, a monumental figure in India's democratic history, passed away in 1964,
succeeded by Lal Bahadur Shastri and eventually Nehru's daughter, Indira Gandhi, in 1966. Her
administration faced challenges, including economic setbacks due to the oil crisis, a railroad strike, and a
critical court decision questioning electoral results. Faced with this turmoil, Gandhi declared a state of
emergency in 1975, suspending civil liberties and detaining opposition leaders. During the Emergency,
Gandhi's policies aimed at imposing "high modernist" projects like forced sterilization to control population
growth and urban redevelopment projects in Delhi. However, these endeavors faced substantial challenges
and critiques. The Emergency eventually led to Congress losing the 1977 elections to a united opposition
force, the Janata Party, marking a brief hiatus in Gandhi's political dominance.
This crisis in parliamentary politics revealed deeper societal failures in postcolonial India, reminiscent of
Gramsci's notion of "passive revolution." The inability to cultivate a democratic society and overcome
hierarchical divisions and cleavages led to criticisms of the state's attempts to control and manipulate the
populace directly. While historical interventions for grassroots democratic development faced significant
challenges, especially in dealing with deeply entrenched societal divisions, critiques of state-imposed
development initiatives, like India's Emergency, pointed to their shortcomings. Balancing elite control and
societal democracy remains a complex issue, especially when considering societal divisions and the potential
impact of religious loyalties on governance. Resolving these dilemmas remains a persistent challenge for
historians and political analysts, shaping interpretations of societal outcomes within the framework of elite
and mass dynamics.
In the democracies of Western Europe and the United States during the 1970s, the prospect of authoritarian
seizures of power seemed improbable, although popular movies like "Seven Days in May" and rumors of neofascist plots in Italy and Spain's coup attempts fueled speculation. However, while these democracies didn't
succumb to authoritarian rule, their party governance began to falter. Elsewhere globally, single-party
systems persisted, as seen in Communist societies, Mexico, India, and many African states. Even in Italy and
Japan post-World War II, single-party dominance appeared unshakable.
As time passed and neoliberal alternatives gained traction against corporatist legacies, the stronghold of
entrenched political parties weakened. In Mexico, challenges emerged for the Institutional Revolutionary
Party from both the right and left. Italy saw smaller "lay" parties from the center leading governments in the
1980s, while factions within Japan's Liberal Democratic Party weakened its overall dominance. The Bharatiya
Janata Party (BJP) in India challenged the long-standing dominance of the Congress Party.
Simultaneously, authoritarian regimes faced downfall. The Greek colonels' dictatorship collapsed
disgracefully after a failed invasion of Cyprus in 1973, marking Greece's return to modern democratic norms.
Similarly, in Spain, despite Franco's one-party rule, a transition was underway. Franco had set the stage for a
monarchy restoration, and King Juan Carlos, influenced by liberal European norms, took charge. Spain's
industrial and economic development, aided by international associations and economic growth, fostered a
shift toward democratic values. The Communists, too, distanced themselves from Moscow's influence and
embraced peaceful transformation. Silent changes within political classes and the assassination of Prime
Minister Admiral Carrero Blanco expedited the transition to parliamentary government in Spain. Legalized
political parties, including the Communists, emerged, and a moderate conservative prime minister worked
toward reconciliation. Framework agreements like the Moncloa Pact facilitated economic transition without
conflict, representing a successful example of neocorporatist agreements seen across Western societies.
Portugal's transition to democracy was tumultuous compared to Spain's. The nation, Europe's poorest noncommunist country and the last colonial power in Europe, faced colonial conflicts in Mozambique and Angola.
The army, disillusioned with these wars, peacefully ousted the discredited dictatorship on April 24, 1974, in
the "carnation revolution." Amidst uncertainty about Portugal's future direction, a power struggle unfolded
between conservative military leaders like General Antonio Spinola, moderates like future president António
Ramalho Eanes, and radical officers inspired by Allende's regime. Initially, it seemed that radical forces might
prevail, but ultimately the moderates, backed by northern small farmers, secured control. Portugal
eventually established a government with alternating conservative and social-democratic parties, as the
army moderates gradually relinquished their influence.
During this period, governance institutions played a significant role in supporting democratization efforts.
Initially preoccupied with supposed radicals, these organizations, like German political party foundations and
human rights groups, shifted their focus and offered both financial and moral support to democratizers. This
change coincided with a belief that the path forward necessitated adopting new economic wisdom,
emphasizing reducing the state's role in economic policy. This paradigm shift in governance marked the onset
of what would become the neoliberal turn in the 1980s—a shift toward market-oriented policies, reducing
welfare, streamlining bureaucracy, and empowering financiers and industrial leaders representing capital
interests.
By the late 1970s, Western governments faced public discontent, particularly due to inflation and oil crises.
OPEC's second three-fold oil price increase in 1978, known as OPEC II, further destabilized economies.
President Carter acknowledged American dissatisfaction with public affairs, attributing part of it to the oil
majors' immense profits. In Europe, inflation surged to double digits, and public service strikes during the
winter of 1978–1979 exacerbated the situation. This turmoil in the West contrasted with the petrostates'
gains, allowing them to invest in infrastructure, health facilities, arms, and European and North American
ventures. However, this newfound wealth was unequally distributed, leading to glaring disparities between
urban affluence and agrarian poverty. Emerging authoritarian leaders like Mu‘ammar Gaddhafi in Libya and
Saddam Hussein in Iraq consolidated dictatorial power, while Iran's modernization efforts faced internal
strife, eventually resulting in the shah's ousting in January 1979.
National elections during this time often saw voters rejecting ruling coalitions or parties. The shift towards
the right was evident as Swedish socialists were ousted in 1976, followed by Callaghan's loss to Thatcher in
the UK in 1979. Ronald Reagan's victory in the US in 1980 marked a similar trend. However, the left's victories
elsewhere were less about economic issues and more about replacing conservative leadership figures.
In France, Spain, Greece, and Portugal, socialist parties ousted conservative governments, signaling a desire
to move beyond their nations' foundational moments. Elsewhere, impatience with the left's handling of
inflation led to political shifts. By 1982, Germany's Christian Democrats replaced the ruling Social Democratic
Party, and Italy saw restructuring of coalitions, with prime ministers from "lay" parties leading for the first
time since 1945. Additionally, governance-oriented associations emerged as influential players, paving the
way for policy stabilization in the face of shifting political landscapes.
CHAPTER 8 - Reinventions, 1978–1990s
The project-state had harnessed public energy for various endeavors—war, economic recovery from the
interwar depression, empire retention, and social insurance programs. However, by the 1970s, governmental
activism encountered widespread challenges. Persistent stagflation in the West, exacerbated by OPEC's
second threefold price hike in 1979, posed significant obstacles to macroeconomic management. Labor
unrest disrupted public life in Britain, Italy, and France, affecting travel infrastructure. State-socialist planned
economies faced mounting debts, while the Soviet Union grappled with a challenging guerrilla campaign in
Central Asia. Hardline political groups pursued terrorist activities in several European nations, finding pockets
of sympathetic public opinion. Military rulers in Latin America were unwavering in their pursuit to eliminate
potential opposition. Crime, urban decay, and uncontrolled graffiti plagued American cities. The stability of
the nuclear balance of power was also under threat, while civil wars erupted in various regions, claiming
hundreds of thousands of lives.
Amid these challenges, policy responses began to shift. The Carter administration initiated airline decontrol,
signaling a precursor to later Reagan-era initiatives. Additionally, Paul Volker, appointed by Carter to chair
the US Federal Reserve, enforced a significant interest rate hike in late 1979 to combat relentless inflation.
However, despite these measures, both the Carter administration and Prime Minister James Callaghan in the
UK struggled to address the economic deterioration during their tenure. Carter publicly acknowledged
frustrations in a famous "malaise" speech, while Callaghan infamously retorted to journalists questioning a
crisis with, "Crisis? What crisis?". These instances contributed to a perception of governments losing control
both domestically and internationally.
“Tendenzwende”: Global Reorientation
In the early 1979s, two fervently determined leaders with drastically different governing visions ascended to
power, both seeking to reshape societal norms and overturn what they considered moral decay within their
states. Despite their disparate ideologies—religious zeal for one and energetic capitalism for the other—both
leaders aimed for universal influence transcending national boundaries, garnering passionate followers and
eclipsing their domestic adversaries.
Ruhollah Khomeini emerged at the climax of Iranian turmoil, overthrowing Mohammed Reza Shah Pahlavi's
authoritarian secular modernization program, backed by Western powers. Iran's history was marked by
power struggles among global influences, with Mossadegh's nationalist movement thwarted by UK and US
intervention in 1953. The Shah's rule weakened over time, leading to mass demonstrations and his exile. The
religious leaders, originating from the Shia center of Qum, assumed control, establishing a new republic with
supreme religious authority, the Council of Guardians, and a paramilitary Revolutionary Guard to manage
grassroots dissent and business activities.
On the other side of the world, Margaret Thatcher's rise to power marked a shift in British politics. She
transformed the Conservative Party from a welfare-state-tolerant entity into one staunchly advocating
market-oriented outcomes. Thatcher's emphatic leadership style and the bitter miners' strike, which she
framed as a conflict against the nation's interests, solidified her position. Her assertive policies culminated in
the retaking of the Falkland Islands from Argentina's military junta, serving as a resurgence of British
nationalism. Her administration followed through with swift privatization policies, although she ultimately
adhered to the rules of party governance.
These leaders, alongside others worldwide, propelled a transformative wave in the late 1970s and 1980s.
Ronald Reagan's presidency, aligning with Thatcher's principles, revitalized conservative ideologies. Similar
movements sought to break political stagnation in Italy, replace conservative regimes in France, rejuvenate
post-authoritarian leaders in Europe, foster European integration, and democratize Latin America. This
period saw a shift from stagflation, political unrest, and reinforced capitalist or socialist economies toward
new directions and ideological reversals.
The political landscape shifted significantly in the early 1980s, marked by changes such as the replacement
of the Social Democratic Party (SPD)–led government by the Christian Democratic Union (CDU) in Germany.
Prior to this, significant shifts were underway, including the Carter administration's response to Soviet missile
upgrades in Europe, leading to the plan to station American medium-range weaponry within striking distance
of Soviet targets. This decision divided the non-communist left in Western Europe, with traditional Social
Democrats and Christian Democrats supporting the move while leftist factions organized mass
demonstrations against it.
Meanwhile, China underwent a profound transformation initiated by Deng Xiaoping, opening the country to
experiments in enterprise autonomy. In contrast, the Soviet Union, under Brezhnev and his successor
Andropov, remained entrenched in authoritarian state management. Gorbachev's attempts at economic
restructuring and liberalization marked a pivotal moment, ultimately leading to the fall of Communist Party
rule in Eastern Europe and the dissolution of the Soviet Union in 1991.
The collapse of European Communist regimes at the end of the 1980s was considered a defining moment by
many historians. However, the decline of the left in Western Europe wasn't solely due to the disorientation
caused by the Soviet Union's collapse. The appeal of the Soviet Communist model had already waned
significantly after earlier events like the invasion of Hungary in 1956 and the intervention in Czechoslovakia
in 1968.
Beyond disillusionment with Moscow, the left faced broader ideological challenges. By the late 1970s and
early 1980s, democratic socialism collided with the imperatives of a global economy, leading many to
question the viability of socialist visions. The achievements of welfare states and egalitarianism, once the
cornerstones of socialist platforms, seemed largely accomplished. Additionally, the industrial labor force in
Europe declined, altering the social and electoral base of traditional leftist parties.
The traditional songs and symbols that once defined leftist movements—like singing "Jerusalem," "Bella
Ciao," or "We Shall Overcome"—became nostalgic echoes rather than rallying cries, as the landscape of
political ideology shifted globally.
The period from 1969 to the late 1970s witnessed significant inflationary pressures, especially with the OPEC
II oil price hike, challenging the fiscal foundations of the welfare state. Faced with these challenges, the
reformist left turned toward liberal technocratic approaches to public policy and sought to invigorate the
European Economic Community (EEC). Jacques Delors, the president of the Commission, envisioned Europe
as a social project, contributing to the establishment of welfare democracies as the norm in European
administration. However, the EEC also bolstered its industrial and financial aspects, evolving into a somewhat
dirigiste yet capital-friendly entity. While free market liberals, particularly in Britain, criticized Brussels'
directives, these measures were often shaped by market needs, aiming to restore market incentives rather
than ongoing state intervention.
Alongside these transformations, associations driven by religious faith emerged as powerful political forces.
The Iranian revolution in the Islamic world presented a significant religious activism center, rivaling earlier
promises of secular nationalist leadership. Similarly, Evangelical Christians in the United States, Latin
America, and Africa gained importance in shaping political opinion. Pope John Paul II's influential presence
in Poland in 1978 contributed to active discontent with the ruling party and regime. These religious trends,
coupled with the dominance of capital forces, hinted at the possibility of the 20th-century state giving ground
to either capital or fervent religiosity.
"Reinvention" aptly characterizes the efforts made to shape societies perceived as slipping out of control in
the 1970s. This reinvention necessitated coordinated efforts among national governments, capital
representatives, and advocates of economic governance at international and national levels. These diverse
entities, theoretically organized with separate missions, became increasingly intertwined during the 1970s in
a bid to sustain the political economy of global capitalism (and the final phase of state socialism).
The late 1970s and 1980s highlighted that the functionality of the global economy relied not only on current
labor and commodities but also on anticipations of the future, manifested through credit extension and debt
accumulation. Consequently, the international economy, previously focused on inflation, underwent
restructuring based on debt. The accumulation and extension of debt became a silent prerequisite for the
policies known as neoliberalism.
Debt’s Dominion, 1
The global economic landscape following the American renunciation of currency convertibility in 1971 was
complex and interconnected. Despite the shift, the U.S. dollar retained its role as the primary medium for
international transactions, including the staggering oil bills from OPEC. Concerns that the significant wealth
accumulated by Middle Eastern nations might remain dormant in their treasuries did not materialize. Nearly
half a trillion dollars from oil profits were funneled into European and American bank accounts, forming the
fractional base for much larger loans primarily to third world countries like Mexico, Brazil, and Eastern
European nations such as Poland. This new liquidity aimed to defuse internal tensions and support ambitious
development plans in these borrowing countries. For instance, Poland's government, under Edward Gierek,
faced challenges due to discontent over price increases and relied heavily on loans to finance consumer
goods to placate dissatisfied citizens. Willy Brandt's Social-Democratic government also increased loans to
Poland and East Germany, both of which accrued substantial debts to meet the demands of their populations.
Amidst this financial environment, the proponents of the New International Economic Order, a United
Nations objective from 1974, secured significant financial backing from commercial banks in the West.
However, concerns about the risks associated with these loans began to surface. The Basel Committee on
Banking Supervision, established in 1974, highlighted the potential dangers, focusing on the exposure of core
country banks to loans extended to developing nations and the overall "country risk" involved in such lending.
In 1976, Mexico encountered severe financial strain and came close to defaulting due to its ambitious
industrial development plans and increasing reliance on American banks. President Luis Echeverría, facing a
drastic decline in foreign currency reserves, negotiated conditional loans with the IMF and the U.S. Treasury,
marking the inception of subsequent "adjustment" programs. Despite successful resolution, this crisis did not
halt the trend of mounting third world indebtedness.
The late 1970s witnessed a capitalist world flooded with monetary claims, stemming from various factors
such as OPEC oil prices, labor demands, profits, and increased welfare and education expenditures. The
recycling of petrodollars back into Western and Japanese banks after OPEC's initial price surge proceeded
without significant hitches, prompting banking supervisors to maintain a lenient stance on the private
banking sector. This led to accelerated lending to less developed countries. Amidst these developments, state
intervention played a crucial role. Countries like the United States relaxed credit controls to facilitate the
swift recycling of OPEC revenues deposited in American banks. Official export-import banks in several nations
guaranteed the debts of developing countries, while the IMF created special facilities to aid economies
affected by OPEC's subsequent oil price hike. However, these measures, intended to help economies manage
expensive oil costs and facilitate the recycling process, posed greater challenges to the international financial
community than those of 1974.
The OPEC crises significantly expanded the role of private banks in lending to less developed countries. After
the breakdown of Bretton Woods and the monetary upheavals of 1971, concerns about the flow of
Eurodollars led some policymakers to contemplate restraining their influence. However, the OPEC price hikes
deferred this threat as officials and bankers were aware of the severe impact these increases would have on
less developed countries. They sought efficient recycling of oil exporters' surpluses to benefit consumers.
This led to a substantial increase in lending, becoming a profitable business for international private banks.
The practice of "loan pushing" amplified lending volumes from an annual average of $14 billion between
1974 and 1977 to $40 billion in both 1980 and 1981. By 1982, loans from first world banks to non-OPEC less
developed countries surged from $32 billion to $247 billion, with US banks holding 40 percent, Japanese
banks 25 percent, and European banks significant shares. However, this loan expansion posed considerable
risks for banks; for example, the Crédit Commercial de France and British banks faced heavy exposure relative
to their capital.
During the 1980s, an accommodation emerged between states and banks. Center-right coalitions in
governments aimed to reduce budget deficits by cutting welfare spending at the behest of the financial
sector. Simultaneously, the Federal Reserve expanded lending, leading to increased household debt and a
surge in foreign direct investment across borders. The borrowing spree, denominated in dollars, exposed
borrowing countries to risks due to rising LIBOR interest rates. Paul Volcker's aggressive increase in the Fed's
discount rate in response to inflation led to market interest rates soaring from 7 percent to above 14 percent
by 1981. While this "Volcker shock" curtailed inflation significantly, it coincided with rising federal budget
deficits that persisted for a decade. Similar economic trends emerged globally. Germany and Japan,
emphasizing exports and lowering internal budget deficits, amassed surpluses. The US, financed by the rest
of the world and increasingly China, accrued deficits. The US, despite its deficits, remained appealing to
foreign buyers, especially for Treasury bonds.
This economic landscape saw the dollar appreciating significantly, placing enormous strain on less developed
countries that had borrowed in dollars. The foreign debtors faced significant difficulties, aggravated by the
dollar's rise until coordinated action by the US and the G5 powers prompted a decline. The 1987 Plaza
Agreement marked the beginning of the dollar's descent in foreign exchange markets. Between 1986 and
1988, the United States found itself as a net debtor, a situation not seen since World War I. This circumstance
led the US Treasury to increase interest rates, eventually contributing to the significant stock market crash
of October 1987. Remarkably, while this crash was as severe as the one in October 1929, it didn't have the
same devastating effects on the underlying economy. Foreign purchases of bonds and deposits helped cover
tax reductions by the Reagan administration. During this period, inflation and labor unrest were considered
problems of the past.
The consequences of the OPEC crises, especially OPEC II in 1979, extended beyond inflationary pressures in
advanced countries. The increased oil prices led to tighter interest rates in developed countries, raising
interest costs significantly. For less developed countries, particularly in Latin America, this brought
substantial challenges. Mexico, for instance, faced substantial financial difficulties due to a massive increase
in spending, leading to escalating deficits. Despite some creditor accommodation, Mexico announced a
moratorium on loan repayments, triggering economic turmoil that affected many debtor nations. The debt
crisis also affected Eastern Europe, where rising oil prices impacted Soviet prices, posing challenges for
countries like East Germany and Poland. Eastern European nations found themselves increasingly relying on
borrowing from the West to manage their economic situations.
Western banks played an active role in lending and faced significant risks as creditors, prompting national
governments to become deeply involved. The crises of the 1970s and 1980s were not just about the transfer
of resources from developed to less developed countries via Western banks but also revealed the active role
banks played in these financial shifts.
Jeffrey Frankel and Andrew Rose's statistical study indicated that countries relying on commercial bank loans
were more vulnerable to crises than those borrowing from multilateral agencies like the IMF or World Bank.
Financial institutions, US government officials, and governance agencies collaborated extensively on
strategies for financial retrenchment and reforms.
During the IMF and World Bank meetings in Seoul in 1985, Treasury Secretary James Baker proposed further
loans in exchange for structural reforms, aligning with historic American foreign economic policies favoring
private enterprise. The "Washington consensus" became a norm in Latin American countries, emphasizing
policies recommended by key financial institutions and think tanks. This approach was adopted in Chile
earlier, led by University of Chicago-trained economists, the "Chicago boys," implementing monetarist
lessons without facing significant opposition.
This period saw the convergence of American capital, presidential power, and international governance,
contributing to the establishment of a new financial order, largely shaped by policies favoring privatization
and liberalization advocated by influential global financial institutions and US economic strategies.
The decision of indebted countries to avoid defaulting, even in the face of substantial financial distress, stems
from various factors that evolved since the interwar period. Notably, the dynamics of creditor-debtor
relations shifted significantly, with the debts held by a few large banks supported by national governments.
This structure allowed these banks to negotiate relief through mechanisms like the IMF without resorting to
a complete default. One key deterrent against defaulting was the fear of being shut out of the international
capital market. While financial historians debate the likelihood of such a sanction, the larger concern might
have been the accompanying consequences of massive devaluation. Past instances like Thai and Russian
devaluations in the late 1990s showed that default often led to significant devaluation, which imposed harsh
costs on general populations.
Throughout history, debts have remained a persistent problem for nations. From Mexico in 1994 to Argentina
in the early 2000s and more recently Greece within the Eurozone, debt crises have been transformative but
have also cemented the dominance of the "Washington consensus." This consensus emphasized policies
favoring neoliberal economic reforms. The crises exposed a lack of a singular set of values to judge the
debtor-creditor relationship. Economists argued for painful stabilization programs, while critics deemed
these programs as imposing intolerable sacrifices. Moral considerations were claimed by both sides, making
institutions like the IMF and proponents of the New International Economic Order face contested legitimacy.
International lending facilitated technological development in the third world, but moral arguments about
debt repayment versus forgiveness persisted. Creditors stressed the necessity of full repayment to avoid
setting a precedent for debt forgiveness, citing concerns about "moral hazard." Both capitalism and socialism
relied on expectations of economic growth and technological change, relatively free from environmental
pessimism. Loans were seen as a bet on mobilizing unused productive capacity, although they often resulted
in rancor due to imprudent lending practices or corrupt deals.
Sovereign debt further complicated normative judgments. Loans aimed at state projects, including
infrastructure, sometimes entailed corruption and wastage. Insistence on repayment led to pressures for
modernization but also imposed significant misery on the marginalized sections of the population. The
balancing act between short-term costs and long-term gains remained subjective, considering the impact on
global incomes, life expectancy, and broader transformations across regions like East and South Asia.
Weighing the immediate consequences against potential long-term benefits remained a challenging and
subjective exercise.
The political and social landscape shifted significantly from the 1960s, especially in the 1970s and 1980s,
marking a departure from the left-leaning policies of many governments. To address inflation during this
period, governments found it necessary to counter the influence of left-leaning ideologies. Measures
included restraining the power of trade unions and reducing extensive welfare provisions, which were seen
as contributing to inflationary pressures. Automatic adjustment mechanisms, like indexation schemes
prevalent in countries like Italy and Israel, were overridden despite union preferences. Communist Party
economists recognized the necessity for such changes, but even supporters faced repercussions, as seen in
the assassination of Ezio Tarantelli in 1985 for advocating these reforms.
Governments in the 1980s and 1990s prioritized reducing public budgets and deficits. While overall
government spending as a share of GDP was partially successful in decreasing, social welfare expenditures,
particularly under administrations like Thatcher's in the UK and Reagan's in the US, were specifically targeted.
Systems like old-age insurance, Social Security, health insurance, and unemployment benefits were
scrutinized for reform, aiming to restrict the socialization of risk in favor of privatization. Efforts to dismantle
pension systems faced challenges, given their historical significance and quasi-universal entitlement status.
In the United States, for instance, Social Security had become a symbolically important program since its
inception in 1935, but discussions about its sustainability and funding remained contentious. In the UK, under
the Thatcher government, efforts were made to limit pension indexation, proposing the abolition of the State
Earnings Related Pension Scheme (SERPS) and encouraging private pension schemes. Similarly, policies like
the sale of public housing and privatization of industries consolidated a social bloc with middle-class interests,
making it electorally challenging for opposition parties to override their appeal.
Efforts to reform social security in the US during Reagan's era faced resistance. Although attempts were made
to reduce benefits for early retirees, the Senate unanimously opposed what was deemed "unfair" cuts.
Compromises were reached to delay adjustments and gradually taper down benefits, acknowledging the
need for supplemental private pension plans. However, the longer-term evolution of social security in the US
didn't see significant restructuring due to conservative opposition to reform. Existing public programs
provided diminishing coverage over time, contributing to a trend where major left-leaning political parties in
the major democracies adopted similar programs by the 1990s, aligning with the changing social security
landscape.
During the eras of Thatcher and Reagan, unemployment insurance and income maintenance programs were
prime targets for reform. There was a prevailing suspicion that these benefits encouraged people to avoid
work, despite high unemployment rates, such as the 12.5 percent joblessness in Britain by 1983. Thatcher's
government gradually reduced universal benefits and shifted recipients toward means-tested supplementary
benefit programs. Even child allowances were deemed "wasteful," although the idea that they undermined
self-help was challenging to comprehend. The Tories were particularly hostile toward the universality of
these programs, a sentiment reminiscent of historical disdain for poor relief since the Poor Law reform in
1834. The concept of universal eligibility was under attack, with suggestions for a negative income tax system
that faced resistance due to its implications for higher tax rates, which were unpopular among Tory
constituencies. In the United States, the Reagan administration targeted programs like food stamps and Aid
to Families with Dependent Children (AFDC). While significant reform had to wait until the Clinton presidency
in the 1990s, the Reagan era saw attempts to shift the burden of unemployment insurance and income
maintenance to the states under the slogan of New Federalism. The administration's approach included
implementing "workfare" requirements, which had some superficial appeal across party lines but required
more resources for childcare.
The Earned Income Tax Credit for the working poor emerged as a notable success during this retrenchment
era, even though the Reagan administration was initially hostile to it. However, both the Reagan and Thatcher
administrations found themselves expanding programs that provided supplements for working families with
low incomes, recognizing their political palatability. Despite these shifts in programs, the rhetoric of
unworthiness for the poor and unemployed persisted, along with fears of individuals exploiting the system.
Hostility toward unions also endured. Interestingly, this climate persisted among subsequent left-center
leaders in the 1990s, such as Tony Blair's New Labour in the UK, Bill Clinton's New Democrats in the US, and
the Gerhard Schroeder-led SPD government in Germany after Helmut Kohl's chancellorship.
The “Grand March” in Disarray: Labor’s Transformation and Ideological Disorientation
The late 1970s and 1980s witnessed a transformation in labor relations and political dynamics that
profoundly affected both workplaces and the realm of party politics. Eric Hobsbawm, in his 1978 lecture,
"The Forward March of Labour Halted?", urged the Labour Party to expand its appeal to the middle classes,
while Milan Kundera, in his 1984 novel, "The Unbearable Lightness of Being," expressed a more cynical view
about the idealistic pursuit of leftist ideologies.
Capitalist labor relations inherently contained adversarial elements. Social classes were defined by
contrasting interests, leading to inherent conflicts between employers and workers. The 1970s saw a
workforce that was still quite militant, especially due to concerns about inflation eroding their negotiated
wages. Governments attempted to manage these conflicts through arrangements like wage-price controls or
corporatist agreements, but these were unpopular and viewed with suspicion by both labor and
management. Workers felt disillusioned as profit surges didn't translate into improved wages, while
employers perceived demands for higher pay as potentially detrimental to their competitiveness. Some
workers began contemplating collective ownership of industries, a notion that gained traction amid
dissatisfaction with repetitive tasks and the growing disparity between executive pay and worker wages.
However, as the late 1970s progressed into the 1980s, there were notable shifts in these entrenched
positions. Instances like the FIAT manager Cesare Romiti dismissing outspoken activists and subsequent
workers' reactions signified changing dynamics. Strikes faced opposition from within the workforce, and
political leaders like Thatcher and Reagan demonstrated their resolve against powerful unions, effectively
curbing their influence.
Various thinkers and sociologists explored the evolving sentiments within the working class. André Gorz
highlighted the loss of fulfillment in the workplace, proposing a society that balanced necessity and
autonomy, necessitating state intervention. Aris Accornero, close to the Italian General Confederation of
Labour (CGIL), expressed nostalgia for the sense of community that labor once held and observed a changing
industrial landscape that would have deep consequences for labor in transitioning from industry to services.
The late 1970s and 1980s marked a shift in the labor landscape, characterized by declining labor militancy,
changing perceptions of work satisfaction, and increasing challenges to traditional labor activism, all
contributing to a reconfiguration of the relationship between capital and labor.
The late 1970s and early 1980s marked a period of profound division and disillusionment within labor unions
and leftist parties across the Western world. Theo Pirker's critical study of German labor unions highlighted
their co-optation and bureaucratization, signaling a deepening rift between reformist and radical strategies
within labor and leftist movements.
The Popular Front's vision, an encompassing alliance of diverse leftist groups, remained challenging to
maintain, especially considering the Communist Party's compromised image due to events in Sovietdominated Europe and the suppression of the Prague Spring. Despite social democrats' perceived successes
in expanding welfare states, educational opportunities, and leisure time, these achievements posed a
conundrum in finding a new agenda that could unify and inspire moral cohesion among the left.
Labor faced dramatic challenges in the late 1970s and early 1980s. Automation, shifts in manufacturing to
Asia, and the advent of post-Fordism - characterized by the decomposition of unified factory systems and
increased outsourcing - altered the nature of work. However, the response from labor unions to organize this
changing workforce, including migrants and women, was not straightforward. The influx of diverse
populations challenged traditional working-class structures, often leading to racialization and the
foregrounding of gender issues, which created tensions within unions already facing declining membership.
The decline in union membership and the changing nature of work impacted the historical allies of labor
unions - leftist political parties. Communist and Social Democratic parties no longer held the same ideological
cohesion and were deeply divided. Leaders like Bettino Craxi, François Mitterrand, Enrico Berlinguer, or
Georges Marchais personalized their leadership, contributing to the transformation and fragmentation of
these parties.
Moreover, the emergence of terrorism in Italy added to the complexities. Figures like Giorgio Amendola
criticized the tendency of unions and parties to excuse violence within factories and highlighted the
detrimental impact of such actions on the broader class struggle. These differing diagnoses, between
bureaucratic entanglement and condemnations of radicalism, seemed irreconcilable, further fracturing the
cohesion within leftist movements.
The period of the late 20th century witnessed a significant ideological transformation within left-leaning
political movements, leading to what could be termed a "non-left left." These shifts were marked by a
departure from traditional redistribution policies and a turn toward a more technocratic, market-driven
approach. Key figures like Tony Blair, Gerhard Schroeder, and Bill Clinton, among others, moved their
respective parties away from traditional leftist economic policies. They embraced tighter fiscal policies,
granted greater independence to central banks, and curtailed further income redistribution, emphasizing the
need for controlling welfare costs and fiscal deficits. This non-left left cohort adopted a market-centric
approach, albeit often shying away from directly labeling their policies as neoliberal.
This ideological shift also encompassed a greater emphasis on lifestyle, identity issues, and human rights. The
AIDS epidemic in the 1980s and the subsequent focus on gay rights, along with the emphasis on broader
human rights, such as free speech and dissent, became central themes. These transformations expanded the
traditional electoral communities of the left, incorporating causes that were not necessarily tied to socialist
or traditional left-leaning platforms. Internationally, the idea of human rights gained prominence, particularly
through movements like Charter 77 in Czechoslovakia and Solidarity in Poland. These movements, often
associated with intellectual dissidents and worker protests, highlighted citizen participation and civil society's
role in opposition to authoritarian regimes. The underground movements, youth culture, and the appeal of
rock music created a new, exhilarating milieu for emancipatory ideas.
However, these shifts within the left also posed challenges. While they expanded the range of causes
supported by the left, they left traditional working-class communities susceptible to populist messages.
Moreover, while these movements emphasized human rights and civil liberties, they raised questions about
the kind of societal order they sought to establish if they gained power.
“Ever Closer Union”: States, Capital, and Governance Create a European Regime
The mid-1980s marked a turning point in European integration efforts after a period of strained negotiations
over the distribution of costs and benefits within the European Economic Community (EEC). Disputes
primarily revolved around differential payments from national value-added taxes (VATs), which formed the
EEC budget, and were channeled into the Common Agricultural Policy (CAP) and Structural Adjustment
Funds.
Margaret Thatcher's persistent demand for a budget rebate for the UK led to protracted negotiations.
Despite initial resistance from other European leaders like Chancellor Schmidt and President Giscard
d'Estaing, Thatcher's persistence paid off with a compromise in 1983, leading her to famously declare, "I have
my check." The metaphorical "bicycle built for two" highlighted the need for concerted effort among member
states to maintain the EEC's progress. While the French and Germans generally worked together, the British
often sought to slow the pace of integration. However, from the mid-1980s, there was a renewed vigor in
integration efforts. Hans-Dietrich Genscher and Emilio Colombo advocated for a treaty on the European
Union, aiming for a common foreign policy and monetary union. Chancellor Kohl embraced this initiative.
A significant turning point came in March 1983 when President Mitterrand had to choose between pursuing
a leftist fiscal program or maintaining the stability of the French franc within the Exchange Rate Mechanism.
To stabilize the currency, France made concessions, including a modest devaluation, reducing agricultural
subsidies, and canceling planned taxes on the wealthy—essentially stepping back from the left's electoral
promises in 1981. Kohl also supported increasing VAT contributions to the EEC budget, endorsing the
Genscher-Colombo initiative for a new Community treaty.
Mitterrand began to prioritize Europe as a central project, aligning the Presidential majority around a centerleft coalition centered on the Socialist Party. This marked a shift toward more neoliberal economic measures
combined with state-driven modernization, emulating Japan's model and aligning closer with Germany.
The latter half of the 1980s witnessed significant reforms in both East and West Europe. Gorbachev's
leadership in the Soviet Union initiated reforms that eventually led to the dissolution of the USSR. Within the
EEC, institutional structures developed, culminating in the Maastricht Treaty of 1992 and the eventual
establishment of a common currency. The European Commission gained momentum with Jacques Delors as
its president, and discussions on the "Treaty on European Union" advanced within the EC's Committee on
Further Development of European Institutions and Cooperation.
During the late 1980s, Mitterrand, Kohl, and the European Commission spearheaded a push for market
liberalization coupled with majority voting within the European Economic Community (EEC). The right of
veto, which allowed a member state to block proposals affecting its vital interests, had been a longstanding
practice. However, France and Germany, supported by a majority, voted for an intergovernmental
conference to amend the treaties, sidestepping the veto power and leading to the Single European Act. This
act aimed at creating "the Europe of the Citizens," promoting free movement of goods and people and
enhancing educational exchanges.
The "Delors package," endorsed by the European Parliament in 1987, comprised over 260 commission
proposals that became directives for member states. This package focused on removing non-tariff barriers
to trade, rather than reducing internal tariffs, which had largely been accomplished. The European Court's
decision in the Cassis de Dijon case further emphasized the principle that products allowed for sale in one
member state should be eligible for sale in others, except where health regulations differed.
Establishing Europe on market principles demanded a more robust bureaucratic structure and directives. This
transition led to an expansion of the commission's civil service and an increase in legislation by the Council
of Ministers. Despite a speech by commission president Delors promising a socially secure internal market,
Thatcher grew increasingly concerned about the shift towards a European "superstate." Her denouncement
of this trend in a notable speech at the College of Europe in Bruges in 1988 reflected her opposition to
expanding majority voting. Thatcher's loss of support within her party stemmed from her opposition to the
trend of European integration and her problematic policies, notably the proposal for a poll tax. Her downfall
coincided with the evolving dynamics of capitalism. New industrial organizations and key industrialists
supported the Delors program, recognizing the importance of completing the internal market amid the
pressures of global competition.
The fall of the German Democratic Republic in 1989-1990 provided an opportunity for Chancellor Kohl to
back these initiatives, aiming to unify Germany without European opposition. The alignment of capital
interests with governance needs highlighted a nonpartisan agenda for rational reform, a collaborative effort
between labor and capital. As the 1990s commenced, the EEC, soon to become the EU, evolved into a quasiproject-state, reflecting a new phase in European integration.
The prospect of German reunification and the unification of East and West Germany under a single currency,
the deutsche mark, became a significant factor in the late 1980s. The idea of monetary alignment was pivotal
to prevent a mass migration from East to West Germany and to maintain stability in the wake of the fall of
the Berlin Wall. Chancellor Kohl and Foreign Minister Genscher pursued German unification while striving to
retain French and British support for European monetary union. The internal treaty of unification in the
summer of 1990 allowed for the conversion of East German marks to the deutsche mark on par in current
transactions. Kohl emphasized the importance of integrating this expanded German currency into a unified
European one. Recognizing that a reconstituted Germany, as the most populous country in Europe, needed
a broader institutional framework for stability, Kohl sought to anchor it within a larger European context.
Mitterrand's choice to align France's currency with Germany in 1983 reflected the importance of the
Bundesbank in stabilizing the French currency. The French believed that aligning with Germany's monetary
policy would discipline and stimulate their economy, while the Germans insisted on economic convergence
before considering a unified currency. This stance led to agreements like the slight revaluation of strong
currencies in early 1987 instead of forcing French devaluation.
The Delors committee, chaired by Jacques Delors, advanced the idea of a European monetary area with a
European Central Bank. The committee, despite opposition from Karl Otto Pöhl of the Bundesbank, agreed
on a three-stage process for monetary union, starting with the free movement of capital in 1990. Mitterrand
sought to leverage German financial power while ensuring no unilateral political dominance.
Both Thatcher and Mitterrand viewed German unification through historical lenses—Thatcher from the
perspective of World War II and Mitterrand from the dangers of a potential repeat of World War I. Mitterrand
feared that German unification before European unity might provoke alliances against Germany, reminiscent
of the anti-German alliances of the past. Monetary union was seen as a substantive step to prevent this
scenario, emphasizing the need for a broader European framework to ensure stability.
Despite initial concerns and diplomatic discussions about the potential impact of German reunification on
European stability, by the end of 1990, the Strasbourg Council adopted a charter on social rights for workers
and moved forward with the conference on monetary union. Mitterrand eventually accepted German
reunification as an accomplished fact, as Gorbachev declined to interfere in the process.
The euro crisis of 2012–2015 led to widespread criticism of the European Union's decision to manage a single
currency without a common fiscal or spending policy. However, this criticism overlooks the inherent
challenges faced by a partial monetary union, particularly the limitations of pegging exchange rates while
allowing free capital flow. The decline of the dollar in the late 1980s also played a significant role in shaping
these dynamics.
During the mid-1980s, the American dollar continued to depreciate against the deutsche mark. Treasury
Secretary James Baker urged Germany to increase domestic spending to slow down the ascent of the
deutsche mark against the dollar. German policymakers were also concerned about the impact of a stronger
deutsche mark on their export competitiveness. Consequently, they saw the benefits of linking their currency
with weaker currencies to alleviate some of this pressure.
In early 1987, several European countries, including Germany, the Netherlands, and Belgium, slightly
revalued their currencies to ease pressure on the French franc. However, despite these efforts, the French
still had to borrow from the European Monetary System's (EMS) emergency facility to maintain the franc
within the ERM's "target zones." The partial linkage of currencies within the EMS created immense pressures,
and it was evident that the system was fragile. The prospect of complete freedom in capital movements by
1992 raised concerns about exacerbating these currency pressures. By September 1987, the deutsche mark
reached the upper limit within the ERM, prompting threats from Baker about allowing the dollar to
depreciate further. This tension caused significant turmoil, leading to a substantial drop in the stock market.
Eventually, pressure from the German government compelled the Bundesbank to reduce interest rates,
calming the German-American currency disputes. However, tensions between Germany and France
persisted, with French officials pressuring the Germans for increased domestic demand.
French Finance Minister Édouard Balladur and Italian Foreign Minister Giuliano Amato highlighted the lack
of balanced growth within the EMS due to lower German domestic demand. However, the Bundesbank
remained cautious, emphasizing that attempting to hasten the development of the EMS without economic
convergence would be futile. There were debates within the Delors committee on how to structure further
cooperation, preserve the role of banks, and achieve convergence of exchange rates through rules governing
budget deficits and government debt limits.
The committee's prevailing view was that formal rules, such as limits on deficits and government debt, were
necessary for convergence. There was a suggestion by Pöhl, which later became the 3 percent deficit limit,
and the committee emphasized price stability as a primary objective of the new banking system. This
emphasis on stability would remain a contentious issue in the European Central Bank's history. Despite
differing opinions, the committee ultimately laid out a path toward monetary union, suggesting that adopting
a single currency could ease management and signify the irrevocability of the union. This development
partially assuaged Pöhl's concerns, as the revised report highlighted price stability as a major objective.
The transition to a unified monetary policy, which included locking exchange rates to the new currency and
managing these rates in relation to external currencies, was to be managed by central bank governors. At a
Madrid summit, government leaders accepted the report as the foundation for future work. Pöhl was content
that political leaders would not be involved too early in the process. However, the United Kingdom's
acceptance of the later stages of this institutionalization remained uncertain. Delors and Pöhl agreed on the
importance of maintaining the independence of the Committee of Governors from their respective
governments. The European Council's Ministers of Economy and Finance (ECOFIN) authorized the Committee
of Governors to proceed with designing the recommended institutions.
After the high inflation of the 1970s, central bank independence was seen as a crucial barrier against political
pressures from legislatures to overspend and accumulate deficits. This concept of independence and
methods to measure it became a subject of extensive literature. Institutions like the Federal Reserve, the
Bundesbank, and the Swiss and Dutch banks were often viewed as models in this regard. The Bank of Italy
gained independence in 1981, freeing itself from the obligation to fund government deficits by purchasing
treasury notes.
The challenge for the Delors committee and subsequent legislative drafters was to shield the new bank from
political pressure to indirectly accommodate national deficits. There were debates on the relationship
between the new bank and the European Parliament, concerns about potential biases against growth, and
debates on the objectives of financial policy. Hans Tietmeyer emphasized the need for discipline, highlighting
that the member countries should not be held responsible for each other's debts. The European Central Bank
prioritized price stability over other economic objectives, distinct from the US Federal Reserve, which
emphasized both price stability and high employment.
The criteria for EU countries to join the Eurozone, such as limits on budget deficits and public debt, were
expected to compel member banks to focus on singular objectives. While governments retained control over
exchange rate policy, the European Central Bank had to consent to such decisions, although it was not
intended to serve as a lender of last resort.
The Committee of Governors saw itself as a governance voice. The emphasis on central bank independence
aligned with the acceptance of minimal government intervention and the dominance of markets. This
institution, focused on ensuring stability, inherently represented capital interests and safeguarded monetary
stability, primarily prioritizing returns to capital over the interests of wage earners. The safeguards mirrored
principles akin to the Washington Consensus, the neoliberal framework recommended by Americans for
stabilizing weak currencies, although the enforcers were situated in Frankfurt's Bundesbank. Notably, during
the 2008–2010 financial crisis, despite these regulations, the guardians of the euro breached their rules to
act as lenders of last resort.
In September 1990, the plan for the European Central Bank was finalized and presented to ECOFIN.
Discussions proceeded gradually in Europe throughout 1991. During this time, the new British Prime Minister,
John Major, made it clear that the UK wouldn't support an upgraded EU without an opt-out clause for a
common currency. Eventually, the German and French governments managed to narrow down the British
demand from a broad escape clause to a specific concession.
The Committee of Central Bank Governors agreed upon the convergence criteria for joining the common
currency: a national debt below 60 percent of GDP, a budget deficit not exceeding 3 percent, and interest
rates within 2 percent of the three lowest rates in the EU. Negotiations at Maastricht in December 1991
resulted in the decision to establish a European Monetary Institute to oversee the transition to the European
Central Bank during the period when the enhanced monetary union would become irreversible. If by 1997
no date was set, the new European Monetary Union (EMU) would begin on January 1, 1999. All these
provisions, along with the existing monetary agreements, were incorporated into the Treaty of Maastricht in
February 1992.
Mitterrand's achievement in Maastricht was seen as leveraging French influence within the Union and
internationally with the United States. Domestically, he aligned the Socialist Party with the EMU, positioning
it not just as a shield against the global market forces but as a means of institutionalizing these market
imperatives. Essentially, it was about aligning French socialism with German capitalism. For Kohl, navigating
the political landscape meant co-opting the somewhat rebellious Bundesbank, grounded in the ordoliberal
institutions encouraged by the Americans in postwar Germany and respected across German public opinion.
EMU, for Kohl, signified a commitment to a Europe that could accommodate a united Germany, emphasizing
irreversibility and setting a clear timetable by 1991–1992.
However, the path to the third stage of transitioning to the new central bank wasn't without hurdles. The
remaining members of the EMS experienced significant challenges in the lead-up to the euro's introduction.
German unification brought hefty fiscal burdens to the Federal Republic, including guarantees for East
German bank accounts. To manage these obligations without deficits, high interest rates were necessary, a
stance the Bundesbank supported. This situation, coupled with speculation on weaker currencies within the
EU, led to market vulnerabilities. Britain joined the EMS in October 1990 but planned not to adopt the euro.
London aimed to maintain a relatively high level for the sterling against the deutsche mark, attracting funds
and speculation, which ultimately made the currencies of inflation-prone countries like Italy and Spain targets
for currency speculation. The early stages of the euro faced significant challenges. The Bundesbank's
insistence on high-interest rates to maintain the deutsche mark exchange, coupled with other countries'
commitments to maintain their exchange rates within the ERM, created a situation that was increasingly
unsustainable. This led to crises in September 1992, marked by the UK's withdrawal from the EMS, and a
subsequent crisis in July 1993, with the franc as a target. The situation indicated the difficulties of a common
currency, showing both skeptics and reform supporters the potential issues of deflationary pressure and the
necessity of a single currency to prevent devaluation.
In 1999, currency values were locked in, and the euro was introduced virtually for Eurozone members
alongside their national currencies. By January 1, 2002, new notes and coins replaced the old currencies,
symbolizing a significant shift in monetary policy. This transition aimed to solve some of the most persistent
problems in European cooperation related to exchange rates and monetary policy. However, this move also
shifted adjustment burdens onto weaker economies and countries with higher domestic inflationary
tendencies, evident in later events like the Greek financial crisis of 2010–2012.
The creation of the Eurozone represented a convergence of state interests, capital interests, and governance
processes. It signaled a commitment to growth and accumulation without compromising profits, imposing
strict debt and deficit limits to prevent a redistribution of profits and capital at the expense of economic
stability. The Eurozone's formation bestowed upon the EU an essential attribute of statehood by creating a
currency through extensive negotiation and reconciliation of interests.
Moreover, the emergence of the Eurozone coincided with a broader global political and economic trend.
When left-leaning governments like Clinton's New Democrats and Blair's New Labour came to power in the
early 1990s, they did not fundamentally challenge the prevailing neoliberal economic paradigm. Instead, they
embraced policies like balanced budgets and welfare system restructuring, emphasizing economic selfsufficiency and reducing dependency. Even the Social Democratic Party (SPD) in Germany, upon returning to
power in 1998 under Chancellor Gerhard Schroeder, implemented policies like the Hartz IV program, which
aimed to reform unemployment benefits. These actions underscored a broader acceptance of neoliberal
economic principles across various political spectrums during that period.
At the turn of the century, the United States was riding a wave of confidence in global politics and the world
economy. Inflation had been effectively curbed, and the U.S. perceived itself in a state of preeminence
unseen since the days of the Roman Empire. Its armed forces were unparalleled, and former adversaries
were grappling with democracy while recovering from deep economic struggles. The prevailing belief among
policymakers and intellectuals was in the supremacy of the market over central planning, aligning the realms
of capital and governance tightly. The European Union, in particular, was flourishing, with eroded internal
frontiers, maturing institutions, and expanding influence. The extreme left had little influence, with centrist
parties steering policies even when right-leaning parties were in power.
Had history frozen at that point, it might have portrayed a fusion of confident capitalists and purported social
democrats celebrating the virtues of the market, alongside a spectrum of governance institutions—
foundations, NGOs, and official agencies. The forces of change were perceived not within the state but in
"civil society," represented by various groups like labor unions, churches, environmental and advocacy
organizations, and courageous journalists who supposedly dismantled authoritarian regimes. Russia
withdrew from Afghanistan, and China was embracing economic reforms, both moving toward
modernization.
Yet, beneath this facade of confidence and apparent stability, fissures were beginning to surface. The
domestic political landscape in the U.S. was also undergoing shifts, as exemplified by the Clinton
impeachment, which, beyond its sensationalism, hinted at deeper underlying tensions. It indicated a
loosening of the social fabric that once held back intense domestic conflicts over moral, social, and religious
issues. It also exposed the widening gap between the ideology of universal opportunity and the reality of
growing disparities in wealth, education, and racial inequality. This political tension, exemplified by figures
like Newt Gingrich and his "contract for America," would eventually lead to a fundamental division in U.S.
politics within the next quarter-century.
CHAPTER 9 - Convergences and Catastrophe
Triumphalism was a term used pejoratively by the left in the 1990s, deemed too simplistic to herald a victory.
Yet, in the context of the Cold War, by the mid-1990s, it seemed that the West had indeed triumphed.
Communist regimes across Eastern Europe and Russia had collapsed, leading to the dissolution of the Soviet
Union after seven decades. A reunited Germany had relocated its capital back to Berlin. Other positive
changes included the dismantling of South Africa's apartheid regime, with Nelson Mandela assuming the
presidency in 1994. Despite not being the focus here, it's worth noting that the United States, in the postCold War glow, overlooked its previous careful stance regarding the movement of its forces into Eastern
Europe during German unification. This oversight led to extending NATO membership to Poland and the
Baltic states under the guise of partnerships for peace.
Economically, there was a sense of confidence. Advocates of international trade, such as President Bill
Clinton, lauded the North American Free Trade Agreement of 1993. The successful intervention to shield
Mexico from a debt crisis further bolstered confidence. Although financial crises hit countries like South
Korea, Russia, Thailand, and Argentina, they appeared isolated and contained without causing global
contagion. Economists like Ben Bernanke and Olivier Blanchard pointed to a "great moderation," indicating
reduced swings in business cycles, fostering the belief that globalization was steering the world economy
toward a more benevolent path.
This period was marked by a sense of magical thinking, albeit with dissenting voices. "Civil society" was
envisioned as the driving force behind this new world, minimizing state control. Markets were extolled as
mechanisms for coordinating human aspirations without coercion, supposedly harmonizing individual
preferences into optimal collective choices. Even social democrats embraced this view, advocating overhauls
of social welfare systems to reduce long-term dependencies on state assistance. There was an increasing
push for efficient, streamlined government procedures and the privatization of state-owned enterprises to
operate more like private firms.
However, separating the state from capital proved challenging, and the realm of governance couldn't claim
complete impartiality. The convergence of interests brought governments and markets closer together
despite attempts to distance them.
Uncivil Society and the Limits of Governance
During the mid-1990s, while theorists celebrated civil society and market forces, parts of Africa and the
Balkans experienced disintegration in civil society. Yugoslavia's imminent breakup in the early 1990s led to a
brutal civil war. Slovenia successfully seceded, followed by Croatia, which Germany promptly recognized in
December 1991. Serbia aimed to dominate the region, leading to conflict over Bosnia, motivated by
nationalistic and authoritarian desires rather than religious differences. The EU remained relatively passive
until American mediation resulted in the Dayton Accords in 1995 and Serbian evacuation from Kosovo in
1999. The conflicts signaled the first war on European soil since World War II and highlighted the EU's initial
helplessness in managing such conflicts.
In East Central Africa, ethnic tensions between Hutu and Tutsi escalated into genocide, with the Hutu labeling
the Tutsi as exploitative. Despite hesitation from international bodies, the violence resulted in a devastating
massacre of nearly 700,000 Tutsi. Lessons drawn from conflicts in Bosnia and Rwanda spurred discussions on
humanitarian intervention and sovereignty.
Western theorists recognized the ambiguities of the decade. Francis Fukuyama's notion of the "end of
history" following the Soviet Communist challenge was juxtaposed against Samuel Huntington's concept of
"the clash of civilizations." Fukuyama foresaw an uneasy fog settling over history with the disappearance of
ideological rivalries, while Huntington highlighted cultural conflicts emerging as a replacement, particularly
emphasizing clashes between civilizations. This shift suggested a departure from traditional ideological
conflicts toward cultural clashes, notably emphasizing the rise of Islamic fundamentalism in the wake of the
collapse of Marxist regimes.sna
By the late 1990s, the emerging political divisions appeared to separate those benefiting from globalization
and digital advancements from those rooted in traditional territorial communities. Traditional party systems
built around class and economic issues seemed inadequate in addressing these newer fault lines, paving the
way for the rise of identity politics over class politics.
In the context of identity politics, race and religion emerged as significant markers of discrimination and
communal disadvantages. In the United States, despite legal desegregation advancements, centuries of
slavery and prejudice led to persistent racial disparities in areas such as housing, income, education, and local
tax bases for education and facilities. Even without explicit language of racial inferiority or superiority, these
disparities were institutionalized, perpetuated by economic and societal structures, often lurking behind
politics. Similar communal disadvantages due to postwar immigration were seen in Europe, largely
unaddressed by believers in market solutions.
Religion, too, was a divisive factor, particularly in Asia and Africa and, to a significant extent, in the global
north. In Europe and the United States, public acts of religious practice often tested commitments to cultural
pluralism. Issues such as the height of minarets or the wearing of veils in schools sparked resistance. Religious
affiliations also influenced major political stances, such as opposition to abortion or support for specific
presidential candidates. Confessional distinctions in countries like the Netherlands became evident when
newer, darker-skinned Muslim communities arrived, challenging the previously stable pluralism. Religious
tensions, when combined with political distrust and historical grievances, often escalated into conflicts,
exemplified by scenarios like India at partition or Northern Ireland in the 1980s.
"Culture" became a frequently used term to explain conflicts related to identity. These issues were
challenging to address through traditional political methods focusing on economic redistribution. Instead,
they required different forms of accommodation, such as territorial identity seeking autonomy or language
primacy in school systems. Nations like Canada and Belgium grappled with issues of identity and language,
with tensions arising in efforts to balance regional autonomy and national identity.
In the midst of these conflicts, governance organizations aimed to mediate violence, particularly in regions
like the Balkans and the global south, deploying armed peacekeepers and humanitarian aid. New NGOs and
UN agencies worked to alleviate human suffering and document violence in conflict zones. Efforts like truth
commissions in South Africa sought to reconcile victims and perpetrators after periods of atrocity, aiming for
reconciliation after violence.
The Carnegie Commission on Preventing Deadly Conflict in 1994 underscored the need for a comprehensive
approach to forestalling internal wars and genocides. However, despite advocating for promoting
democracy, market economies, human rights, and civil societies, the report highlighted the challenge of
preventing conflicts, which often required the absence of the very conditions it sought to establish.
The World Bank faced a changing landscape in the post-Cold War era, with increased emphasis on preventing
deadly conflicts and promoting good governance. However, this shift was challenging due to reduced funding
from donor countries and the rising influence of the private sector in providing financial support. While the
Bank's commitments were limited, private foreign direct investment soared, leading to a significant disparity
in financial contributions. Efforts to leverage development assistance for troubled governments were
complicated by the need to navigate the delicate balance between offering incentives for national political
stability and avoiding overt political interference. Unlike the Cold War era, where economic terms were
sometimes bent to influence borrower alignments, the focus now shifted toward curbing corruption,
promoting good governance, and respecting human rights. These actions were seen as essential for
preventing conflicts that could hinder economic development. However, the Bank faced internal dissent
regarding tying lending to specific political demands. There were limitations in directly incorporating human
rights criteria into loan conditions due to constraints outlined in its founding agreement, which prohibited
overt political interference. Corruption became a focal point as it was seen as an indicator of a troubled
state, resembling the significance of human rights violations for the United Nations.
In this evolving landscape, the realms of governance and capital were becoming increasingly intertwined,
posing challenges for the World Bank's efforts in conflict prevention and post-conflict reconstruction.
Living with Neoliberalism / Modernizing Social Democracy
During the late 20th century, a prominent trend in advanced capitalist economies was the push to reduce
the state's involvement in regulating economic outcomes and narrowing the wealth gap between the rich
and the poor within countries. This movement, often referred to as neoliberalism, aimed to diminish state
intervention in regulating capital and redistributing wealth. Policies associated with neoliberalism included
deregulating the financial sector, reducing state ownership of economic enterprises, and cutting back on
welfare provisions.
However, the term "neoliberalism" itself is contentious and can evoke academic disapproval. Its connotations
vary across different contexts. In the United States, it described movements seeking to dismantle political
restrictions while advocating for economic or racial equality. In Europe, liberal parties often resisted the latter
aspect. Historically, figures like Friedrich Hayek, John Maynard Keynes, and German ordoliberals have been
associated with liberalism for different reasons.
Neoliberalism has been a political project aiming to diminish state intervention that might hinder private
property accumulation. Advocates argued that redistributive policies were confiscatory, ineffective, or
burdensome due to excessive bureaucracy. They believed that fostering private saving and investment would
generate economic growth benefiting all. This era marked a societal shift from the class structures identified
in Marxist sociology towards a vision of a predominantly middle-class society, with a focus on assisting the
marginalized or socially excluded groups rather than delineated social classes. Neoliberal policies aimed to
remove state limitations on capital aspirations, emphasizing tax cuts, welfare reduction, and state enterprise
privatization, aligning with the interests of capital, policy foundations, and political leaders.
However, this neoliberal project led to contradictions. Privatization transformed the state without
necessarily reducing its size, making regulation more complex. Private governance utilized self-regulation to
preclude government rules, often exploiting international and national variations in regulations.
Simultaneously, the goals of capital shifted towards maximizing shareholder returns, as articulated by Milton
Friedman's assertion that corporations must prioritize maximizing shareholder profits. While not all business
leaders adhered strictly to this principle, the emphasis on earnings and market performance grew
significantly. Governance institutions concerned with economic welfare tacitly accepted much of this agenda.
The intertwining of economic success with philanthropy also emerged, with many beneficiaries of outsized
gains making significant charitable contributions. This beneficence often justified and obscured the rise of
plutocracy in society.
During the 1990s and the early 2000s, parties associated with social democracy, including the American
Democratic Party, underwent a notable transformation by embracing and even championing marketoriented policies and private enterprise. This shift from traditional social democratic principles towards a
more business-friendly stance was observed across various countries and was not limited to any single
political entity. For instance, Tony Blair's leadership in Britain during this period exemplified this trend.
Labour under Blair continued the privatization of public assets, advocated for competitive markets, and
emphasized public-sector reform. The party moved away from its historical commitments to public
ownership and collectivism, a shift that had already been evolving in social democratic parties since earlier
decades. In the late 1980s and early 1990s, several social-democratic parties across Europe underwent
ideological reorientation. The German Social Democrats abandoned their commitment to nationalization in
1959. They formed coalition governments, including a social-liberal government with the Free Democrats,
recognizing that collectivism and solidarity no longer resonated with the middle-class electorate they aimed
to attract. Similar shifts occurred within the Norwegian Labour Party and the British Labour Party, which
discarded their historical commitments to public ownership and class-based politics.
Various explanations have been offered to elucidate this shift in social-democratic parties. Some attribute it
to changes in the role of economists, transitioning from theorists informing collectivist programs in the early
20th century to transnational financial economists integrated into these parties, advocating market-oriented
approaches. However, this perspective may overlook the demands created by changing socioeconomic
conditions beyond national control. Factors such as the breakdown of the Phillips curve premise—where
managing inflation had traded off with employment—and the stagflation of the 1970s disillusioned and
sobered social democrats. The increasing influence of imports from Asia and the constraints of globalization
compelled union and left party leaders to negotiate not just for higher wages but also to retain jobs within
this globalized framework.
Nevertheless, it's crucial to note that this ideological shift wasn't merely a forced adjustment to external
circumstances. Labour under Blair, for example, did not continue budget cutting; government spending
increased to over 40 percent of GDP during Blair's tenure. Similarly, the Clinton administration in the United
States pursued programs addressing racial, educational, and environmental issues, indicating a continued
commitment to certain social welfare initiatives despite the broader shift towards market-oriented policies.
During the 1990s and into the early 2000s, the social democratic or center-left ideologies seemed increasingly
enamored with capitalist growth, the advancements in technology, and the flourishing profits, signaling a
departure from their historical base in industries traditionally tied to the working class. For instance, under
Tony Blair's leadership, allowing the Bank of England to determine interest rates independently of the
Treasury was a move indicating an assurance to capital. This action aligned with supply-side economics and
was framed within the rhetoric of the "information age." However, not all liberalization during this period
was deemed "neo." While initiatives like providing more parental options for education, prison reforms, and
regional devolution were part of the broader policy, the underlying principle was the expansion of choice.
Yet, this had ambiguous consequences. Charter schools in the United States, for instance, offered ambitious
parents in inner-city areas the chance for better education for their children but also contributed to further
stratification within the public school system.
The center-left's approach to welfare payments for the unemployed became a focal point. There was a strong
emphasis on reducing this burden as a means to showcase social-democratic competence. The aim was to
reintegrate the unemployed into the labor market, pushing a narrative that promoted work over welfare
dependency. This shift was evident in the rhetoric of figures like Gordon Brown in Britain, who emphasized
that any job was preferable to a life reliant on welfare. Similarly, Bill Clinton, during his tenure as governor
of Arkansas and later as U.S. president, highlighted the alleged issues with Aid for Dependent Children, aiming
to transform welfare programs. His Temporary Assistance for Needy Families (TANF) program, introduced in
1996, provided block grants to states, limiting individuals to a specific duration for welfare payments.
However, these reforms also downplayed the challenges faced by single mothers, signaling a departure from
the more supportive approach seen during Lyndon Johnson's War on Poverty in the 1960s. The emphasis on
encouraging women to work while minimizing the focus on the difficulties of single motherhood reflected a
significant ideological shift within the center-left during this period, influenced by the economic conditions
and the changing social landscape.
The early 2000s witnessed a significant debate on unemployment insurance and social welfare payments in
Germany. Chancellor Gerhard Schröder, running for his second term in 2002, had pledged to implement the
recommendations of the Hartz Commission, chaired by Peter Hartz of Volkswagen. One of its most
contentious recommendations was Hartz-IV, which aimed to merge social welfare assistance with
unemployment insurance, reducing overall benefits, implementing means testing, and enforcing sanctions
for refusing employment. These reforms were crafted during a period when Germany struggled to adhere to
the Maastricht criteria of maintaining the budget deficit below 3 percent. The implementation of Hartz-IV,
although contributing to a significant drop in unemployment rates, was criticized for its harsh reduction in
benefits. Recipients who found part-time work experienced deductions in their benefits, and family
members' earnings could also impact unemployment benefits. Over time, the majority of eligible recipients
became migrants, with a substantial number being elderly individuals. Politically, these changes disrupted
the long-established equilibrium among German political parties, leading to a reshuffling of political alliances.
The rise of new parties and shifts in voter support saw the decline of traditional post-war parties like the SPD
and CDU. This transition created room for new parties like the Left and the Greens, alongside the emergence
of the populist Alternative for Germany, especially in the East, echoing historical political distributions
reminiscent of the late Weimar Republic.
The ideological transformations experienced by New Labour, the third-way adherents, or the New Democrats
reflected a departure from traditional ideologies. While classical liberalism and social democracy traditionally
catered to either rational individual subjects or collective working-class entities, these newer factions
appeared disillusioned with traditional collective constituencies, viewing them as impediments to progress
and economic growth. Instead, they sought to construct their own constituencies and communities.
For instance, New Labour in Britain emphasized the conditions brought on by globalization and the
knowledge economy, advocating for a modernized society catering to the middle class, emphasizing work,
success, and consumption. However, this shift also highlighted a move away from intermediate organizations
and bodies, favoring direct state-citizen interactions and market-oriented policies. Critics labeled this shift as
"post-democracy," focusing on image-driven politics and the exclusion of certain groups and institutions in
favor of direct communication and professional politics.
The "third way," conceptualized by figures like Anthony Giddens and Ulrich Beck, aimed at responding to
heightened individualism and globalization. They advocated for a new democratic state, administrative
efficiency, and the democratization of knowledge and discussion. Beck particularly emphasized the need to
decentralize discussions and involve citizens more in decision-making, arguing against a purely technocratic
approach to governance.
The evolution of social democratic thought in the late 20th and early 21st centuries witnessed a significant
departure from traditional ideologies. Figures like Anthony Giddens aligned themselves with New Labour,
emphasizing a redefined concept of equality and welfare in an era that was transcending scarcity. Giddens
proposed a broader welfare model encompassing security, self-respect, and self-actualization, not just for
the poor but also for the affluent. He envisioned a new pact between different socioeconomic strata,
emphasizing lifestyle changes and a widened notion of welfare that moved beyond merely providing
economic support to fostering individual fulfillment.
Mark Bevir summarized this shift by highlighting the evolution of the state's role in promoting social justice
and prosperity. The Keynesian welfare state was seen as no longer adequate, replaced by a Third Way
approach that combined supply-side interventionism with welfare-to-work programs. This was aimed at
creating a more equal distribution of skill-based assets and mitigating the unequal outcomes of the market
economy. Labour, once trailing behind European social democratic parties in modernization efforts, was seen
as leaping ahead by the 1990s, shedding its previous inclinations towards nationalization, Keynesianism, and
other traditional socialist stances.
Similar modernization agendas were observed in various European countries among their social democratic
leaders. Leaders like Felipe Gonzalez in Spain, Giuliano Amato in Italy, and Willem Kok in the Netherlands
embraced intellectually appealing and media-savvy approaches, catering to a newly educated, postindustrial middle class. They represented a completion of the trajectory that began with the divergence of
Social Democratic "reformists" from orthodox Marxists a century earlier. These leaders moved away from
traditional socialist ideologies, adopting policies that aimed to modernize and adapt social democracy to the
changing socioeconomic landscape.
Public and Private, State and Society
The modernization of social democracy involved an embrace of market societies, although the terms "market
societies" and "capitalism" weren't interchangeable. Market societies indicated the dismantling of statecontrolled planning and centrally imposed prices, while capitalism entailed not just prices determined by
supply and demand but also the acquisition of ownership rights from either private owners or state
concessionaires.
In transitioning from centrally planned economies to market-oriented ones, a choice had to be made
between shock therapy—swiftly changing property rights and implementing free prices, favored by staunch
neoliberals like Lesczek Balcerowicz in Poland and Václav Klaus in Czechoslovakia—and the alternative, which
involved trying to sustain old industries with state subsidies. Shock therapy promised a quicker revival of
economic activity but at the cost of painful unemployment and a severe drop in GDP. On the other hand,
maintaining obsolete industries risked impeding economic recovery and perpetuating inefficiencies.
Privatizing state-owned enterprises became a major focus during this period. Arguments for privatization
were not purely ideological; while ideology played a role, historical factors and party ideologies also
influenced decisions. In various countries like Great Britain, Italy, and Germany, the approaches to
nationalizations and subsequent privatizations were shaped by the interplay of historical events and political
ideologies. In Italy, the Institute for Industrial Reconstruction (IRI) emerged during Mussolini's era and grew
to hold a significant share of Italian industry and banking. IRI became a source of patronage for political
parties, especially the Christian Democrats. The privatization of entities like IRI and ENI (Ente nazionale
idrocarbone) faced resistance and challenges, especially concerning government aid and competition policies
within the European Union (EU). Figures like Romano Prodi grappled with divestiture pressures and
resistance from politicians, while EU commissioners like Karel van Miert aimed to reduce state ownership of
national enterprises to create a more level playing field in the EU.
This period of transition and privatization was marked by complex negotiations between national
governments, EU bodies, and political ideologies. It wasn't solely about an ideological victory for capitalism
but involved a balancing act between economic policies, national interests, and EU competition regulations.
The broader perception was that Europe needed a new economic organization on a regional scale to foster
growth and structural change at the national level, which influenced the trajectory of privatizations and state
involvement in various sectors.
The concept of public enterprise within capitalist nations was historically prevalent. Countries like Norway
and Britain established national firms to manage their significant oil reserves. France had nationalized its
railroads and controlled major sectors like aerospace, electricity, and oil through entities like Électricité de
France and Elf-Total. Germany had federal state-organized banks, and Austria had a national oil industry.
Even the United States had significant public sectors such as the Federal Reserve System and entities like the
Tennessee Valley Authority for hydroelectric networks and NASA for space exploration. Additionally, housing
sectors in various countries were initially majorly owned by local governments before changes in policy.
However, by the 1970s, criticism of these public enterprises grew stronger. The objectives and effectiveness
of these enterprises came into question. There were concerns about political patronage, unclear objectives,
and questions about their economic utility. Many sought to privatize these enterprises, viewing them as
potential sources of profit and attempting to address persistent deficits within national budgets. The case for
retaining public enterprises was clearest when these enterprises involved "natural monopolies" or resources
considered inherently public, like the North Sea oil fields. However, managing these enterprises was not
straightforward. Public enterprises often bore significant sunk costs or environmental liabilities, making
finding private investors a complex matter.
In state socialist countries, the challenges of divestment were more dramatic. In countries like Poland and
Russia, efforts to transition from state-controlled economies to market-oriented ones led to significant
divestment of state assets. However, these transitions were marked by economic downturns, hyperinflation,
and steep declines in output, particularly in Russia. The privatization process in post-communist Germany
also faced challenges, resulting in significant job losses and a decline in industrial employment.
Overall, the trajectory of privatization faced considerable challenges and sacrifices, impacting economic
productivity, employment rates, and the morale of the workforce in the short term. The process revealed the
complexities and difficulties involved in transitioning from state-controlled enterprises to privatized
industries.
The evolution of China's economic policies under Deng Xiaoping in the late 1970s set the stage for one of the
most significant transformations in global history. Initially experimenting with enterprise zones and
considering shock therapy, China opted for a more gradualist approach after facing challenges like rising
inflation. The country developed a mixed economy by allowing the growth of a private sector alongside
state enterprises while maintaining strict political control, exemplified by events like the Tiananmen Square
protests and the recentralization efforts under Chairman Xi Jinping.
The era spanning the 1980s and 1990s witnessed an unparalleled conversion of collective property into
personal or corporate assets through widespread privatization. This period, marked by neoliberalism, saw
substantial increases in overall welfare alongside a technological revolution despite growing wealth
inequality. The changes brought by this shift were profound and, for some, challenging, particularly those
accustomed to older forms of collectivism.
Considering the historical juncture, questions arise about the choices made and their alternatives. There's
contemplation about whether different decisions during the early Industrial Revolution or the rise of
neoliberalism could have led to less painful outcomes for many. However, measuring welfare and utility
encompasses various dimensions beyond income equality, encompassing advancements in race and gender
rights, educational access, and societal acceptance of diverse human experiences.
In the late 20th century, there was a lack of an effective counter-capitalist party in the Western world, leading
to the assertion that market forces would govern the world irrespective of political leadership. However,
counter-capital social movements emerged in Asia, Africa, and Latin America, challenging the dominant
policy consensus. Instances like the protests during the World Trade Organization meetings in Seattle in 1999
underscored the potential for resistance against globalization, not yet as organized political parties but as
diverse movements capable of disrupting the prevailing consensus. These movements signaled that despite
the dominance of market-oriented policies, there existed substantial dissent and potential for disruption,
especially in regions beyond the Western world.
Echoes of Empire
The landscape of capitalism's potential transcended traditional nation-state boundaries, reflecting a
framework that went beyond territorial sovereignty. Political confederations, free trade areas, protectionist
economic blocs, and empires historically illustrated this logic. Despite the absence of conventional colonial
empires by the late 20th century, certain actions and expansions still reflected imperial characteristics.
Examples included China's incorporation of Tibet and, more recently, Putin's moves against Ukraine, leading
some critics to perceive these as forms of imperial domination.
America's influence, particularly through its military bases, industrial products, and investment funds, raised
concerns about a new kind of empire, especially when intertwined with capital interests. The U.S. had a
complex relationship with European resource empires, advocating for the dissolution of their formal
structures post-World War II. While it urged for the independence of colonized nations, it faced challenges
in stabilizing regions where European influence waned. American administrations historically safeguarded
U.S. firms' investments in Latin America, intervening in various countries like Guatemala and attempting to
thwart the Cuban Revolution. Different regions posed distinct challenges to U.S. interests and values. Threats
from ideological and strategic rivals like Russia and China led to military buildups in Western Europe and East
Asia. The Middle East's complexities involved religious dimensions and material interests, particularly related
to petroleum holdings, influencing American involvement and alliances. In Africa, the U.S. opposed efforts
by former colonial powers to retain control, yet it also engaged in actions to influence power transitions,
often in alignment with its global competition against forces defining themselves as nationalist, Marxist, or
Islamic-inspired.
While the U.S. faced setbacks, such as in Vietnam, these localized defeats didn't necessarily compromise its
overall strategic viability in the global context. The structural inevitability of engaging in global rivalries
against adversarial forces, often defined by nationalist, Marxist, or Islamic identities, underscored the
challenges and complexities inherent in American foreign policy during that era. The United States, to its
adversaries, represented a stark embodiment of secular materialism. Opposition to this ideology often took
the form of anti-capitalism or religious fundamentalism. This opposition increasingly manifested through
violence targeted at non-military entities, leading to terrorism, a strategy that gained traction through the
20th century in various regions globally.
Terrorism involved the use of lethal force against civilians or off-duty military personnel by opposing civilians
or militias, deliberately involving civilians as pawns in asymmetric warfare. While aerial bombing against
civilians had previously stirred moral qualms, it gradually became a more accepted military strategy.
Terrorism posed a complex challenge to America's global dominance and domestic security. Domestic terror
incidents, like attacks on racial minorities or schoolchildren, failed to spur a cohesive national response due
to deep ideological divides, particularly regarding gun control. However, terrorism orchestrated by aggrieved
Islamic adversaries generated rare unanimity, especially after the 9/11 attacks, resulting in responses like the
PATRIOT Act and heightened surveillance measures.
The September 11 attacks acted as a catalyst for a significant shift in American priorities. Similar to the
response following the attack on Pearl Harbor in 1941, citizens reacted strongly to a direct assault, leading
to a renewed focus on homeland security and extending security measures to areas breeding terrorism
globally. National security became a central theme in U.S. foreign policy, especially since the 1940s when
the nation prepared for global conflict. The Soviet Union's power and ambitions posed a significant challenge
during the Cold War era, prompting responses such as foreign aid, subversion efforts, ideological persuasion,
and military commitments worldwide. This era seemingly positioned the United States as a global hegemon
following a conventional empire trajectory—maintaining supremacy through battles at the empire's edges,
some won and others lost. The "limes" or frontier of American supremacy stretched along the Iron Curtain,
marked by the Berlin Wall and shared values like toleration of political disagreement and protection of
individual rights. Post-Vietnam and amid perceived threats to oil security, American focus shifted to Africa
and, after 9/11, to Central Asia and the Arab Middle East. The George W. Bush administration spearheaded
this shift, with key figures like Vice President Dick Cheney and Secretary of Defense Donald Rumsfeld shaping
policy decisions. The administration sought to leverage the emergency of the War on Terror to consolidate
executive power, echoing a push for executive supremacy akin to the Federalist founders' intentions.
The United States wielded global preeminence in the latter half of the 20th century via an unconventional
yet powerful profile. Its ascendancy was no longer solely dependent on the economic framework it had
previously harnessed for national and military purposes between the 1940s and 1960s, known as Fordist
economic organization. By the 1980s, it leveraged a symbiotic relationship with a rising China, termed
"Chimerica" by Niall Ferguson. China sought to expand its state capitalist industrial development by creating
overseas consumer markets while encouraging American investment, thereby funding the United States'
current account balance and domestic deficit. This arrangement allowed the United States to evolve into
what could be considered an empire of consumption—a major driver of global demand that fueled China's
export-oriented policies, following in the footsteps of Japan and Germany. Concerns over public debt grew
over time, with figures like Peter Petersen from the Council on Foreign Relations expressing worry about its
catastrophic implications. The Reagan administration increased the deficit by lowering taxes, aiming to spur
production, a strategy unsuccessfully attempted by the British government under Liz Truss in the fall of 1922.
Subsequently, the Clinton administration managed to reduce the deficit, but following the 9/11 attacks, the
George W. Bush administration allowed it to increase once more. Republicans, despite their historical
opposition to the "tax and spend" economy of Democrats, did not shy away from the "borrow and spend"
model. The country's fiscal deficit translated into growing debt owed to foreign entities that purchased
Treasury bonds. Although theoretically possible, the Chinese selling their American Treasury bond holdings
on the market would have devalued these bonds, impacting Beijing's own interests significantly due to its
substantial sales in the West and Western investments in Chinese industrialization. This mutual financial
embrace between creditor and debtor nations posed risks but also bound them together in shared
prosperity. Smaller debtor countries faced a different danger, as witnessed by defaults and devaluations in
the late 1990s. The convergence of capital and the international ascendancy of the American state persisted,
and following the 9/11 attacks, any argument that these two aspects might be separable was unlikely to gain
traction. The entwined nature of global financial systems and geopolitical dynamics made it challenging to
disentangle the United States' fiscal situation from its global dominance.
Debt’s Dominion, 2
The shift towards an "empire of consumption" signified a transition in American capitalism characterized by
a growing prominence of financial activities, accompanied by a decline in manufacturing since World War II.
Financial services' representation in the American economy increased from around 10 percent in 1945 to 20
percent by 2006, a shift applauded by both American political parties. However, these figures only reflected
the income claimed by financial institutions, not the paper assets they generated.
The removal of restraints on the banking system occurred as the Clinton administration balanced the national
budget, culminating in the repeal of the Depression-era Glass-Steagall Act in 1999. This deregulation
expanded the credits offered by financial institutions, often exceeding the physical expansion of output or
productivity growth. A considerable portion of economic effort in Anglo-American economies went into
trading paper claims on future income and wealth, such as shares of corporations, mortgages, and
derivatives—a type of financial wager on the appreciation of underlying assets.
Financialization did not directly translate into higher real wages for workers involved in the production of
goods or non-financial services. Instead, it contributed to an inflation of asset values, including the stock
market, real estate, and rising prices in education. While this wealth was distributed unequally, a substantial
amount was held in widely diffused assets like pension funds and homes. This financialization was both a
consequence of and contributor to reducing the state's inhibitory role on markets and profits. Profits within
the financial sector grew significantly, accounting for about 20 percent of nonfinancial corporate profits until
the 1970s, surging to nearly 45 percent by 2007. However, by 2008, the growing pyramid of credit reached a
critical point, characterized by a Ponzi phase or a "Minsky moment," where new investors were constantly
required to repay the debts of previous ones.
This surge in private sector debt, particularly household mortgages, became more precarious than the
country's public debt to China. Total US debt, including federal debt, dramatically increased from 157 percent
of GDP in 1973 to 363 percent in 2007. Financial sector debt rose from about 10 to 32 percent of the total,
contributing significantly to this overall increase. European banks were heavily involved in American home
mortgage securitization, relying on funding from these loans. Consequently, when the 2008 financial crisis
struck, the Federal Reserve had to extend credits to vulnerable European banks to prevent them from
liquidating their US holdings. The surge in household debt, reaching 98 percent of GDP in 2007, was partially
fueled by the rising real estate prices, creating a feeling of increased wealth among the public and leading
them to leverage their house values more liberally. Homeownership had always been a fundamental aspect
of the American dream, contributing to the propensity of households to pursue subprime mortgages, often
enticed by low initial interest rates that later ballooned to substantially higher rates. This trend mirrored
corporate behavior where the value of new stock issues dropped by $600 billion from 2000 to 2005, while
borrowing surged by $400 billion. Riskier debt brought higher interest payments and was often labeled as
"junk bonds," but investors questioned just how risky these bonds actually were. These high-risk loans were
bundled into separate corporate entities known as special-purpose vehicles, theoretically not burdening the
parent institutions' books. Large lending institutions viewed lending to families seeking homeownership as
insufficiently adventurous. Mortgage originators often sold mortgages individually to specialized institutions
or used them as collateral with government-sponsored enterprises like Freddie Mac and Fannie Mae. These
enterprises held or guaranteed mortgage-backed securities, selling bonds to investment banks and then to
individual investors or dealers.
Following the dot-com crash of 2001, the Federal Reserve reduced interest rates to 1 percent, prompting a
massive wave of mortgage refinancing at lower costs. Financial institutions created new instruments to
package and sell mortgages as mortgage-backed securities. These mortgages were sliced by risk and interest
rates into different tranches and placed into special-purpose vehicles, separate from regular balance sheets,
and peddled as securitized debt to the public and among institutions.
To hedge against defaults or sell for profit, investment houses devised individually tailored insurance policies
known as credit default swaps (CDS). However, the perception of default risk was initially considered
minimal, making selling CDS almost appear risk-free.
The industry had long advocated for relaxed regulations. Basel II regulations proposed in 2004 lowered the
requirement for banks to cover mortgage loans from 50 percent to 35 percent of their nominal value. This
move, influenced largely by the industry's trade association, decreased the provisions needed to cover
mortgage loans.
The crisis that unfolded primarily in the American heartland expanded to the international banking world,
with lenders finding reassurance in the loans they traded among themselves. The shadow banking system—
comprising entities like investment banks, mortgage lenders, hedge funds, among others—operated largely
unregulated, magnifying the role of credit and private money creation. Even regulated banks ventured deeply
into these activities, with large European banks piling up loan-to-deposit ratios as high as 50:1, and American
counterparts reaching 20:1. This trend significantly increased the risk within the financial system.
The financial system's self-inflation, heavily reliant on passing paper claims between investors, banks, and
investment bankers, was supported by agreements like "repo" or repurchase agreements. These short-term
sales of financial assets substituted for borrowing, wherein a bank seeking quick cash sold government
securities to another lender with the agreement to repurchase them at a slightly higher price within a short
period, the difference acting as an implicit interest payment. However, between September 2007 and late
2008, the average rate for these repurchase agreements, known as the haircut, surged from below 2 percent
to 45 percent. The repo markets in the US and Europe may have reached trillions of dollars.
The drying up of the repo market, alongside the decline in short-term corporate debt (commercial paper)
sales, further contributed to the financial contraction. Banks were reluctant to foreclose on real estate they
couldn't sell, and the lack of valuation on these assets made them challenging to collateralize. This triggered
a chain reaction of defaults that threatened both American and European banks. The turning point came in
September 2008 when the Treasury declined to provide guarantees to JPMorgan for refinancing Lehman
Brothers. This decision was justified on grounds of avoiding moral hazard by not rewarding irresponsible
behavior, sending shockwaves of crisis through the financial system. The refusal to bail out Lehman Brothers
intensified the crisis, leading Ben Bernanke to label September and October 2008 as the worst financial crisis
in history, even surpassing the Great Depression.
The Treasury's massive intervention, authorized by Congress, averted systemic collapse. Despite the
transition from Bush to Obama, policymakers continued the bailouts without a significant break in the
approach. Hank Paulson and Tim Geithner, who led the Treasury under both administrations, followed similar
strategies. The Troubled Asset Relief Program (TARP) authorized the Treasury to purchase or insure
distressed assets to stabilize financial markets, resulting in short-term nationalization of banks through stock
purchases and warrants. The Federal Reserve's commitment to the financial system reached nearly $8 trillion
by March 2009, an amount exceeding half the GDP of that year. This massive rescue operation to stabilize
the banking system drew criticism for its perceived moral implications, even with limitations set on bank
executives' compensation. Advocates of the bailout argued that it was addressing a liquidity crisis, not a
solvency one. They justified the need for government backing until the banks' portfolios regained stability.
The impact of the subprime crisis extended swiftly to Europe. European banks heavily invested in the
American mortgage market, significantly increasing their asset-based commercial paper. The crisis
threatened German, Irish, and British banks, leading to emergency measures such as blanket guarantees by
Ireland's government, credit lines extended by Germany, and quasi-nationalization measures implemented
in Britain. The interdependence between American and European financial institutions intensified the crisis.
European central banks faced demands for dollars that couldn't be met without selling off dollardenominated assets in the US. The Federal Reserve stepped in with massive swap agreements, accepting
European banks' domestic loans and providing dollar loans in return, thus stabilizing the transatlantic
financial network. The Fed's interventions were driven by a keen awareness of the catastrophic implications
of the 1929 market crash and the subsequent collapse of the international financial system in 1931. The level
of liquidity provided during this crisis far exceeded what was available during the Great Depression.
Even in 2013, signals emerged that the Federal Reserve might scale back its stimulus efforts, but given the
precarious conditions, these plans were postponed. The temporary swaps among major banks were
extended indefinitely, and emerging markets received indirect guarantees through expanded swap facilities
offered by the Bank of Japan to various countries.
The Federal Reserve and the European Central Bank played crucial roles in helping stabilize the financial
system during the crisis, but this assistance came with significant economic challenges and suffering. The
repercussions of the financial crisis were staggering. Over 9 million homes in the US faced foreclosure, leading
to an immense loss in household wealth. Automakers like Chrysler and General Motors went bankrupt,
erasing the value of existing equity. The crisis also had a widespread global impact, causing a contraction in
growth rates across both advanced and emerging economies. Europe, particularly the Eurozone, grappled
with internal imbalances and escalating banking crises. Starting from 2007, suspicions arose regarding banks'
solvency, leading to a decline in interbank deposits. Countries like Ireland found themselves struggling to bail
out their overextended banking sectors. Ireland's banking assets soared relative to its GDP, prompting the
Irish government to seek assistance from the ECB. The ECB offered aid but required substantial contributions
from taxpayers, triggering divisions and debates within Ireland. Greece faced mounting debts dating back to
the 1980s, exacerbated by tax evasion and a reliance on borrowing. Transitioning to the euro increased
Greece's borrowing capacity but left it vulnerable due to debts in a currency it couldn't control. By 2009,
Greece's budget deficit and debt were alarmingly high, leading to concerns about repayment and rollover of
loans. This fragility extended to other Eurozone nations, with national banks facing deficits and surpluses
while relying on the ECB for lending. The Eurozone's crisis, particularly in 2011-2012, highlighted the
interconnectedness of national banks and their reliance on the ECB for support. This period saw significant
growth in consolidated accounts of Eurozone national central banks and raised concerns about the fragility
of the financial system, with Greece's financial troubles acting as a focal point for the Eurozone's potential
collapse.
The aftermath of the financial crisis led to a prolonged crisis within the Eurozone, especially concerning
Greece. Although Greece's national income was a small fraction of the Eurozone's total, its financial woes
reverberated across Europe due to interconnected banking systems and the fragility of Spain and Italy's
banks. Loans to Spain, Portugal, and Greece amounted to trillions of dollars, and these countries faced severe
economic challenges. Greece, unable to borrow from capital markets, negotiated a bailout program with the
EU, IMF, and ECB, known as the troika. However, the austerity measures imposed on Greece as part of the
bailout program posed challenges. Austerity policies focused on reducing labor costs, often resulting in
layoffs, and increasing privatization and public sector reductions. These measures strained Greece's ability
to meet repayment terms, particularly as GDP fell. The debt burden became immense, requiring Greece to
allocate a substantial portion of its GDP toward servicing its creditors, akin to reparations post-World War I.
By 2011, it was evident that the original bailout plan was unfeasible. The IMF suggested debt restructuring
involving private sector involvement, meaning bondholders would need to accept reduced payments,
extended deadlines, or even principal reductions. The EU agreed to reduce Greece's debt value by 21 percent
through lower interest payments and extended maturities, assuming bondholders agreed.
Disagreements emerged between debtor and creditor nations. Greeks sought a reduction in the face value
of the debt, which Northern European countries resisted, emphasizing their citizens' responsible repayment
practices. The fear of a Greek default led to concerns about collateral acceptance and the potential triggering
of credit default swaps. Talks of Greece reverting to the drachma currency were floated as a potential
solution to their financial crisis.
In late 2011, Greek Prime Minister George Papandreou's proposal for a referendum on the bailout package
sparked anger among creditors, leading to its withdrawal in favor of a parliamentary vote. International
discussions, including G-20 meetings and EU summits, aimed to find a comprehensive solution, recapitalize
Greek debt, and prevent Italy and Spain from facing insolvency. The situation remained precarious, requiring
concerted efforts to stabilize Greece and prevent further economic deterioration across the Eurozone.
The debt restructuring in Greece aimed to reduce its debt-to-GDP ratio from 165 percent to 120 percent by
2020. This involved bondholders exchanging their old bonds for new ones, resulting in a write-off of around
53 percent of the debt. Despite this effort, the reduction hardly provided a lasting solution for Greece's
financial woes, causing continued economic strain. The aftermath led to political and social unrest in Greece.
National elections witnessed the emergence of new political parties like Syriza and the neo-Nazi party Golden
Dawn. The austerity measures imposed on Greece, coupled with mounting debt, led to economic distress
and social discontent. Even as the Greeks struggled with high unemployment and declining public services,
the imposition of further austerity by Germany exacerbated the situation.
The Germans, staunchly advocating austerity, faced challenges in realizing that such measures worsened
unemployment and made balancing Greece's budget increasingly difficult. The refusal to consider debt
forgiveness while extending more loans to prevent a currency collapse in the Eurozone highlighted the
limitations of the monetary union. Critics argued that the common currency lacked a mechanism for common
fiscal responsibilities at the European level and prevented individual nations from devaluing their currencies.
This, coupled with irresponsible borrowing practices and the delegation of money printing to private lenders,
contributed to the crises faced by countries within and outside the Eurozone.
The crises exposed the flaws in neoliberal economic policies that prioritized financialization and income
redistribution, benefiting those who held financial claims on the future at the expense of those with lower
present earnings. The reluctance to acknowledge this outcome highlighted a shift in values among centerleft parties, allowing for the financialization of the future and the concentration of wealth in the hands of a
few.
Ultimately, while the global society's material welfare increased due to industrial and technological progress,
the distributive consequences of financialization were disregarded by governance representatives, capital
holders, and the state, leading to increased inequality and wealth concentration.
The years following the subprime crisis in the US and the Greek economic turmoil were marked by a
prolonged period of stagnating real incomes, labeled as "austerity," particularly affecting advanced
economies. This economic hardship persisted until the relatively external shock of the COVID-19 pandemic
struck in late 2019, further impacting global economies.
During this period, the Democratic Party in the US took significant steps to rescue capitalism, mirroring
actions taken in 1933. The American government played a pivotal role in reviving the banking system,
preventing a financial catastrophe that would have amplified suffering across the nation.
The dominance of capital in the political economy had been a trend since the 1980s, with the American state
actively supporting economic growth. However, this trend came with its costs, notably affecting minority
communities. The shift in job landscapes from industrial craftsmen to roles in retail, call centers, security,
and healthcare reflected these changes.
Similar trends were observed in Europe, where financial sectors and exporters from countries like the UK and
Germany held sway in dictating policies, including the rescue of struggling economies like Greece.
The concept of "austerity" shaped the terms of rescue for the periphery or economically weaker nations,
echoing stratification from earlier resource empires. The idea of a financial periphery existed within the EU,
with countries like Greece, Portugal, and Italy labeled as such, although similar designations did not apply to
the dollar or pound zones.
The absence of a resilient social democratic coalition or a centrist coalition less focused on moral hazards
impeded the implementation of policies that could have addressed the concerns of social losers. Left-leaning
parties, such as Syriza in Greece, initially opposed EU-imposed policies but ultimately had to conform to EU
demands once in power. This demonstrated the limitations of their ability to enforce more egalitarian
economic measures.
Amidst this political and economic landscape, populism and authoritarianism gained traction, capitalizing
on the grievances arising from the aftermath of the crisis. These movements reflected the legacy of
converging political and economic forces in the early 21st century.
CHAPTER 10 - The Populist Assertion and the Return of Authoritarianism
Viktor Orbán, the Hungarian prime minister, notably linked the 2008 financial crisis to significant political
transformations in his era. He likened this crisis to regime changes of the past century, particularly the
monumental shifts at the end of World War I, World War II, and the collapse of communism in 1990. Orbán
stated that the financial crisis of 2008 marked a similar turning point, signaling a need for a different world
order. He emphasized the need for nations to focus on inventing a state that could effectively ensure their
success, moving away from Western liberal democratic models. Orbán expressed admiration for systems in
Singapore, China, India, Turkey, and Russia, suggesting that departing from Western European ideologies and
exploring alternative community structures could bolster competitiveness in the global landscape. He
challenged the assumption that democracy must be synonymous with liberalism, advocating for a different
kind of state—one that he labeled as an illiberal or non-liberal state—aimed at organizing and developing
the Hungarian community. Orbán's speech highlighted the idea of a community that is distinct from a simple
aggregation of individuals, suggesting the need for a stronger, organized community and a state that serves
this purpose, albeit not explicitly promoting nationalism in the traditional sense of defining the nation against
external threats. While nationalism remains a potent force, Orbán's focus appeared to center on an ethnic
community's protection within a rapidly globalizing world, rather than advocating for territorial expansion or
irredentist claims.
The envisioned state, as portrayed by Orbán, seemingly centered on safeguarding the ethnic community,
and some critics labeled this achievement as the establishment of a "post-communist mafia state." This
characterization brings into question whether Orbán's state is akin to a project-state, as discussed in various
typologies of state structures. This narrative of populism, its convergence with a potential resurgence of
authoritarianism, and the various state options are interconnected and form the core complexities that this
chapter aims to unravel.
Creating the People
Populism has woven its way through history across various continents, embodying diverse forms and
interpretations. Its roots trace back to ancient Rome's concept of SPQR, encapsulating the Senate and People
of Rome, signifying the collective power of the people within the political framework. In mid-1870s Russia,
the Narodniki—a group of enthusiastic students—sought to engage with the peasantry in community
organizing, sparking a debate about Russia's identity, torn between embracing Western liberalism or
preserving its Slavic, Orthodox, and communal values.
In the United States, populism emerged from agrarian protest movements in the South and West during the
late 19th century. Referred to as the People's Parties, these movements arose amidst agrarian struggles
exacerbated by unfavorable trade terms, deflationary currency trends, and grievances against railroad pricing
policies that disadvantaged sparsely populated regions. In Germany during the late 1870s, Volksparteien with
anti-Semitic undertones emerged in response to declining agricultural prices, advocating alternative credit
sources like Raffeisen banks against what they viewed as exploitative urban banks. American populists
advocated for the unlimited coinage of silver as a means to alleviate debt and critiqued capitalist systems.
Despite their influence in local elections, they encountered obstacles in national presidential polls due to
electoral system constraints. However, they significantly impacted the Democratic Party, culminating in the
nomination of William Jennings Bryan in 1896, shaping a fundamental economic referendum.
This era of populism was marked by conspiratorial thinking, criticizing remote eastern bankers—sometimes
associated with Jewish identity—and contrasting their perceived manipulative urban practices with the
struggles of heartland agrarian producers. This sentiment extended across Europe and found resonance
even among Prussian Junker landlords, resulting in the suppression of the grain futures market for a decade
post-1896. Decades later, Ezra Pound repurposed this rhetoric in fervent support for Benito Mussolini's Italy,
drawing parallels between Mussolini and Thomas Jefferson, emphasizing the emergence of a one-party
system when a singular vision outpaces the masses, contrasting it with the controlled two-party system
within corrupt oligarchies.
Populism's historical journey in the first half of the 20th century manifested in various forms, not all aligning
with the contemporary understanding of the term. In post-World War I Italy, the emerging Catholic party,
known initially as clericali, transformed into the Popolari, encompassing a spectrum from conservative
landlords to fervent priests. In Peru in 1931, presidential candidates mobilized marginalized segments against
a supposedly self-interested oligarchic elite, portraying an appeal to the virtuous people. The Third
International also adopted populist rhetoric, endorsing Popular Fronts in the mid-1930s and sponsoring
"People's Democracies in Eastern Europe" post-World War II, aiding Communist Party sympathizers in seizing
political control.
Yet, the most contentious link in populism's legacy has been its association with classical fascism. Mussolini
had established a concrete regime by the late 1920s, while German National Socialists gained electoral
ground in 1930. Latin America witnessed a latent fascist movement, exemplified by Argentine General José
Félix Uriburu's rise to power in 1930. Classical fascism and contemporary populism shared elements but
diverged in their emphasis; fascism highlighted military virtues and conflict-driven vitality, partly propelled
by the aftermath of World War I and Communist revolutions. This differentiation led historians to discern
between movements like Huey Long's or Perón's populism and European fascism.
Contemporary populist ideas delineate a nation into two categories: a virtuous, often ethnically
homogeneous core, and a collection of perceived parasitic elements—be it intellectuals, immigrants, or
politicians. Populism summons a sense of opposition, often targeting intellectuals and cosmopolitans who
might be deemed an elite by virtue of education rather than wealth.
Moreover, populism necessitates a figurehead—a people's tribune or political entrepreneur—to summon
or define the people as a political entity. The historical model for this leadership was drawn from antiquity's
Caesarism and elaborated upon by Marx and Engels in The Eighteenth Brumaire. Populist movements thrive
on the emotional power of collective action, uniting individuals in moments of crisis or transformation,
echoing the fervor seen during civil rights marches or political conventions.
This ability to harness collective experiences and emotions, making political participation feel urgent and
transformative, lies at the heart of populist movements. It's this potential to incite change that infuses
political participation with significance, fueling movements and making them impactful in shaping history.
Movements and Political Entrepreneurs in the Twenty-First Century
The ascendancy of populist leaders doesn't merely hinge on their personal charisma; the ideological platform
they champion plays a crucial role. The appeal to non-materialistic values—be it nationalism, religious fervor,
or xenophobia—has been instrumental in rallying support for these movements, often overshadowing
economic programs focused on collectivism or redistribution. Historical instances such as authoritarian
nationalism in the French Third Republic or the loyalty of American Evangelicals to the Republican Party
exemplify how these values have been wielded effectively.
Populist coalitions aren't solely about shared values; they represent intricate networks of interests with
varying stakes in economic outcomes. The success of populist movements in countries like Turkey and India
underscores the importance of understanding the multifaceted networks and political agreements that
underpin apparently monolithic ideological movements. These movements depend on assembling diverse
coalitions, appealing to various interests across federal states or local constituencies to achieve electoral
victories. However, once in power, these parties often transform into mechanisms for patronage and
management rather than serving the original ideals.
The late 19th-century rise of populism emerged in an economic context characterized by tight money and
depressed agricultural prices. In its recent iteration, populism gained momentum in the aftermath of the
financial crisis, but it was the adept, sometimes demagogic, political leadership that proved critical. Leaders
like Juan and Eva Perón in Argentina, Getúlio Vargas in Brazil, and Huey Long in the United States displayed
inventiveness and an ability to connect with the masses, forging mass collective identities that became
central to their movements.
Argentina's Peronismo, for instance, crafted the "decamisados" (shirtless ones) as their mass collective
interlocutors, capitalizing on associations within the European-like society. In contrast, ethnic identity played
a more significant role in other parts of the Americas, serving as a motif for reclaiming indigenous heritage
or uniting against perceived ethnic adversaries.
The phenomenon of populism largely remained confined to Latin America until the economic challenges of
the 1970s revived it, leading to its resurgence in the 1990s in various forms across different countries, often
contending with Marxist guerrilla movements. The unraveling of single-party regimes, seen in places like
Poland and Mexico, often results in the emergence of opposition that, over time, succumbs to populist
temptations, redirecting the trajectory of political power, as evidenced by transformations from Solidarność
to the Law and Justice Party (PIS) in Poland or Mexico's populist challenge to the PRI, represented today by
Andrés Manuel López Obrador (AMLO).
The landscape of Eastern Europe has been receptive to the rise of populist authoritarianism. In post-1989
Poland, the opposition against the Communist state was a confluence of worker-intellectual fusion
represented by groups like the Workers' Defense Committee (KOR), Lech Wałęsa's Gdańsk shipyard workers,
and the Western-oriented dissidents, along with forces of rural and Catholic traditionalism. However, the
formal division of Solidarity led to the rise of the populist Law and Justice Party (PIS), dominated by the
Kaczyński brothers, which eventually clinched power.
Similarly, Czechoslovakia saw the ascent of Václav Havel as president in 1990. Still, the Civic Union that led
the protests eventually fractured, with neoliberalism gaining strength, especially after the country's division.
Slovakia supported Vladimír Mečiar, a former Communist Party official, leading to the creation of an
industrial economy closely linked to German manufacturing.
Hungary witnessed a notable transformation with the Fidesz party, which facilitated the transition in 1989–
1990. However, following their overwhelming majority in 2010, the Hungarian government significantly
reduced social welfare and circumvented constitutional court scrutiny. Orbán, the Hungarian Prime Minister,
claimed to represent not just a regime but an entire idea of the state and a vision of history, setting himself
apart from other authoritarian leaders whose ambitions often focus solely on perpetuating their power
without constructing transformative states.
These leaders often attempt to bypass existing state institutions, evade judicial oversight, and directly appeal
to the electorate to garner adulation. The personalized nature of their regimes is evident, and they strive to
shape the populace they seek to rule.
In certain cases, leaders have been successful by appealing to affiliations with dominant religions, such as
Recep Erdoğan's appeal to Muslims in Turkey and Narendra Modi's mobilization of a cross-class Hindu
coalition in northern India. Erdoğan, in particular, navigated between contending Islamic networks,
leveraging both Anatolian-based entrepreneurs committed to social Islam and the religiously motivated
movement inspired by Fethullah Gülen. However, the relationship between Erdoğan and Gülenists
deteriorated over time, leading to a failed coup attempt by Gülenist officers in 2016 and subsequent purges
and trials.
Erdoğan's ultralow interest economic policies aimed at fostering growth were met with uncertainty by the
end of 2021, with concerns about potential hyperinflation. These measures have marked a shift toward
autocratic rule and raised doubts about their long-term economic efficacy.
The rise of Narendra Modi in India echoes the strategies adopted by populist leaders worldwide. Modi
leveraged Hindu allegiance by stoking fear of a Muslim enemy and fostering violence. His appeal to the poor,
inconveniencing the rich through demonetization, despite its hardships, also contributed to his success. In
Uttar Pradesh, the northwestern state, Modi built on anti-Muslim networks like the Rashtriya Swayamsevak
Sangh (RSS), similar to how the Democratic Party machines in the late nineteenth-century American South
relied on the Ku Klux Klan.
Modi's success wasn't a one-size-fits-all approach. His formula for victory differed in Gujarat, his power base,
where he highlighted his success as an industrial leader. However, in poorer regions like Bihar, winning over
backward classes and Dalits necessitated a focus on battling upper castes to build trust among these
communities.
To solidify his power, Modi neutralized potential opposition by intimidating journalists, undermining local
oversight bodies, and asserting control over investigative agencies and the supreme court. This consolidation
of power relied on what was dubbed an internal "deep state" within the government and parallel Hindu
nationalist vigilante groups outside it. The years following the 2014 elections witnessed continued vigilantism
and anti-Muslim violence, while Modi's control over institutions tightened.
India, Hungary, and the United States alike required the construction of cross-class alliances, despite initial
implausibility. Political entrepreneurs effectively mobilized economically marginalized groups—such as
Dalits in India or industrial workers affected by globalization in Europe and the US—to create an electoral
bloc. Yet, their subsequent policies often favored the affluent through tax and welfare reforms, even as they
attracted support from marginalized communities.
The success of populist movements remains uncertain. Some leaders may face challenges navigating financial
realities or might settle into a more conventional form of authoritarianism. While electoral considerations
remain crucial, populism's endurance hinges on resolving tensions between populist rhetoric and governance
realities.
The ebb and flow of populist politics, whether indicating exhaustion or temporary phases, remain
unpredictable. Historically, ambiguous dictatorships faced critical junctures that either solidified their
authoritarian grip or led to unexpected turns, illustrating the temporary nature of populist initiatives in the
early twenty-first century, which lacked concrete institutional foundations like those seen in established
autocratic regimes elsewhere.
Comparatively, illiberal populist states in Poland, Hungary, Turkey, and India, despite their judiciary
transformations, haven't yet reached the level of institutionalization observed in regimes like the Egyptian
or Myanmar military or the Chinese Communist Party by the early twenty-first century.
The term "totalitarianism" historically referred to regimes characterized by the profound control and
atomization of civil society, leveraging arbitrary terror and party-led mobilization as fundamental tools of
governance. It was first applied to Mussolini's fascist government by Italian Communists and Socialists in the
mid-1920s, later associated with the National Socialist and Soviet regimes. Totalitarian systems were
characterized by concentration camps, gulags, single-party dominance, political police, and pervasive
ideology, as depicted in George Orwell's "1984."
However, as the century progressed, the concept underwent evolution. The continued mobilization of terror
and ideology seemed to wane in Europe, replaced by outright military rule without the pretense of mass
enthusiasm in countries like Brazil, Chile, Argentina, Egypt, and Syria. The term lost some of its precision as
some theorists saw totalitarian potential in all states, while historians highlighted internal divisions within
regimes like the Third Reich and Stalinist Russia.
Dissenting voices in Eastern Europe in the late 1980s revitalized the term totalitarian but with a shift in
emphasis from outright terror to the pervading distortion of the public sphere. The mechanisms of control
evolved, focusing more on pervasive surveillance, censorship, control over privileges, and access to
education, rather than sudden acts of singling out enemies.
The collapse of totalitarian regimes in Eastern Europe led to a decade of liberalization but also saw
opportunities for corruption as public property was privatized. In some successor states, there was a
resurgence of crude populism and renewed authoritarianism. Across the world, as of the current context,
various modes of consolidating dictatorial power have manifested—utilizing tactics such as imprisonment,
reeducation, censorship, corruption, and even assassination, especially in scenarios of beleaguered rulers or
party armies engaged in civil wars.
Dimensions of Inequality and Revolt
Populism tends to thrive on a dual sense of alienation—both socio-economic and cultural. On one hand, it
reflects a response to the growing disparity between groups significantly affected by economic shifts and
those amassing greater wealth. This revolt against economic inequality, seen in movements like "Occupy Wall
Street" or protests against global trade organizations, is statistically evident in the widening wealth gap.
Equally significant, however, is the rebellion against the governance systems perceived as elitist and
detached. This dissatisfaction manifests in various ways, including resistance to established medical
protocols like vaccinations, votes for anti-establishment parties, and even high rates of abstention in
elections. Recent instances, like the surge in abstentions and the vote for Georgia Meloni’s Fratelli d’Italia in
Italy's parliamentary elections, illustrate this revolt against both economic disparities and governance issues.
The discontent is not merely due to economic inequality itself but more so to its visible effects, shaping usable
political narratives. Populist leaders capitalize on this disillusionment, framing the narrative as hardworking
commoners struggling to make ends meet while financial elites thrive, often highlighting rhetoric that praises
"disruption" or lauds concepts like "creative destruction."
The rise of globalization in the 1980s and 1990s, accompanied by neoliberal economic policies, automation,
and financialization, left many industries obsolete and led to unemployment in certain regions. While
globalization benefited emerging economies, it did not equally benefit local industries or the working class
in developed nations. Neoliberal doctrines and austerity measures further exacerbated hardships for
ordinary citizens, leading to debates about the efficacy of these policies.
Populist regimes in various parts of the world, such as in Latin America or Hungary, adopted a mix of
neoliberal and traditional conservative measures in response to economic challenges. Policies ranged from
social spending cuts to nationalizing private pension funds or instituting work requirements for
unemployment support. The economic program of these leaders often took a backseat to their primary goal:
retaining power.
The issue of wealth and income inequality grew significantly within major economies between 2000 and
2020. Thomas Piketty's notable work highlighted this exponential rise in inequality since 1980, attributing it
to the fact that returns on capital consistently exceeded economic growth rates over the long term
(expressed as "r > g"). This, combined with higher saving rates among the wealthy, led to an increasing share
of national income going to capital and exacerbated income inequality. Additionally, the emergence of supermanagers, executives who significantly increased their salaries and perks, contributed to this inequality
through competitive compensation practices among peers.
Piketty's analysis, while earning support primarily from the left, also found some agreement from unexpected
quarters due to the empirical correlation he identified between wealth inequality ("r > g") across historical
periods and the neoliberal years. This trend highlighted a counterbalance toward greater equality that was a
brief outcome of the world wars and the establishment of welfare states. Piketty's proposed solutions, such
as increased taxation of the wealthy and higher inheritance taxes, attracted both support and criticism.
Nonetheless, his findings, particularly regarding recent decades, were substantiated by the McKinsey Global
Institute, an entity not typically associated with leftist sympathies.
The McKinsey Global Institute's study of the national balance sheets of major economies confirmed a
significant divergence between wealth and income over the past two decades. Despite sluggish economic
growth, net worth experienced substantial growth, far outpacing GDP. The total market value of wealth in
ten leading economies increased from approximately $150 trillion to $520 trillion, demonstrating a
considerable rise in asset prices relative to national income.
The study indicated that the net worth at a global level primarily encompassed real assets such as real estate,
factories, equipment, patents, and intellectual property. Financial assets like stocks, while not counted
separately in net worth, played a significant role in funding the production of tangible and intangible assets.
Surprisingly, only 4 percent of the rise in net worth was attributed to the digital economy, while the majority
(77 percent) represented price increases and 28 percent was from new net investment.
Despite the influx of savings, stock prices and real estate investment soared while income did not witness
corresponding growth. This phenomenon raised questions about whether mature capitalist economies had
entered a phase of secular stagnation, a concept previously considered by John Maynard Keynes. However,
Keynes envisioned this scenario leading to the "euthanasia of the rentier," not exacerbating inequality. In the
twenty-first century, this trend seemed to reward the wealthiest beneficiaries of global capitalism, fostering
increased inequality.
McKinsey's proposed remedies included greater real investment in social needs and decarbonization, while
Piketty suggested a progressive tax on capital. Both proposals faced uncertainty regarding their political
viability, historically requiring economic crises to gain traction.
Ultimately, these studies highlighted a detachment between asset prices and income-generating investment,
shedding light on the potential implications for wealth distribution and economic policy in the contemporary
era.
The historian should place primary emphasis on analyzing the shifting balance of institutional power for
several interconnected reasons. Firstly, the organized labor's failure to robustly advocate for income
redistribution is widely acknowledged. This trend, rooted both intellectually and socially, saw labor
movements in heavily industrialized countries favoring policies of class collaboration after being suppressed
by fascism, Nazism, and military-based dictatorships.
Secondly, the triumph of what was previously termed the "politics of productivity" established an enduring
focus on national economic growth rather than increasing the wage share. This discourse gained prominence
during the Cold War era, influencing even the leaders of center-left parties by the 1990s, aligning with
capitalist and neoliberal ideologies.
The collapse of communist alternatives in 1990 and the discrediting of centrally planned economies,
excluding China's evolving state-supervised capitalism, further contributed to rewarding the top deciles of
society. While these centrally planned economies were not successful alternatives, they symbolized a
collectivist regime that, despite its flaws, presented a plausible ideological alternative to capitalism.
These centrally planned economies hinted at the possibility of politically determined primary income
distribution, albeit imperfectly. Social democracy, as an alternative, focused on income redistribution
through taxation and the welfare state. However, faced with challenges like global competition and the rise
of East Asian industrial competition, Western social democrats collaborated with neoclassical economists,
diverting attention from increasing wages in Western economies.
The concept of countervailing power, initially proposed by John Kenneth Galbraith in the 1950s as a shield
against monopoly, faltered in a broader sense in 1989 due to a default in economic vision. Social democratic
coalitions played a role in stabilizing wage inflation but were unable to counter the dominant neoliberal
enthusiasm for market magic. The fall of state socialism in 1989 left liberal democracy as the dominant
ideological force in the global north.
Despite the staggering growth of inequality, institutions like think tanks, international financial agencies,
and NGOs expanded, and advocacy organizations multiplied. However, their efforts to deplore inequality's
rise and address global economic issues often faced limitations in effecting significant change. The rise of
NGOs and advocacy groups, while influential in addressing specific issues and crises, was also countered by
co-option and adaptation within the framework of neoliberal globalization. Savvy corporations, for instance,
formed their own NGOs, co-opting the language and goals of sustainable development and environmental
activism even while pursuing their interests in resource extraction. Transnational civil society, to a significant
extent, became co-opted by neoliberal globalization rather than undermining it.
The purveyors of governance, including politicians of social democracy, often operated within the established
institutional framework rather than challenging it. Their focus tended to be on poverty alleviation rather than
addressing inequality at its root. Institutions such as Brookings, private companies like McKinsey with
research departments, and academic economists started spotlighting the rising trend of inequality, albeit
within the existing system. Global governance organizations, while recognizing political conditions
contributing to poverty, rarely ventured into suggesting radical alternatives due to potential unwelcome
reception in critical areas.
The realm of governance primarily functioned by sidestepping distributional issues, largely avoiding the core
problems of income and wealth inequality. However, it inadvertently contributed to the growing sense of
alienation and reaction by emphasizing education and science. The concept of "meritocracy" became laden
with significance, implying a privileged realm of knowledge accessible only to a select few. This stance echoed
deeper societal issues beyond the resentments often attributed by experts.
For instance, skepticism about science didn't just stem from the content of scientific teachings but also from
the claims made by scientists themselves. The governance community at times conveyed an attitude of
possessing a superior realm of knowledge, creating a divide between insiders and those outside their circles.
This approach resembled the historical attitudes of privileged classes, expecting deference based on
knowledge—a stance that clashed with the egalitarian ideals of modern democracies.
The populist movements emerging in the early twenty-first century challenged this view, illustrating the
limits of expecting deference based solely on expertise or knowledge. These movements revealed that
equality and governance required more than simply expecting deference; they necessitated a deeper
understanding of societal dynamics and a more inclusive approach to addressing the concerns and grievances
of ordinary people.
The State as Project: A History of Concepts
The emergence of populism was fueled not just by the systemic vulnerabilities of capitalism and state
socialism but also by the ambiguities surrounding the term "socialism" itself. In political rhetoric, particularly
during the campaigns of 2016 and 2020 in the US, "socialism" was used by Republican Party politicians to
discredit policies advocating public provision of social services—an approach that Europeans labeled as social
democracy or democratic socialism. This ambiguity stemmed from historical contexts where the term
"socialism" referred to different economic systems.
The collapse of state socialism, primarily associated with the communist bloc, occurred while mixed
economies continued to operate. States practicing socialism in the form of nationalization, particularly those
governed by communist parties, focused on collectivizing the means of production, often through
confiscation or purchase. However, their inability to adapt to diverse consumer demands and the continuous
repression required to sustain their power discredited their economic system, leading to further
disillusionment with the political apparatus.
Contrastingly, the capitalist state, whether following liberal or authoritarian lines, had diverse objectives
beyond protecting property. These states, through the nineteenth century, fostered the growth of capital,
which was considered a success evidenced by GDP growth. Despite the significant achievements in areas like
literacy and medical care by some communist states, the non-communist states generally maintained a
better human rights record, particularly when they didn't succumb to authoritarianism or fascism.
The conceptualization of the state according to Max Weber's definition—a community exercising a monopoly
of legitimate violence in a specific territory—might have been overstated by historians and social theorists in
the early twenty-first century. This definition, derived from the German and Prussian experience of 1900,
might not fully capture the ever-changing nature of territories or the daily challenges to the monopoly of
violence posed by various groups, including guerrillas, terrorists, or armed citizens expressing grievances. In
many cases, rulers themselves waged war against their own citizens, exposing the fragility of legitimacy and
authority, thus rendering Weber's formulation more of an ideal rather than a practical reality.
The debate on statehood and its essence extends back to historical philosophical discussions, including those
from the German-speaking world. Karl Ludwig von Haller and Georg Friedrich Wilhelm von Hegel represent
two contrasting viewpoints. Haller, a reactionary Swiss political philosopher, rejected the idea of the state as
an abstract concept for centralized rule, viewing it as a hierarchical system based on treaties between
unequals. According to him, the ruler stood atop a pyramid of unequal treaties with subjects, deriving power
through inheritance or acquisition rather than delegation from the people. In contrast, Hegel vehemently
criticized Haller's views, emphasizing that the state possessed a public essence transcending private
contracts. For Hegel, the state represented the highest expression of reason, with sovereignty transcending
individual interests within civil society and the economy.
In the modern era, this debate might seem foreign, especially in the context of Montesquieu's ideas.
Montesquieu highlighted how social, religious, and economic institutions, along with natural endowments,
determined historical outcomes. States existed but were not solely transcendent ethical communities or
merely treaties of private submission. Instead, they were complex political societies where classes and
interests contended, often involving contractual relationships among citizens and their chosen rulers.
Considering the contemporary world, the concept of "political society" might offer a more accessible ideal
than Weber's conceptualization of the state. It represents a resultant of forces shaped by ambitious projectstates, the self-interest of capital, and the high-minded norms of governance. Montesquieu's and Locke's
ideas influenced American revolutionaries, emphasizing reciprocity within contractual relationships, while
Hegel's conceptualization influenced Marxism, albeit contested by later thinkers like Herbert Marcuse.
Marcuse defended Hegel against accusations of having paved the way for fascism, arguing that Nazism
represented a triumph of sectoral interests rather than Hegel's envisioned state that would have restrained
ambitious actors within society.
This historical debate on statehood remains relevant, as it addresses the intricacies of political societies, the
challenges of maintaining liberal structures, and the interplay of interests and ideologies within governance
systems.
The examination of various countries and their governance models showcases diverse approaches to
statehood and governance practices, surpassing the conceptual frameworks set forth by Hegel and Weber.
Analyzing Arab countries, Nazih Ayubi highlights the inadequacies of their states, describing them as "fierce"
but not "strong." These states struggle with tax collection, war victories, and establishing hegemonic power
or ideologies beyond coercion and corporatism. Similarly, in Alex De Waal's exploration of the Horn of Africa,
regimes function as political entrepreneurs buying and selling military violence to gain power. This marketlike approach, intensified by foreign dollars and territorial resources, commodifies loyalty and escalates
violence, posing challenges for these societies.
Furthermore, Milan Vaisnav's observations in India emphasize that in fragmented political universes like
India, being perceived as a "thug" can benefit local or state-level leaders. This challenges the notion that
tainted politicians in democracies indicate a breakdown in political accountability. Despite these diverse
governance models, they all fall short of the traditional understanding of a state described by earlier thinkers
like Montesquieu, Tocqueville, Mill, or the American founders. Instead, they resemble Haller's model of
contracts between authoritarian commanders and their subjects.
The modern state, following the totalitarian experiences of 1917–1989, faces skepticism regarding inherent
rationality or claims of being indispensable for individual existence, as espoused by Mussolini. The notion of
a "bossy state" has been a cause for concern, especially in the American construct, which focused on
dispersing power to prevent its concentration.
Post-communist states have raised significant research inquiries and challenged simplistic labels. Henry Hale
introduces "patronalism" as a social equilibrium where political and economic pursuits revolve around
personalized exchanges rather than abstract principles. Bálint Magyar's concept of the "post-communist
mafia state" characterizes the decay following the collapse of communist dictatorships, where corruption
transcends deviancy to become systemic. Here, private interest supersedes public interest systematically,
often led by political figures transitioning from rational discourse to populism. These states witness the
concentration of wealth and power in the hands of political elites, controlling businesses and shaping laws
to sustain their dominance.
In Hungary, Viktor Orbán's regime exemplifies this trend, combining populism and autocracy with neoliberal
policies. Orbán's rule, termed a "mafia state," involves disciplining oligarchs, manipulating civil society, and
wielding power through legislative changes. This regime presents a forgiving yet controlling narrative,
fostering precarity while securing loyalty through familial political connections. Orbán's regime, reliant on EU
funding yet flirting with ideological alliances with Putin, raises uncertainties about its stability, especially in
the context of the Ukrainian conflict. The distinction between a state and a regime, especially in today's
political landscape, is pivotal. The rise of demagogues and aspiring authoritarians, such as Modi, Erdoğan,
Bolsonaro, Trump, Orbán, Putin, or collective cliques like the Polish PIS or Sudanese military, reflects more
of a patrimonial power structure—a set of agreements between a leader and their followers—reminiscent
of Haller's vision. These leaders don't necessarily embody the traditional notion of a state; rather, they
manipulate bureaucracy and specialized offices to reinforce their authority, exploiting these systems for
their own ends.
Although these regimes possess bureaucratic layers and enforce rules, their essence is contingent upon
reinforcing the bond between the leader and those who submit to their will. Many countries recognized by
the UN as states might not embody the stringent definition of a state in the traditional sense, especially when
ruled by authoritarian-minded leaders.
The discussion isn't a plea for a transcendent governing entity or an endorsement of the early 20th-century
strands of liberalism. Instead, it's an exploration of whether there's a place for a sense of the "public matter"
or res publica—an arena where voters consider the common good rather than solely their individual
interests. This concept of a public good within a state framework could lead to a non-populist democratic
vision.
The idea of "Dare more state" implies tasking the state with projects beyond mere security or power. This
approach envisions a state that engages the public in endeavors like space exploration and strives for projects
that transcend personal interests, aiming to restore the government's role between Haller's patrimonial
power and Hegel's higher form of reason.
The debate revolves around whether a strong state, focused on such projects, can refrain from behaving like
an empire, especially in controlling populations without a voice in governance. The aspiration for a projectstate—a state committed to expanding membership, fairness, and life chances—resonates against corporate
lobbying, populist impulses, or governance-focused recommendations.
While this vision presents an ideal, its feasibility remains uncertain. The Economist's analysis, viewed
through the lens of capital, opposes this trend, highlighting the resurgence of a more meddlesome state as
undesirable. However, this author argues for a different balance, acknowledging that while some state
interventions might impede innovation or economic progress, entrepreneurs and inventors have often driven
economic advances, sometimes working for the state as clients.
Ultimately, the debate encompasses whether a state should primarily serve the interests of a leader or a
select few, or if it should embrace public projects that prioritize broader societal welfare. The danger posed
by the state today is different from what many economic observers, like The Economist, primarily consider.
The ongoing conflict in Ukraine exemplifies how leaders, whether traditional or populist, exploit international
tension to consolidate power. The competitive nature of sovereignty often fuels political divisions, leading
leaders to leverage international crises to bolster their authority. Reasserting state power through military
actions can become an intoxicating endeavor, but it carries significant risks that advocates for a robust state
shouldn't overlook.
This book began by illustrating how World War I normalized the project-state, and it concludes amidst the
new conflict in Ukraine, showcasing the state's ability to temporarily subordinate the claims of international
capital when state needs clash with the global economic web. However, the wartime power to impose
sanctions on commerce and capital should not serve as a model for peacetime politics. Even in wartime,
sanctions can inflict general suffering on innocent populations and might not effectively deter aggressive
regimes. Nevertheless, this experience highlights that even within a liberal state framework, there exists the
capacity to confront the modern economy using legal and regulatory instruments. While wartime shouldn't
become a norm for politics, leveraging state power to rebalance the relationship with global capital deserves
consideration.
The erosion of state influence, or the substitution of personal authoritarian rule for a well-regulated state,
has had severe consequences—growing inequality, civil strife, and climate catastrophes. Despite increased
global commerce and migration, counter tendencies have emerged, reflecting an untethering of civil society.
This untethering signifies a general weakening of societal bonds, not necessarily totalitarian atomization but
rather evidenced in mass shootings, fractured collective audiences, and weakened social connectivity due to
the internet's influence. These trends coexisted with a surge in nationalist sentiments, often manipulated to
conceal societal fractures arising from wealth disparities, rapid communication advancements, and
technological innovations.
Similar phenomena were observed during the turn of the 19th to 20th centuries and the early 21st century.
Social observers in the early 20th century recognized societal unraveling but sometimes lacked the analytical
energy to fully understand it. They decried the rise of the masses and advocated for hierarchical international
societies guided by higher civilizations. Forces counteracted growing tensions by organizing the masses,
disciplining capital through state intervention, and attempting governance procedures to prevent destructive
conflicts.
At the close of the 20th century, a comparable untethering occurred, marked by massive private wealth
disparities, the influence of capital pressure, and a substantial explosion of personal expression through
social media. While many welcomed the disintegration of earlier societal bonds as liberating, these changes
also brought about profound shifts in societal structures, including the redefinition of family and personal
emancipation. These transformations were celebrated as progress, challenging traditional norms and
embracing individual freedom and expression, aiming to strike a balance between authority and the common
good.
The guardians of governance largely welcomed the changes brought about by an untethered society,
championing its opportunities. Prophets like Anthony Giddens, Ulrich Beck, Alvin Toeffler, and Thomas
Friedman lauded this untethering, envisioning a society led by the computer-savvy, sensitive, and
enthusiastic individuals, relying more on governance than traditional government. The transformative impact
of digital technology and social media supposedly facilitated this shift, coinciding with evidence of
unprecedented climate change and the resurgence of pandemics. The untethered society appeared to
promise opportunities for both the affluent and the less privileged, fostering a sense of progress and
liberation.
Thomas Mann's novel "The Magic Mountain," a monumental work of the long century, culminates with the
protagonist Hans Castorp thrust into the uncertainty and peril of World War I. Similarly, the historian,
navigating through a familiar yet transformed world, faces an uncertain fate much like Castorp on the
battlefields—uncertain yet wagering on collective survival and the renewal of a spirit that could expand
freedom, equity, and justice.
The present moment is fraught with contradictory possibilities: conflicts in Ukraine, politicized debates over
vaccination during a pandemic, violent clashes in various regions globally, climate-induced crises becoming
arenas for regional power struggles, and geopolitical dynamics shaping peace agreements in the Middle East.
Moreover, ideological conflicts plague countries like the United States, Brazil, Italy, among others, leading to
deeply divided societies. The outcome of these events remains unpredictable, leaving much of the historian's
work in the realm of hypothesis.
However, amidst this uncertainty, the significance of political striving remains evident. The state and
capitalist impulses, when restrained, can contribute to potential human progress. Instances of warlordism,
mafia dominance, gang violence, or tribal conflicts underscore the consequences of state authority collapse.
Populist movements disrupt the necessary institutions for effective governance. The competition inherent in
the state system carries its own risks, often intertwining with nationalist identities, posing challenges for
collective claims within modern states.
Restoring political society might necessitate transcending the individual project-state aspiration to
incorporate an international society. Many intellectuals across the Americas, Europe, Africa, and Asia aspired
to this during the interwar and post-World War II eras, envisioning institutions that could bind together
international society.
The prospects for international confederation coexist with spectacles of state disintegration, driven not solely
by ideology but also by the urgent demands posed by environmental degradation. Questions arise about
addressing climate change, supporting populations affected by rising sea levels or inhabiting more arid
regions, and navigating existing hierarchies of resources and legacies of empires.
Decades hence, a reader might perceive this historical account as an explanation of how and why these
evolutions transpired or, conversely, why they failed. The historian of the contemporary world remains
unable to predict outcomes, walking a fine line between past and future without closure.