Gil Scott Heron Wrote:‘The military and the monetary get together whenever they think it’s necessary’.
Pincohet and Kissenger
What role(s) does the state play in the market economy? One way to start thinking about that is to look at some moments in recent history:
August 1842. The governments of China and Britain sign the Treaty of Nanking after China loses the first Opium War. China agrees to allow opium imports, to declare free trade in five port cities, and to give Hong Kong to Britain.
January 1933. Adolf Hitler is elected Chancellor of Germany, supported by the country’s main industrialists and investors as their saviour from the communist threat. Massive state spending on arms and infrastructure gets Germany back to growth and full employment. Similar policies also work economic wonders in Japan, the US, the UK, and elsewhere, ending the Great Depression.
July 1945. The Labour Party comes to power in the UK, introducing the post-war welfare state: the National Health Service, national insurance and child benefit, and nationalisations of the Bank of England, railways, coal mines and more.
August 1953. The British government, working together with the CIA, organises a coup to topple the Iranian government headed by Mohammed Mossadegh, which had nationalised the Anglo-Iranian Oil Company. This company was then majority owned by the British government, and was a major contributor to the cost of the British Welfare State – but paid little back to Iran. It has since been privatised, and renamed BP.
September 1973. General Pinochet seizes power in Chile from the left-wing Allende government, which had nationalised US corporate property in the country. The ‘Chicago Boys’, Chilean economists trained at Chicago University, are given control of economic policy. Their 'neoliberal’ programme of privatisation and deregulation will inspire Reagan and Thatcher.
November 2011. the leaders of two European democracies – Greek prime minister Papandreou, and the Italian Berlusconi – resign. Without elections, they are replaced by bureaucrat economists heading ‘technical governments’. With one mission: to push through the ‘austerity packages’ of cuts, privatisations and job losses demanded by Europe’s bankers.
What is a state?
Max Weber, one of the founding fathers of sociology, gave the classic definition.
Quote:A state is an institution with a ‘monopoly on the legitimate use of violence’ in a territory.
The state uses violence through its armies, police, jailers, and other armed functionaries. A monopoly of violence means that no one else in the territory is allowed to use force without the state’s permission: citizens should not ‘take the law into their own hands’. What does ‘ legitimacy’ mean here? Perhaps that the state’s citizens or ‘subjects’ agree that the state has the right to use force against them. Liberal political philosophy since the 17th century has endlessly discussed the ‘legitimate’ limits of the state’s monopoly. The main point, maybe, is that no state really governs by force alone – as its troops are always outnumbered, it needs at least some level of ‘consent’ from citizens. In reality, Weber’s definition is an ideal that states aspire to: probably no state has ever been accepted as legitimate by everyone it tries to rule; or really held a complete monopoly of violence. Just as no economic system is monolithic, state power is never total.
Role 1: Defender of property and markets
In capitalist economic theory, a market is where people can come and make deals ‘freely’ with each other. A market could be an actual physical place: like a town market, or an old-fashioned trading floor. Or it could be a virtual network of buyers and sellers spread around the world. Any market needs a set of rules. These could include: rules about what can be traded on the market; about who is allowed to trade on the market; about how deals are made, prices are decided, etc.
In most capitalist markets, one very basic rule is: you can only trade a commodity if you have a legal property right to it. For example, if you own it as your own property; or you have borrowed it, with permission from the owner to trade it. If you don’t have any property, you can’t trade on a market.
Property Law is a system of rules which defines who has what rights to use and trade goods. It is part of the Legal System: a system of rules which are defined and enforced by the State. However, as well as legal rules, there are also norms and conventions , often unwritten, behind markets and property. For example, a market like the New York Stock Exchange has its own set of regulations which traders have to obey if they want to do business; these are not government laws, but the Exchange may exclude people who don’t follow them. ‘Black’ and ‘grey’ or ‘informal’ markets also have rules and conventions, though it will not usually be the State police who enforce them.
Theories of modern government often distinguish between three ‘branches’ of state power. The legislature is where laws are made – e.g., parliaments, or presidential decrees. The judiciary means the court system (judges, lawyers, juries, inquiries, etc.) which rules on particular cases. Finally, the executive enforces the law.
The executive commands state forces like the police, the army, the prison service, tax collectors, border guards and customs officers. These officers of the state do the hands-on work of enforcing the law. Alongside private sub-contractors: mercenaries, private prison companies, security guards, etc.
Law enforcement
Enforcement means the threat, or actual use, of force against people who do not obey the legal rules. Perhaps this should be obvious. But liberal theorists and other state supporters do a lot of work to help us forget about the violence of the state, using euphemisms, selective reporting, etc. So, to be clear, some of the means used by the state to make sure that people do not take others’ lawful property include:
• beatings with fists, shields, truncheons, batons, etc.
• tear gas, pepper spray and other chemical weapons
• horse charges, water cannons, tasers, plastic bullets, and other ‘less than lethal’ weapons
• guns, tanks, bombs (‘air strikes’), land mines, nerve gas, computer-controlled drones, etc.
• prison cells, hard labour, isolation cells, the death penalty (in some countries)
• tortures and ‘extraordinary rendition’, cattle prods, sleep deprivation, water boarding , etc.
Changing property rights
One role of the State is to define and then enforce who has rights over what. Property definitions, as well as enforcement techniques, are constantly changing. Here are just a few examples of how property rights can differ and change:
• Slavery. Most ancient ‘civilisations’ recognised chattel slavery: human beings could be owned as property, and traded on markets like other commodities. Property rights over slaves were formally abolished across the British Empire in 1833, and similar laws were enacted across the world over the 19th and 20th centuries. Some legal systems, however, still recognise forms of debt slavery: you sign an enforceable contract to pay back debts with labour. Many democratic countries widely practice enforced prison labour. In the US, and now also UK, selling rights to the use of prison workers to private contractors is a growing market.
• Inheritance rights. Most property systems recognise inheritance: family members and others can pass on their property to others when they die. Inheritance helps maintain and build up concentrations of wealth. Inheritance law concerns who can inherit: e.g., in ‘primogeniture’ systems, the first son is entitled to most of a father’s property. Many states have introduced inheritance taxes to take a share of passed-on property.
• Land rights: planning regulations. In many countries, the State has some control over the use of land: even if you are the owner of the land, you will have to apply for permission to use it for particular purposes, such as building houses or business property.
• Crimes and Torts. The English legal system (and systems which descend from it, including the US) makes a distinction between civil and criminal law. For example, if you trespass on someone else’s land, this is not initially a criminal offence, but a disagreement between two ‘civil parties’ – you and the owner – which has to be resolved in a civil court. The police are only supposed to get involved if the court rules against you. The UK government recently (September 2012) changed occupying residential property into a criminal offence.
• Intellectual Property. Intellectual property law governs rights in ‘intangible assets’: music or books, inventions, or designs and symbols such as corporate names and ‘trademarks’. The 1709 ‘Statute of Anne’ in England is one of the world’s first laws for copyrighting written texts. The 1624 English Monopolies Act was an early patent law, granting rights to exclusively use a new invention. In 1980 the US Supreme Court upheld a patent on a genetically modified biological organism (case of Diamond v. Chakrabarty).
Regulating markets
As well as guaranteeing property rights, States may actively regulate market transactions. States throughout history have policed markets by, for example, imposing laws on the quality of goods; on licensing for traders; or standardising the use of weights and measures.
One important form of regulation is control over what can be used as money. For example, many states throughout the 19th century (re-)introduced monopolies on coining or printing money. The regulation of financial markets in particular is a particularly hot topic – I will look at it in the next thread.
Liberalism
Liberalism is a political philosophy that grew up together with capitalism. Of course, not all capitalism is ‘liberal’. China is still officially Marxist. In Europe in the 1930s, many bankers and industrialists who had supported liberal democracy switched easily enough to fascism and Nazism.
The arguments of early liberal thinkers such as Thomas Hobbes, John Locke, David Hume, or Jean-Jacques Rousseau still form the basis of mainstream ‘political philosophy’ today. These writers developed theories to undermine the old medieval institutions of feudalism and supreme monarchy. At the same time, they also attacked the ideas of revolutionaries who wanted much more radical change: revolting peasants like the Dutch and German Anabaptists; the English Levellers, Diggers and Ranters; early urban rebels like the French Sans-Culottes.
Important tasks for liberal theory were: to develop new systems of private property; to establish the power of the market; and to fix the role of the state. Liberals supported strong and standardised property rights which benefited the rising merchant and capitalist classes. Property needed to be protected from kings and lords on the one hand; and from the ‘mob’ on the other. Liberals attacked old rules and institutions that limited the market: on the one hand, aristocratic corruption, feudal taxes and levies, and royal monopolies; on the other, traditional communal land rights, traditional wage and price agreements, or the guilds of craftspeople and workers.
The English philosopher John Locke, who was also involved in the colonial administration in New England, developed a new theory of property. Land, and manufactured goods, belong initially to those who work or ‘mix their labour’ with them.
In Locke's theory only labour creates ‘value’ – an idea later developed in the ‘labour theories of value’ of David Ricardo and Karl Marx. As the ‘American Indians’ left pastures and forests ‘wild’, colonists had a right and even a duty to take them and make them ‘productive’. Labour and industry, together with enclosure (‘commodification’) and private ownership, bring wealth and prosperity.
Hobbes, Locke, and later Rousseau, argued that government was justified by a ‘social contract’ between rulers and ruled. The government’s role is to defend private property, and so prosperity; in return, the people obey its laws. Although Locke and Rousseau argued that ‘the people’ have a right to disobey and overthrow a ‘tyrannical’ government that abuses its power.
David Hume and Adam Smith, friends and leading thinkers of the ‘Scottish Enlightenment’, argued that if individuals follow their economic ‘self-interest’, this brings peace and prosperity for all. Earlier philosophy had praised aristocratic virtues of honour, courage, or noble self-sacrifice, and seen ‘self-interest’ as ‘low’ and undignified. Now, in liberal theory, it became the foundation of a good society.
Many of the political struggles of 18th and 19th century Europe involved the rise of the new capitalist class – the ‘bourgeoisie’. In the 'Glorious Revolution’ of 1688, English capitalists supported the replacement of Catholic King James II by the pro-market Dutch protestant William III. The new government was dominated by the ‘Whigs’, identified with a new property regime against the old ‘Tory’ ‘landed gentry’. In the French Revolution of 1789, and in the English reform struggles through the 19th century, the new class went further, overthrowing Aristocratic government altogether. In the new 'Parliamentary Democracies’, all property-owners could claim some share of state power.
The bloody birth of capitalism – a hidden history
A witch riding a goat lets loose a rain of fire.
Silvia Federici, Caliban and the Witch Wrote:‘The development of capitalism was not the only possible response to the crisis of feudal power. Throughout Europe, vast communalistic social movements and rebellions against feudalism had offered the promise of a new egalitarian society built on social equality and cooperation. However, by 1525 their most powerful expression, the ‘Peasant War’ in Germany ... was crushed. A hundred thousand rebels were massacred in retaliation. ... With these defeats, compounded by the spreads of witch-hunts and the effects of colonial expansion, the revolutionary process in Europe came to an end. Military might was not sufficient, however, to avert the [economic] crisis of feudalism. ... It was in response to this crisis that the European ruling class launched the global offensive that in the course of at least three centuries was to change the history of the planet, laying the foundations of a capitalist world-system, in the relentless attempt to appropriate new sources of wealth, expand its economic basis, and bring new workers under its command.’
Role 2: Original Appropriation
Property rules are constantly changing. In the history of capitalism, the State hasn’t just enforced existing property systems; it has also been involved in actively pushing the boundaries of property, helping create new markets and ‘commodities’. Again, by whatever means necessary. In the early stages of European capitalism, national armies were built up and used to enforce a number of important shifts in power relations which allowed capitalism to flourish:
Enclosure.
Turning communal land into private property. In England this took two main forms: abolishing the ‘open-field’ system in which peasants farmed strips of land in a non-hedged village field; and privatising and fencing the ‘commons’, lands where villagers had collective rights to hunt, graze animals, gather fruits, etc. Enclosures were often the work of local landlords; but they were backed by the State with a series of ‘Enclosure Acts’, new laws phased in from the 15th up until the 19th century. The peasants frequently rebelled, in local riots or major ‘peasant wars’, and the State sent in the troops.
Colonisation.
The biggest enclosure of all was the land grab in the colonies. The colonisation of Latin America led the way, directly enforced by armies sent by the kings of Spain and Portugal, responsible for the genocide of many millions. In later colonisations, corporate and state power worked together. The British East India Company started out as a trading company, before gradually taking over state power from local rulers. In 1858 India became a direct colony of the British State, after it crushed the ‘Great Uprising’ of 1857.
Enclosing our bodies.
Enclosure threw hundreds of thousands off the land – they became fodder for the new factories and mills of the industrial revolution, or the mines and plantations of the colonies. Indigenous peoples of the colonies were enslaved en masse. Europeans became wage-workers, tied to the clock and subsistence wages.
Silvia Federici, Page 63 Wrote:‘This process required the transformation of the body into a work machine, and the subjugation of women to the reproduction of the work force’.
Again, resistance was met with force, as states sent armies to smash slaves’ and workers’ revolts. Federici argues that the Witch-Hunts of the 16th and 17th centuries were an attack on women and on their pre-capitalist roles in rural communities ‘to eradicate an entire mode of existence’ which threatened economic and political power.
The struggle continues
Enclosure, colonisation, and other forms of commodification have continued apace through capitalist history. Very often the same pattern holds: local capitalists or landowners start asserting increased property rights; the dispossessed rebel; if property-owners aren’t strong enough to smash resistance alone, or with hired thugs, they call in the State.
• England, 1549. Kett’s Rebellion. A peasant army of up to 16,000 rebels uprooted enclosure hedges, defeated a government army, and captured Norwich. Their first demand was that ‘no man shall enclose any more’. They were defeated, and 3500 massacred.
• Chiapas, Mexico, 1994. The Zapatista Uprising. Around 3000 indigenous rebels launched an insurrection on 1 January, taking control of major towns in Chiapas and turning villages into self-governed ‘caracoles’. Their programme included communal village land rights, as well as rejection of NAFTA, (North American Free Trade Agreement) which dramatically extended the reach of global capitalist markets in Mexico.
There have been many rebellions against enclosure and commodification. What can we learn from them today?
Shock Therapy
According to Naomi Klein in her book ‘Shock Doctrine’, modern states systematically use ‘shocks’ to ‘re-engineer societies’ whilst people are too confused to resist. It doesn’t matter where the shock comes from. Some, like wars, are caused by States directly: after the invasion of Iraq, corporations like Halliburton and Blackwater, close to the Bush regime, moved in quickly to grab contracts for running new infrastructure, security apparatus, and privatised oil supply. But terrorist attacks like 9:11, or natural disasters like Hurricane Katrina will do just as well.
Massive profits have been made from the security industry after 9:11, and from the ‘rebuilding’ and gentrification of New Orleans. The economic crisis is another example. Governments across Europe have been rushing through bank bail-outs, ‘austerity packages’ and privatisations, claiming they are necessary to save us from economic collapse. These changes benefit the same corporations and banks who caused the crisis in the first place. In the ‘moment of vertigo’ during a crisis, argues Klein, people are more ready to accept any emergency ‘solution’ offered by a government.
Role 3: producer and consumer of last resort
In classical liberal theory, the State is supposed to stay in the background, defining and protecting the rules and institutions on which capitalism relies. Private companies and individuals do the actual production and trading. In reality, it doesn’t work like this: states are themselves major producers, consumers, and traders.
The military-industrial complex
In 1961 US President Eisenhower used the term ‘military industrial complex’ (MIC), a combination of an ‘immense military establishment and a large arms industry’. In 2009 the US Government spent $712 billion on ‘defence’, about 5% of US GDP. World states altogether spent $1.531 trillion. (Source: SIPRI).
As discussed in the thread on financial markets, though, major government military spending is nothing new. From the beginning of capitalism, leading powers have built up military might to defend their economic interests. At the same time, military spending ‘stimulates’ the economy, encourages industrialisation, and has also been key in financial innovations such as early bond and share markets.
The new deal and war capitalism
In the 1930s, economist John Maynard Keynes argued that governments should attack unemployment directly by hiring unemployed workers on schemes such as road-building. ‘Keynesian’ policies such as the New Deal in the US, or the massive industrialisation and infrastructure projects in Nazi Germany, were widely credited with ending the Great Depression. When financial markets collapsed and companies could no longer get finance to produce, the Government could step in. The wages paid out from government schemes would have a snowball effect, stimulating new demand for private industry also. Governments would have to borrow or raise taxes to run these schemes, but the long-run gain to the economy would outweigh the cost.
But was it roads and railways that saved the 1930s economy, or tanks and guns? According to the theory of ‘military Keynesianism’, what really ended the Great Depression was government spending on arms. Whilst unemployment was killed off (all too literally) by mass recruitment.
The welfare state
After the Second World War, most developed capitalist countries developed ‘welfare states’. Governments committed to providing a basic ‘social safety net’ of minimum healthcare, housing, education, pensions, and benefits for unemployed people, etc. There had been some ‘social insurance’ measures earlier on: the right-wing German government under Bismarck introduced the early pension and health insurance schemes in the 1880s. But these systems were massively expanded in the 1940s. Currently, most European countries spend at least a quarter of national income on state-organised welfare systems.
The welfare state can be seen as part of a ‘historic compromise’ that ended open class war in rich countries. At the end of World War One, millions of troops returned home to ruins and unemployment, but with military training.
Revolutions broke out not just in Russia (1917) but in Germany and elsewhere. Western governments wouldn’t let this happen again at the end of World War Two. Across mainland Europe, new welfare systems were largely funded by the US Marshall Plan. This massive US aid programme was designed explicitly to stop the spread of Communism.
Welfare & warfare spending , developed countries (% of GDP). Sources: OECD and SIPRI
Main areas of welfare spending in the UK (figures % of GDP)
Outsourcing
Since the 1970s, ‘neoliberal’ western governments have been trying to ‘shrink’ the welfare state. The new ‘austerity measures’ of the economic crisis are the latest move in this direction. But in fact government welfare spending is not really shrinking. Just, more of that money is being redirected to private companies. With outsourcing, the State doesn’t directly manage welfare services; instead it pays private contractors to run everything from prisons to pensions. Politicians and bureaucrats often have close links with the successful companies, such as holding well paid ‘advisory’ or board positions.
Some examples: private prisons (G4S); private (‘PFI’) hospitals; private pension managers; corporations who run benefits systems, etc. Business is booming in the ‘security’ and ‘anti-terrorist’ industry. Some companies specialise in doing government outsourcing : like the UK’s Serco, which runs everything from prisoner transport to school kitchens to the Docklands Light Railway.
Bail-outs
The important role of the State in supporting capital when times get rough becomes very clear when we look at the recent crisis ‘bailouts’. In the aftermath of the 2008 crisis, the US Government spent about $3 trillion on ‘bailouts’ to banks and companies hit by the economic crisis. That is about 20% of US GDP. I already mentioned this in a thread Mider opened up.
US Bailouts after 2008 crisis (money spent or loaned):
$127 bn AIG bailout
$168 bn Economic Stimulus Act 2008
$358 bn Recovery Act 2009 (2nd stimulus package)
$776 bn Buying up mortgage securitisation bonds
$295 bn Buying up government bonds
$78 bn Support to car manufacturers
$26.3 bn Bear Sterns bailout
$110.6 bn Freddie Mac and Fannie Mae bailouts
$45.4 bn Small bank takeovers
From Keynesianism to Neoliberalism
After WW2 most capitalist economies were run along the lines of what became known as the ‘Keynesian consensus’, named after British liberal economist John Maynard Keynes. Governments regulated markets closely to keep them running smoothly. They used fiscal (i.e., tax and spending ) policy to boost consumer demand. International capital flows were stabilised with a global financial architecture: the Bretton Woods system fixed currency exchange rates until 1971; institutions like the World Bank and IMF acted as global economic police. Twenty years after Keynes’ death the system seemed solid. In 1965 Time magazine ran a famous cover story with the headline ‘We are all Keynesians now’, celebrating unparalleled economic growth and confidence. The title was a misquote from Milton Friedman, professor of economics at the University of Chicago. Two editions later Time published Friedman’s letter complaining that he’d been quoted out of context. Within a decade, Keynesianism was dead and Friedman was the reigning prophet of the new, right wing, ‘neoliberal’ economics.
What happened was the end of the post-war ‘long boom’, two decades of continued growth. In 1971 the US, crippled by its debts from Vietnam, pulled the dollar out of Bretton Woods, breaking the worldwide currency system. In October 1973 the Organisation of Petroleum Exporting Countries (OPEC) quadrupled the price of oil – the first of the 70s ‘oil shocks’. Stock markets collapsed, triggering recession. Through the late 70s Keynesian policies failed to pull developed economies out of ‘stagflation’ – a combination of stagnant production and inflation. This failure opened the way for a new doctrine which fitted nicely with the interests of big business.
The handiest term is ‘neoliberalism’. Basically, it meant turning the clock back to the 1920s. The state should defend property, but not regulate or intervene too much. Markets will run smoothly if they’re left alone.
But to get back to the ideal of ‘natural’ competition, governments first have to get busy hacking away the ‘distortions’ that hurt the economy. State-run services should be privatised; financial regulations scrapped; trade unions smashed; ‘protectionism’ for third world industry scrapped and replaced with ‘free trade agreements’. The military government of Augusto Pinochet in Chile was the first big ‘neoliberal experiment’. Friedman flew out to give advice, and the economy ministry was run by his students – the ‘Chicago Boys’. In 1979 Margaret Thatcher introduced a neoliberal programme in the UK. In 1981 ‘Reagonomics’ took power in the US. Over the next two decades neoliberal policy became the new orthodoxy – they are all neoliberals now.
Role 4: manufacturing consent
A bit like fairies (only not so nice), capitalism and the state can only survive so long as people believe in them. Private property, markets and the rest are systems of rules and conventions which we have to learn and accept. Even the power of the state doesn’t just come ‘out of the barrel of a gun’: even the strongest and most brutal tyrannies can topple if people stop believing in their power.
If we grow up in capitalist societies, we learn most of the rules – how money works, how to buy and sell things, and so on – as children. We learn that the State protects and defends us. We learn to love our country. We learn the histories of good and great rulers (as well as of a few ‘bad apples’). We learn that consumer goods make us happy, and work makes us free. (I will look more at these points in the thread after the next one). The figures on welfare spending above didn’t include one thing : spending on public education. Modern industrial states spend between 5-10% of GDP on education systems. Neoliberal politicians often propose outsourcing education to private businesses. Or transferring education back to religious institutions, which often ran schools in the past. But few would propose scrapping public education altogether. Modern worker-consumers must be trained.