Monday, April 22, 2013

WAR AND MARKETS: Why great wealth is not a product of individual initiative alone

In my International Political Economy course we recently discussed the evolution of the nation-state, and how the process contributed to our current market-oriented economic system. The key - as I write in chapter 5 of my book - is understanding that since the 17th century surviving in the international community compelled the state to organize in a way that encourages individuals to create and build wealth that can be taxed. New sources of taxation were necessary to help fund the militaries of the modern eraWhile we may not always think of it this way, war is the inspiration for the modern state and the market-oriented economies we see around the world today. 

During the 17th century if you weren't part of the aristocratic or leisure class wealth creation and wealth accumulation were virtually impossible. Built to sustain old customs and traditions, feudal societies helped to stifle individual initiative and the accumulation of wealth for those who lived outside of the circles associated with the aristocracy and the church.

With the cost of war increasing during the 17th and 18th centuries enlightened leaders slowly came to realize that the ability to create wealth - as opposed to plunder and simple wealth extraction - was absolutely necessary if they were going to fund modern militaries. To create the funds necessary for fighting war feudal leaders began catering to the needs of the artisans and merchants of their time. They understood that the more artisans and merchants produced the more they could be taxed. The agreements between merchants, artisans and feudal tyrants (lords, kings, etc.) are the genesis of our modern constitutions.

The free market economies and the great wealth accumulation we see today are the end product of these agreements. Put more simply, the conditions under which great wealth can be created today are the product of the demands of war.

How the state created these conditions is a mystery for many.

Our modern market economies are the product of almost 400 years of evolution. During this time we have seen the most dominant nation-states pursue wealth and resources through exploration, colonization and plunder (1648-1815), colonization, exploitation, and economic nationalism (1815-1919) and by acquiring market share and market domination (1919-today).

Specifically, after the Treaty of Westphalia in 1648 we saw the great empires of the past (Britain, Spain, France and Portugal) secure the resources they wanted or needed by invading and plundering neighbors and far off lands alike. The spirit of exploration and the Reformation helped many question long held customs and traditions.

Colonization and mercantilism led to settlements and charter corporations, which became the keys to power and wealth. Generally speaking this period - also known as the first wave of imperialism - would last through the American Revolution.

After the Napoleonic Wars and the Treaty of Vienna (1815) we see the emergence of the new mercantile states (Germany, Italy, Japan, and Belgium) who went in search of colonies and territories. Even the United States pursued territorial conquest across the North American continent. While colonization was still part of the game the new European players would replace settlers with merchants whose primary goal was to extract resources. The end game during the second wave of imperialism was to support national economic development, industrialization and market players back home.

Culturally many of the myths and superstitions of the past came under attack from discoveries and ideas that emerged out of the Enlightenment. Economically, while much is said about Adam Smith in reality the intellectual godfathers of the 19th and early 20 centuries were Alexander Hamilton and Friedrich List.

The old "imperialists" developed a greater understanding of trade, finance, and capital investment(s), which allowed them to preach market capitalism. However, high tariffs in the United States and the realities behind Manifest Destiny, entrenched colonialism and the Open Door policies in Asia spoke more to aggressive economic nationalism than it did to Adam Smith.

Still, with freedom and liberty echoing in the west, the concepts we now understand as free markets and free trade emerged under the new constitutions of the 18th and 19th centuries.

After World War I and the Treaty of Versailles (1919) the concept of free trade is embraced in the west, but will take a few steps back after 1929. It re-emerges with a vengeance after World War II. But market economies are carefully re-created and managed by the dominant powers (starting with the agreements at Bretton Woods and Potsdam).

Wanting to avoid the conditions that led to the rise of fascism in Europe and communism in Russia - and leery about the impact of free markets run amok after 1929 - we see the establishment of "freer" markets in the west. While free markets are often preached John Maynard Keynes steps ahead of Adam Smith as the key intellectual force economically (at least through the 1970s).

Douglas MacArthur stands in front of Commodore Perry's flag at the Japanese surrender ceremonies aboard USS Missouri in Tokyo Bay, September 2, 1945. Commodore Perry's flag is symbolic because in 1854 he used the U.S. Navy to forcefully open Japan's economy for trade to the west (and stymied their imperial impulse in Asia). For his part Gen. MacArthur would rule and guide Japan's economy in the post-war era, which included the unionization of labor, equality for women and land reform. MacArthur Photo courtesy of the Navy Historical Center.

The goal was to promote cooperation, stability, and to create the conditions for states to acquire market share.

While Geo-Politics and the realities of the cold war were still governed by balance of power considerations the west developed a more sophisticated understanding of power and wealth in the 20th century. Geo-Economic considerations compeled states to cooperate and develop new treaties to facilitate cooperation.

While realpolitik is still practiced it's clear that helping domestic corporations go abroad is much easier than sending troops to occupy foreign soil. Weapon innovation and fire power are still necessary for the dominant military powers but the security umbrella created by the United States allows nation-states (especially Japan, Germany, and western European states) to pursue research & development and the accumulation of investment capital in the 20th century.

To help merchants become more successful throughout these three periods the state consistently had to modernize the administrative machines of government  Keeping records, building infrastructures, managing the currency, creating an educated workforce, maintaining justice, regulating commerce, and establishing industrial standards requires bureaucratic efficiency. Because we understand the historical evolution of the state we can call these our bureaucracies of violence.

Along the way state driven treaties, market subsidies, opportunities at home, and state supported research & development became basic staples for building competitive market economies. The regular and efficient collection of taxes became critical too. Simply put, if the state is going to create the conditions under which great wealth is created the our social contract says that the state has a legitimate claim to tax it for war, current expenditures and the next generation (which helps explain why the tax rate on the richest Americans was above 90% from the 1940s through the 1950s).

Unfortunately there are not many people who understand how all of this is connected.

We now have large segments of society who (rather simplistically) like to believe that our market oriented economies emerged out of thin air, and that their wealth is the product of individual initiative alone. This is not true. Free markets didn't just emerge, and are not inevitable to the human condition. They are the product of the demands of war, and the result of complex historical developments and political agreements at both the local and international level.

Put more simply, in the modern era, the state creates the conditions under which great wealth is created. There are no invisible hands in our world.

- Mark

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