FREDRIK LOGEVALL: My name is Fred Logevall, and I'd like to welcome all of you to this special talk. I'm the director of the Mario Einaudi Center for International Studies here at Cornell. I'm also a member of the history department. And I'm delighted to have this opportunity to introduce our speaker.
This is the fourth of five talks that we have this academic year in our distinguished speaker series, which is part of a foreign policy initiative that we have at Einaudi Center and which, I think, has gone extremely well from my perspective. The series has been in existence now for several years. We have had some 30 speakers in the series over the past several years. And if you have a program, you can see just how distinguished a list this is, representing various academic disciplines, representing many different professions, but all of them having in common distinction in the area of international affairs, having something to offer, I think, to the Cornell community. And obviously today's speaker is no exception.
The initiative is also part of a broader effort we have on campus, which is to connect faculty and others-- students, staff who have an interest in foreign policy issues-- and to bring people together in settings like this to discuss issues of contemporary concern. I want to extend a special thanks, as we always do, to the San Giacomo Charitable Foundation for its support for this, to the Kessler family, to Mrs. Judy Biggs, and also to the Bartels family. We would not be able to put on these events were not for the support that they provide.
The last speaker, I said that this is the fourth of five this year, we have one more to come. And I want to draw your attention to that. On Tuesday, May 1, at 4:30, right here in this room, Peter Beinart will be here to speak on his new book, which has just been published. And the book, if I'm not mistaken, is called The Crisis of Zionism. And he is a senior fellow at the New America Foundation, and an associate professor of journalism and political science at the City University of New York.
Peter Beinart, some of you will remember, was here as one of debaters in our Lund foreign policy debate back in the spring. He loved Ithaca and Cornell so much that he basically asked if he could come back. And we're going to have him speak on May 1 on this new book, May 1, hope you can join us.
Today's talk on The Impact of the Global Economic Crisis on the Future of International Relations will be delivered by Lord Skidelsky, who is emeritus professor of political economy at the University of Warwick and Andrew D. White professor at large at Cornell. He is a member of the British House of Lords and chairman of the Governors of Brighton College.
Lord Skidelsky is a preeminent economic historian, perhaps best known for his award-winning three-volume biography of John Maynard Keynes, volumes that received numerous prizes, too many for me, certainly, to list, and has achieved the kind of acclaim that I've seldom seen in a major biographical work. I will say that, from my perspective, reading the single volume version that Penguin put out, and I read it over the Christmas break in anticipation of Lord Skidelsky's visit, was just an extraordinary experience. And so I certainly recommend that Penguin edition. At least from my perspective as a non-economic historian, I think it's just a marvelous, marvelous work.
His other works include The Road from Serfdom: The Economic and Political Consequences of the End of Communism and a shorter work called Keynes: The Return of the Master published in 2009. He also contributes a monthly column for Project Syndicate, "Against the Current," which is syndicated in newspapers all over the world. Currently, he is in the process of writing How Much Is Enough: The Economics of the Good Life jointly with his son Edward Skidelsky.
Additionally, Lord Skidelsky has extensive political experience. He was a founding member of the Social Democratic Party and remained in the party until its dissolution in 1992. Soon after, he joined the Conservative Party, holding the position of chief opposition spokesman in the Lords for Culture and later Treasury Affairs. In 1991, he became the chairman of the Social Market Foundation, a British think tank that focuses on the nexus of economic and social policy. He is currently a member of the All Party Parliamentary Group on Extraordinary Rendition.
Since 2003, Lord Skidelsky has been a non-executive director of the mutual fund manager RUSNANO Capital. From 2003 to 2011, he was a non-executive director of Janus Capital. And from 2008 to 2010, he sat on the board of Sistema JSC. He is a director of the Moscow School of Public Studies, I was interested to see, and was the founder and executive secretary of the UK-Russia Roundtable. Since 2002, he has been chairman of the Center for Global Studies. And in 2010, he joined the advisory board of the Institute of New Economic Thinking.
Lord Skidelsky earned his DPhil from Nuffield College, Oxford. I am just so pleased that he's here with us for, not one, but for several days here at Cornell this spring. And I would like you to now join me in welcoming Lord Skidelsky.
LORD ROBERT SKIDELSKY: I'm very happy to be here. And it's all too short. I've got to leave tomorrow evening. I've got to get back for my son's wedding, the one with whom I've just written this book. He's left it a bit late. But it's not an occasion to miss.
Look, I want to talk about what the title of the lecture says I will talk about, which is not always the case. But I'd like to stick to my brief.
In the Chicago school view of the world, large economic collapses are impossible. Put their models under the microscope, and you won't find any of these collapses. No black swans, no upsets, no unknown unknowns, only the instantaneous adjustment from one state of optimum equilibrium to another. In DSGE, Dynamic Stochastic General Equilibrium, models, which are the workhorses of today's macroeconomics, default, bankruptcy, and insolvency are impossible. There are no banks, no debts, no money, the very things that cause economies to go wrong.
Now, you might think that a method of theorizing which seems to have so little purchase on the real world would have equally little influence on policy. But you would be wrong. Of course, economists don't believe in these models, that these models are literally accurate descriptions of reality. But the idealized view of the world which they consist of ramifies in their craniums. And through the advice they render to policymakers, they aim to make the actual world conform more closely to their models.
I could give you many examples of how policy has been tailored or, as I would say, deformed to fit the needs of the theory. But I confine myself to one example, to the testimony of a Adair Turner, chairman of the UK's Financial Services Authority and a considerable intellectual and economist in his own right. With commendable honesty, he outlines the intellectual assumptions of the pre-recession light touch regulatory policy of the UK Financial Services Authority.
And these are the following propositions. "Market prices are good indicators of rationally evaluated economic value. The development of securitized credit has improved both allocative efficiency and financial stability. The risk characteristics of financial markets can be inferred from mathematical analysis, delivering robust quantitative measures of trading risk. Market discipline can be a useful tool in constraining harmful risk taking. And financial innovation can be assumed to be beneficial, since market competition would winnow out any innovations which did not deliver value added.
From which it follows that markets are generally self correcting." All this is a quotation, by the way. "That the main responsibility for managing risks lies with individual firms. Customer protection is best insured not by product regulation or direct intervention markets but by insuring that wholesale markets are unfettered and as transparent as possible."
Now here I resume. You can't understand, I think, the extensive deregulation of the financial system pre-recession-- in America, I suppose notably the repeal of the Glass-Steagall Act but many others-- without reference to this intellectual background. I'm not, of course, claiming that this kind of theory was the result of disinterested academic speculation. The most influential ideas of an era reflect the interests of its power structure. I know this sounds terribly Marxist, but it seems to me that looking at the history of thought, you've got to make this connection somewhere. And this was the voice, what I've been saying was the voice of corporate America speaking through its intellectual [? fugal ?] men.
Now, the view that the market system is inherently stable if untouched by government interference clearly has huge implications for politics and particularly for the role of the state in the economy. In international relations, it underpinned the project of globalization, the market-led integration of economies across political frontiers or more graphically a vision of the world without political frontiers for any significant economic activity. Large traces of this vision are to be found in the so-called Washington Consensus, which greatly restricted the role of government and enlarged that of markets. The essential point of that consensus was that a global market economy requires very little governing. In fact, the absence of global government is its great strength.
A global market economy, on this way of thinking, was not just economically benign. It was politically benign, since it removed the main causes of war. This was the normative thrust of globalization. International relations would be much more pacific if they were seen, these theorists said, as an aspect of international trade theory. Don't need international relations theory. Just have good international theory and apply, and you won't need international relations theory. I'm caricaturing a bit but not excessively.
Consider the influential Fukuyama view of international relations, which had a long sway. And I think it's a very, very good essay, by the way. Fukuyama, roughly what it asserted was that democracy plus markets equals peace and prosperity. It combined the proposition that democracies never go to war with each other, with the view that the market system produces a social optimum.
Thus, those theories of international relations, which locate the causes of conflict in the existence of an international anarchy or the scramble for markets and raw materials, are dethroned if you accept that this is the development which we're inevitably headed for. And Fukuyama's remains an elegant intellectual construction, which continues to tease us.
What he did in The End of History was to satisfy our longing for an endpoint when we could finally harvest the gains of progress and enjoy an eternity of pleasurable mediocrity. The struggle was over bar a few mopping up operations on some fringes.
And in Fukuyama's view, democracy and markets are linked aspects of the same unfolding historical process. Both remove the causes of war, the central preoccupation of international relations theory, by eliminating relations of domination and subjection. So zero-sum outcomes are eliminated from both spheres, politics and economics, simultaneously. The relationship between the two, by the way, isn't made as clear as I think it should be. But that's the thrust of his argument.
However, this conclusion, Fukuyama's conclusion, is only reached by a very restrictive interpretation of democracy, essentially confined to Western liberal democracies and a wholly benign view of market transactions. If you insert into that picture illiberal democracies and economic black swans, you get not the end of history but regression to more primitive conditions. In other words, what happens to international-- in other words, my question is, what happens to international politics if the welfare guarantee of the international division of labor is canceled?
And that's the topic I want to explore this afternoon. I do say by way of comparison with what happened in the Great Depression of the 1930s. Now, it's a tribute to the scale of the collapse of 2008 that the Great Depression immediately suggests itself as the point of comparison. And it can be misleading, but it's also suggestive.
So if you turn to these two charts, it's the second chart really that we need to start with. And there you see the downward slide in both depressions. It's somewhere in a booklet I think you should have received. I was advised not to use PowerPoint.
So what you see there-- maybe it's not as clear as it might be-- is that in the first five quarters, that is 1929, June, '29, and April, 2008, the slide down, the loss of output in the world economy, was exactly the same. So when people were in the middle of that very early slide down, they had very good reason to believe that they were heading for another Great Depression.
Well, the good news is that the world economy bottomed out in 2009, end of 2009, after five quarters but went on sliding, in comparison with the 1929-1932 period when the world economy went on sliding for 13 successive quarters. The difference, in my view, was almost wholly due to the massive stimulus policies adopted in 2008, 2009 and their absence in 1929, 1932.
So I think people realized that they were heading for a really big-- after the collapse of Lehman Brothers-- really big crisis unless they did something about it. And that was a massive stimulus. I mean, it was led, interestingly enough, well, not surprisingly by the United States but also by China. And Europe came in rather reluctantly a bit later, not the UK but German-led Europe, which didn't believe in stimuluses. But anyway, they were persuaded to. So that was really what, I think, stopped it.
Now the bad news, though, is I think that the consequences to the injury to the world economy haven't worked themselves out fully. And policy is discoordinated at the moment. So we're still in the middle of the economic consequences of the collapse of 2008 with much of the world in conditions of semi-slump.
And I think the chart, the first of the graphs, illustrates that point. You can see really what was happening pre-recession. You have this big V which is the huge dip. Then you have a very, very, mediocre recovery. I mean, that line on the right-hand side of the diagram really means that we're crawling along the bottom. In fact, some large parts of the world are actually on the bottom. There's no upward momentum at all. And that's true of most of the Eurozone. The United States is at present doing quite a bit better.
Now let's turn back to the 1930s. The Great Depression started in 1929, as you all know. And you also all know that the Second World War started 10 years later. What's the connection between the two?
Well, there's quite a nice fit actually between the Great Depression and the ensuing wars of conquest. Japan in Manchuria in 1932. Italy in Abyssinia in 1936. And Germany in eastern Europe, 1939.
But a fit or a correlation isn't a cause. And it's much too simple to say that the world economic breakdown caused the Second World War. I've often toyed with trying to really prove that it did, but there are too many intervening variables. Too many things had to go wrong between 1932 and 1939 to produce the political catastrophe which, in fact, occurred. But nevertheless, it's suggestive. It's a suggestive question.
Let's start, though, in trying to make sense of this period with the state of international relations at the time because I think we have to start there. Kenneth Waltz, who is quite a bit of a hero of mine in international relations studies, has drawn attention to the influence of the system as a whole on the behavior of the parts. His contention is that the international anarchy conditions the behavior of states more than the behavior of states creates international anarchy.
This world system theory approach for international relations is particularly useful in an age of globalization, which can be defined in terms of the growing impact of the whole on the parts. Waltz' argument, in a nutshell, is that you need to look at the system of interstate relations to predict how individual states will behave regardless of their domestic constitutions. In international relations the structure of the system affects the characteristics of the states. It affects the choices of the states, their aspirations, their choice of means, even there internal organization.
"It is the enduring," and I quote, "enduring anarchic character of international politics which accounts for the striking sameness of the quality of international life throughout the millennia despite the huge variety of political systems." It's something systemic in the structure of the systems which affects the behavior states, causing them to repeat the same patterns of behavior.
I want to draw attention to the fact-- and this, I think, is a link I've made. I don't know that others have-- attention to the fact that Waltz' systems theory approach to international relations is the political science analog to Keynesian macroeconomics. Its opposites are the primacy of domestic politics approach in political science and the primacy of microeconomics in economic theory. In both these approaches, the whole is the sum. The whole is the sum of the parts rather than the decisive influence on those parts, the way those parts behave.
And the Fukuyama theory is an almost perfect illustration of that. Democracy and markets jointly create world order. Whereas by contrast, for Waltz and Keynes in there different spheres, world order is the product of public goods that are produced and that shape the system as a whole. Global public goods have to be provided outside any global system to secure its stability.
Now, let's go on from there. I mean, in states, in domestic jurisdictions, the important public goods are provided by government. In fact, public goods theory is the economist's explanation for the existence of the state. Without a supply of public goods, all social systems succumb to uncontrollable free riding and Hobbes' war of all against all. But there's no world government.
So what happens here? Therefore an orderly world, in my view, has to be secured by what I've called surrogate sovereigns. When such sovereigns exist, the global system tends to be orderly. When they do not, it tends to break down into disorder. And globalization, as it's been practiced since the 1980s, 1990s, can be viewed as the latest of the attempts to create world order without public goods, relying on the spontaneous forces of democracy and markets to produce an orderly path to peace and prosperity.
Now, I think this world system perspective is a good starting point for an explanation of why the politics and economics of the 20th century, or the first part of the 20th century, became so dire. For this was an exceptionally fluid period in international history. The rapid spread of industrialization at the end of the 19th century had fragmented power among half a dozen nations, bringing to a close long era of the Pax Britannica.
This inaugurated the two great wars of the British succession. I know I'm looking at it from a rather parochial point of view. There were other elements in that war. But I think from a European perspective you can regard them as the wars of the British succession, in which, of course, the chief challenger was Germany.
And those ended with the establishment of the Pax Americana or, more accurately, a US-Soviet condominium. But in the intervening period, large and decisive shifts of power were thought to be possible. And Germany emerged then as Britain's main challenger for what would now be called superpower status. And it's interesting that new books coming out of China use the word the next superpower, China's quest for superpower status. I've read about four of them in the last six months.
And so your ancient patterns reassert themselves. History never repeats itself exactly. But here you have some elements of fluidity in the international situation produced by the decay of the Pax Americana. I mean, I think it hasn't gone nearly as far as Britain. And it probably won't go that way either. But nevertheless, there are elements there.
Now, we turn to Charles Kindleberger's theory of the underwriter. And that's really an application of this surrogate sovereignty idea to economic relations. He writes in a well-known book called The World in Depression, 1929-1939, for the world economy to be stabilized, there has to be a stabilizer, one stabilizer. He emphasizes the one. And I'll come back to that in a second.
Kindleberger argues that a liberal trading system requires that all countries have easy access to long-term finance, rapid and certain access to short-term finance, and free access to foreign markets so that principal and interest payments on loans can be met by exports. And the management of the-- he believes that the management of the inducement to countries to follow the rules of a liberal trading order, and particularly free trade rules, depends that the inducements to do that have to be centralized in a single power.
Because he argues-- I think this is too extreme actually-- that if the inducements are competitively provided, individual nations will evade the rules by playing off one provider against another or the other alternative, which may be the eventual result of the first, is that the global system will break down into subsystems or trading blocks.
So his idea is that you have this globalizing process. There's no world government. You need a surrogate sovereign. It has to be the power with the greatest weight and influence and desire to play the role in the international system. If that power fades and you have a lot of challengers, rivals, fragmentation of power, then you get a dissent into international anarchy. So once again, the good working of the system depends on the structure at the top of the system, the public goods that are provided internationally, analogously to the public goods in a single jurisdiction.
And Kindleberger's explanation of why the Great Depression was so severe and prolonged, and I quote him here, "was that the British could no longer, and the Americans were not yet ready to, provide the necessary public goods for global economic stability." And then he gives examples. From 1924 to 1928, America, and to a lesser extent British foreign lending, kept the world economy afloat. But then in 1929, the Americans stopped lending abroad. Their savings were increasingly diverted into a stock market bubble. And that wrecked the financing of commodity producers, leading to a huge collapse in agricultural prices and raw materials, foodstuffs and raw materials.
And then instead of keeping an open market for commodity exports as the British had done that had a free imports policy from the corn laws till actually 1932, the Americans put on the gigantic Hawley-Smoot Tariff in 1931, which, I'm quoting Kindleberger again, "made it clear in the world economy there was no one in charge." And Britain followed, partly in retaliation, with the Import Duties Act in 1932 and the Imperial Preference System in 1933.
And most countries in the world went protectionist in the early '30s. Germany had a particular system of bilateral foreign trade which was conducted through a bilateral clearing system in which money transfers played no part. And so that was a reversion to actually a barter economy in Germany's foreign trade. Each account had to be balanced bilaterally. And multilateral clearing was forbidden.
And the financial crisis of 1931 made it clear that the city of London could no longer function in any way as lender of last resort to the global economy. And the Americans weren't interested in playing that role at that time.
Then you had the collapse of the gold standard, which, of course, disrupted the whole of the monetary relations that had been built up in the 19th century. And that was good in one sense in that it freed currencies from their, what Barry Eichengreen has called, their golden fetters. But it was bad in that it started several years of currency wars.
France followed a purely nationalist policy and acted as a kind of spoiler in this process of disintegration. In short, the leaders of the world economy broke it up in order to protect themselves.
This, then, was one of the two main channels through which the economic crisis of the 1930s led to the political disaster of 1939. There was a second channel, though, which was suggested by E.H. Carr in a brilliant book which is thought by many to be the foundations of international relations theory, called The Twenty Years' Crisis: 1919-1939. It was published in 1939.
And this had two ideas which are relevant to my inquiry and our inquiry. The first is his distinction between have and have-not nations or status quo and revisionist powers. And one he might well have got incidentally from Lenin's imperialism. The second is that a country's domestic political system is largely determined by its position in the international order of states.
Both ideas are quite easy to grasp. If the welfare guarantee of the international division of labor is canceled, if free trade can no longer guarantee the welfare of the countries taking part in it, countries will try to become more self sufficient, that is reduce their dependence on foreign trade. The have countries in this situation are fortunate. They're the countries with large territories. And they have-not countries are those with small territories.
Small countries with small territories can shelter under the wing of big countries with large territories. The problem arises for great powers with small territories over which they have little political control. Britain, France, the United States, the Soviet Union all had large territories, including empires, capable of developing a considerable degree of self-sufficiency. Germany, Italy, and Japan were great powers with small territories. The Great Depression gave them a strong economic incentive to try to gain political control over the territories of others.
I mean, that's just an economic explanation. I'm not saying that is the only explanation of their aggressiveness. But that gives a rationale for seizure of empire by countries with no empire. The have-not powers wanted to grab territory because you were in this sort of world. The Great Depression had destroyed the mechanisms of a functioning global economy.
And the Japanese case is actually particularly instructive. Between 1929 and 1938, Japan managed to achieve a most remarkable shift of trade from the United States and Europe to a yen block in East Asia. But this shift involved the seizure of Manchuria and Kwangtung from China. And even so, it left Japan dependent for oil on the United States. Hence, the strategic decision taken by Japanese leaders in 1941 to seize the Dutch East Indies and also Malaysia.
Now, the Japanese historian-- this was rationalized by Japanese historian Masamichi Royama, who wanted East Asia to become a vast self-sustaining region where Japan would acquire economic security and immunity from such trade boycotts as it had experienced at the hands of the Western powers because Japan suffered both from the Hawley-Smoot and also from British closure of India to the Japanese markets. But, of course, that ambition brought about the war with the United States and Britain, which the Japanese couldn't sustain.
E.H. Carr's notion that a country's domestic system adapts to its place in the international system is quite fertile in explaining the success of fascism in some states and not in others. In the have-not states it was more successful than in the have states. Fascism's claim to rule-- I'm not saying it was an honest one particularly. It was based on its promise to change for the better the international situation of the unfavorably placed powers.
Specifically, it set out to create a mass space for an ideology hostile to liberalism, pacifism, and humanitarianism, the peaceful virtues, a social system which abolished class conflict to unite the nation. A political system which would give unity of direction and clear purpose and an economic system which would support the regime's aggressive foreign policy aims.
Now, that fascism tried to organize its society for wars of conquest seems to be indisputable. That's what it was about. I mean, that's certainly what Germany was about. It's what Italy became about in the 1930s. And it's certainly what Japan, in its way, became also, a militarized society.
But it's much too simple to see the expansion of the fascist powers purely in terms of world economic breakdown. And I'm not making that claim that world economic breakdown caused fascism and that led to war in that simple chain. The Depression did not so much stimulate a positive program of economic imperialism as destroy the most telling argument against the policy of economic imperialism, namely that it would sacrifice economic prosperity because economic prosperity was exactly what was in question when the liberal trading system fell to pieces in the early '30s.
It does strengthen the political position of all those who wanted to change the existing international system for other reasons. It rationalized wars of conquest. That such rationalizations gained powerful political currency, though, is testimony to the severity of the crisis at the time.
Now, in the last part of my talk, to turn from the overwrought 1930s to the present is to replace the hallucinogen with a blast of common sense, one might think. You know, true enough many of the reactions of the 1930s can be sensed today in the question is Obama an FDR. That is a comparison that people think to make because they seem to think that the situation somehow requires similar powers of leadership. But these reactions come in such a muted form as not really to constitute the same plot.
There's obviously some resemblance between having one's hair cut and having one's head chopped off. But only in gangster movies are they likely to be part of the same narrative. And so everything is-- we're not there. We're not in the 1930s. We're not about to go to war, even in five years. So the prospects are much more benign. But while the situation isn't nearly as dire, let me give you some reasons for thinking that there are disturbing trends which suggest to the historian the reemergence of ancient patterns of thinking against which we would be well advised to take precautions.
Within the parameters of the milder shock of 2008, 2009, let me concentrate on a number of things that have been going on-- trade. Now, the pattern isn't exactly the same. In the 1930s, trade collapsed by far more than output, signaling an increase in self-sufficiency. That hasn't happened this time. In fact, output has collapsed more than trade.
So the trade system has been kept going. And output has suffered more than trade. And one of the reasons for that, I think, is the existence of the World Trade Organization, which nothing like that existed in the 1930s. And that does seek to establish, monitor, and enforce the rules of the trade regime. But despite the WTO, just consider the following figures.
In October, 2011, an EU report observed that its main emerging market trading partners, such as the BRICs, had adopted 424 trading restrictions since 2008, 131 of them in 2011 alone. Some of the abuses cited included blocking access to government procurement contracts and adopting measures to restrict the export of raw materials. And on the other side of that, I'll come to that in a moment, and that's the flip side of the BRICs's complaint about Western monetary policy. So there's friction developing there.
Under World Trade Organization rules, countries have some scope to increase tariff barriers, if they were set initially at a high level. And this started to happen in 2010. Ecuador announced that it was lifting tariffs across the board, increasing the levy on some imported meat to 85% from 25%. India raised tariffs on steel. While Russia, which isn't a WTO member, boosted levies on imported cars. According to a 2010 WTO service, 16 countries launched 85 new anti-dumping cases during the first six months of 2009, compared with 61 investigations a year earlier.
So all this is on the rise. Mexico threatened to bar meat imports from the United States, which US farmers viewed as retaliation for new rules requiring meat imported into the US to be labeled by country. And so on. It's [INAUDIBLE].
Now, the most important thing I think, though, is this. Bilateralism, which was a big feature of the 1930s, is on the rise at the expense of multilateralism. At the World Economic Forum in Davos in 2011, Pascal Lamy, director-general of the WTO, remarked that you need a lot of political energy to do things multilaterally, and it's just not available. It's in short supply, just as it is in climate change.
Instead, government leaders are focusing their energies on bilateral talks, regional arrangements, such as the proposed Trans-Pacific Partnership. And Ron Kirk, US Trade Representative, agreed with Lamy's assessment. Kirk said that the US had not given up on the Doha Round but it wasn't an urgent matter. Bilateral agreements are more readily able to create jobs and bring benefits to the two parties.
Well, there's some who argue that this giving up on Doha and completing the round is merely a transitional phase. And it'll resume when the overall structure of the world economy stabilizes. But my question is, how do you get the overall structure of the world economy to stabilize when all this is going on?
We now turn to currency. And that represents an equally mixed picture. The 1930s was the era of currency wars. And we can see some signs of this. In 2010, then head of the IMF Dominique Strauss-Kahn, the late, unlamented head of the IMF, Dominique Strauss-Kahn, remarked that, I quote, "there is clearly the idea beginning to circulate that currencies can be used as policy weapons." This came after the efforts of a string of countries, from Japan to Switzerland, Columbia to Israel, to drive down the value of their currencies against the dollar.
And there are two extremely important problems involving currency at the moment. The unbalanced creditor positions of Germany and China, both are maintained by mispriced currencies which are generally thought to be unsustainable. And I think they are unsustainable. But little is being done to improve that position.
To proxy trade imbalances, I've looked at the development of the US and Chinese current account balances in percentages of GDP. We can clearly see the effects of the crisis in the data. Leading up to 2009, there was a steady growth in the current account surplus in China and an almost equally steady growth in the current account deficit of the United States. In 2009, both the Chinese current account surplus and the US current account deficit shrank considerably because trade actually went down enormously. And the United States simply was importing a lot less.
Since then, the Chinese surplus has grown again and is reaching pre-crisis levels. While the American deficit has remained significantly below its 2009 levels. Now, how do we explain that? I think it suggests that China has been switching a lot of its trade to East Asia to create a renmindi block, much as Japan did in the 1930s. And I think the data show this. And it's the adaptation of-- it's the deglobalization of trade relations that you can see in that pattern.
But the China-US tensions over the Chinese currency situation remains. In October, 2011, China threatened to launch a trade war, I'm quoting, against the US if Congress passed the anti-China currency bill. This bill, which did pass on the 21st of October of last year, allows Washington to impose duties on Chinese goods imported to the US to punish Beijing for undervaluing its currency. The Chinese reaction was immediate. Its statement-- by using the excuse of a so-called currency imbalance, that bill escalates the exchange rate issue, takes protectionist measures, gravely violates the rules of the WTO Organization, and severely upsets China-US economic and trade relations.
So, again, this is words. Not much action yet. But nevertheless, indicative of a feeling. And China has a big problem here. It's got not just to switch its trade relations to the region, the East Asia region, in order to avoid US retaliation. But it's also got to rebalance its domestic economy towards greater consumption. And that means scrapping a lot of its development, economic development, plan, which was export led.
So now there's the big political problems for the Chinese leadership in making that kind of switch because, among other things, it involves things they're starting to do to create a proper social safety net, to raise wages in the rural areas. And this will take some control of the movement of population. Now, it may well be able to resolve these problems. And one hopes so. But there's no inevitable soft landing in this adaptation to its economic model which has been caused by the collapse of the global economy.
And interestingly, the term currency wars is increasingly used by emerging market economies in relation to the bouts of expansionary monetary policy in the West. I think Brazil has emerged as the spokesperson of the currency war thesis.
Just the other day I saw that President Dilma Rousseff writing in The Financial Times, notes that, I quote, "threatened by large speculative cut capital flows, as well as by rapid and unsustainable currency appreciation, developing countries that adopt a floating exchange rate such as Brazil are forced to take prudential measures to protect their economies and their national currencies. We will not succumb to inflationary pressures coming from outside."
And what actually those precautionary measures are are capital controls. So Brazil has extended a tax on foreign borrowings and threatens even further capital controls. All of this suggests that we're likely to see a retreat of globalization, both in cases where the mispricing of currencies is being mitigated in the United States-China relationship and where it's not, Brazilian in the case of Brazil in the West.
OK. There are countervailing factors against currency wars. Small countries in Europe, I'm thinking of Croatia-- I was in Croatia last week-- small countries in Europe, if they devalue their currencies, and Croatia still can because it's not a member of the European Union or the Eurozone, face heavy penalties, since most of their foreign borrowing is denominated in the euro. So there are countervailing forces to the outbreak of currency wars. But nevertheless, they're on the horizon.
In the Eurozone currency mispricing is hidden by the existence of a single currency. It's a very good way of hiding currency misalignments. But the real exchange rates of countries like Greece, Spain, Portugal, Italy, Ireland will probably have to come down by about between 10% and 20% to regain competitiveness against Germany. Where the devaluation required is substantial, the country or countries concerned will either have to leave the Eurozone or risk great social conflict.
Countries with smaller trade imbalances against Germany will probably be able to regain competitiveness by internal devaluation. That's a process of reducing their nominal wage rates. But that's also quite risky from a social point of view.
Let's go on to the next case I want to consider which is capital controls on the movement of capital. In 2011, the IMF and G20 came out with a new framework for regulating international capital flows.
At a talk in Nanjing on the 31st of March of last year, in complete contrast to the IMF's previous position on the topic, the aforementioned Dominique Strauss-Kahn stated, I quote, "the good functioning of the international monetary system depends crucially on orderly cross-border capital flows. But here there is new system at all. It is clear that our views are evolving. In the IMF, in particular, while the tradition has long been that capital control should not be part of the toolbox, we are now more open to their use in appropriate circumstances. Although, of course, countries should be careful not to use them as substitutes for good macroeconomic policy,"
Very careful, but capital controls are in. That is back to Bretton Woods minus its other features. But the use of capital controls as part of the toolbox is now coming to be accepted. And, of course, everyone wants it to be subject to regulation and discretion. But this is what the world of the 1930s was like. Capital ceased to move in the 1930s internationally. It only moved within the blocks set up by the powers with large territories.
And the shift in thinking on capital controls which is going on is partly a function of the greater power held by China, India, Brazil and other nations in the G20. And they also have more voting power at the IMF and World Bank. So many of these nations deploy controls and see them as part of preserving autonomy for domestic objectives and partly, of course, its function that the fact that countries with capital controls have fared better in the recent crisis than countries without capital controls. So here's something going on.
And this has very real consequences. According to the IMF's annual report on exchange arrangements and exchange restrictions, in 2010 144 countries reported capital controls on capital market securities, 124 on money market instruments, 94 on derivatives, 86 on commercial credits, 120 on financial credits. And this stands in sharp contrast to-- there's a huge rise in the incidence of those controls. And, of course, the European Commission has proposed implementing a tax, so-called Tobin tax, starting in 2014 on all transactions involving stocks, bonds, and derivatives that are conducted between financial institutions.
And the last of these topics, migration. A battery of new migration restrictions have sprung up since 2008. And I can go through them. But I don't want to spend too much time on them. I'll just go to the United States. I've got some stuff on UK, France, Italy, Spain, Korea, and the United States. So that's the economic side of things.
What about the politics, the growth of nationalism and anti-capitalism? It's difficult to assess the direct causal link between the financial crisis and nationalism after such a short period of time. While it is very likely that the roots go back further than 2008, it is nonetheless the case that Europe has seen the entry of a large number of extreme right-wing parties into national parliaments over the last few years.
Parties touting anti-immigrant and Islamophobic ideas have spread beyond the established strongholds in France, Italy, and Austria to the traditionally liberal Netherlands and Scandinavia. And they all now have significant parliamentary blocks, the right-wing parties, in eight countries in Europe. And similarly in April, 2010, Governor Jan Brewer of Arizona signed the nation's toughest bill on illegal immigration into law in his state.
So my conclusion. I've argued in this lecture that we're in the middle of a process whose end is not get in sight. The world's system of politics and economics has certainly not collapsed in a disorderly way as happened in the 1930s. Whether the present moves to restrict globalization will be seen as blips or preliminary signs of a much more disturbing trend will depend on whether a globalized economy can achieve a sustainable basis of economic recovery. And that takes us back to the political foundations. Are they there? What about the surrogate sovereigns?
Because huge adaptations are going to be involved. And that will decide whether we return to the block economics of the 1930s or go forward, whether we have the wisdom to build a managed and modified form of globalization, free from the illusion that everything can be safely left to the markets. And we have to confront the palpable inadequacy of global institutions. There's no economic government of the world, much less a political government. And the era of surrogate sovereigns seems to be over.
There either has to be a quantum leap in the ability of the great powers to cooperate and implement cooperative solutions, or the political economy of globalization will start to fragment. Thank you.
FREDRIK LOGEVALL: Well, we have some time for questions. They can range from, I suppose, the systemic down to individual theorists-- Carr, Kindleberger , Waltz, Fukuyama, who presumably got some of his ideas while a student of political philosophy and classics right here at Cornell. So the floor is open. And Lord Skidelsky, I think, can probably handle his own questions. Yes, [INAUDIBLE].
SPEAKER 1: The fall of Russia and communism and sort of Thatcher, Reagan, deregulation, liberalism, the whole chant of globalization and deregulation, it would seem to have been-- a whole new world order that was going to be one form of capitalism. Now we're 20 years into it, and so the question, you said there has to be someone sort of, some leading country to sort of put some order into this globalization.
And so the general question I would have is how, we're still working through it, but has the United States basically lost its moral authority as being the champion of this direction? And yet the abuses and the excesses and the irresponsibility, not just of individuals but of the management of the national and global financial system in general. I mean, is it sort of-- have we just lost the moral authority to make all of this happen? And it has the losers and the lesser countries just no longer going to look to the United States because look at the mess that we've made in the 20 years subsequent to the fall of communism.
LORD ROBERT SKIDELSKY: Yeah. I think moral authority is important. I mean, country's power depends not just, or perhaps even mainly, on their military power but on their intellectual and moral authority. And this set of ideas by which we have lived is not nearly as widely accepted as it used to be. I mean, the Washington consensus is in disarray. The fact that it was called the Washington consensus is important of the state of the world at that time.
But now it's being challenged. I mean, China doesn't accept the Washington consensus. And the BRICs don't really accept the Washington consensus. And the United States is no longer as dominant economically as it was. I mean, it is in relative decline by any indicators, except in military terms.
But that's inevitable. I don't think one should worry about it, as other countries catch up, and America obviously slips down a bit. And China is the second largest economy in the world. And it will, I think, if it sorts out its domestic problems-- big if-- will become the largest. And therefore it's going to play a more salient part just by the weight of its economy, leave aside moral authority and military authority, it's going to play a more salient part in determining how things go.
Now, it's Kindleberger's view that the world economy disintegrates unless there's a single sovereign, surrogate sovereign. It's not necessarily my view. I think you can do quite a lot through cooperation of the great powers. And I think you are building up these institutions of cooperation which didn't exist in the 1920s or 1930s. There were a few global economic conferences. Lots of people came, made speeches. They tended to go home without having accomplished anything.
There was no organization. The only organizations there were dealing with the international economy were consortia of central bankers. I mean, the Bank of International Settlements was set up in Geneva in 1929. And there were one or two others. There was also strong personal relationships between central bankers.
But there was no formal machinery like the G20 or, indeed, the G7. So it was easier the world of that era to fall to pieces when the economy started to go south. And of course, the big indication that there was no coordination anywhere was the failure to take any coordinated steps to attack the Depression as it evolved. It was partly a failure of theory, but partly a failure of institution.
So the answer is, if you accept the thesis that the spontaneous order of the markets does not produce stability, certainly not continuous stability, you have to then look at the political foundations. Are they adequate? Are there some surrogate institutions of governance or government in the international economy which we take for granted in the domestic economy?
This problem occurs in somewhat miniature form in the European Union where they're all at sixes and sevens. And they can't really agree. Germany is trying to lead things. But I think in the wrong direction.
So it's a very good question. And we have to see. But we have to think about it. That's all I can say at this moment.
SPEAKER 2: Lord Skidelsky, what do you feel is the error that the reformers, and particularly in America, are committing? Is there a certain error? Is the fact that there is a deglobalizing tendency, is that an acceptable thing, something that we can work with? Or something that is simply not good for the continued progress.
LORD ROBERT SKIDELSKY: Yeah. It's not good. I think globalization was pressed over-enthusiastically and without real attention to the problems it was going to face on its way. I think the same thing happened, by the way, with the European Union and specifically with the Eurozone. They got the bit between their teeth. They thought they got the right kind of the ideas to make it work. And they swept under the carpet problems which anti-globalizers really pointed out.
I think there's a lot wrong with globalization. I'm quite a protectionist in many ways. I think it's absolutely intolerable that jobs should be outsourced to the extent that they are and that outsourcing accepted so that you lose, a country loses, in a very short period of time a large part of its manufacturing capacity. I think that's wrong. What's it going to replace it with? They're never going to answer that, the theorists of comparative advantage.
So it should have been done much more slowly. And institutions should have been built up on the way so that the whole thing could have been done much more gradually. But they decided they could do it. And, of course, the globalizing project itself, one has to accept the fact that it was an ideal escape route for business because there's no government.
So if you're against regulation, you go global. There's the real anarchy. And then you sell the idea that this is all wonderful and that you don't need government anyway.
So I do think academic analysis has to be very, very critical of what was done. And I get quite radical about this because I think there's been an absolute unmoral willingness to sacrifice millions of people on the altar of abstract theory and corporate greed.
FREDRIK LOGEVALL: The very back, yes.
SPEAKER 3: Just taking from your lecture what I'm understanding is that when we look at the 1930s Depression Era and we accept for this thesis there being a surrogate sovereign or some sort of sovereign organizer, leader of some sort of hegemony? If we accept that, and we go back to the idea that you said, about the end of sort of Britain's control or sort of Britain's sort of Pax Britannica and how at that period, Britain's no longer capable of sort of asserting that sort of political authority. And the United States had not really appeared to step up into that position.
So kind of playing off this same idea that I think a lot of these questions are getting at, of course in a very American perspective, I'm sure it's very complicated, but what happened with Britain? Why was Britain no longer capable of exercising that capacity? And maybe looking at that from the perspective of how is that similar, politically, to the United States' sort of position in the world right now?
LORD ROBERT SKIDELSKY: Well, the first reply is it was weakening economically by the end of the 19th century. And, I mean, it had lots of assets left. But its position in the world economy was declining. And one of the ironies of Kindleberger's thesis is-- it's a very interesting argument-- which is that the exercise of the hegemonic power itself weakens the hegemon because others free ride really. And that was obviously happening.
The second reason is, of course, the massive cost of the First World War. I mean, all the European powers were crippled by the First World War. And so there was a power vacuum. And Britain really lost the will or energy to go on doing this.
Especially as a third reason is that there was the rise of the Labor Party. And universal suffrage increased massively the opposition to running the kind of economy on which the hegemonic function depended, free movement of capital, free trade, and the dominance of the city of London in the domestic economy.
So you've got a growth of resistance. I think the way the economists called it was wages became sticky. And once that happened, things like the gold standard and defense of the gold standard as the priority policy, ran into more and more trouble for Britain. And so once the gold standard was abandoned in 1931, then the economy reverted to some form of-- it became protectionist.
And you know the rest of the story. The imperial preference system became highly protective. Britain abandoned this role out of weakness really. And the United States then found itself in that position again as a result of the inability of the European powers to sort out their own problems. I mean, Hitler did make it extremely difficult.
And so the others we're sucked in. America was sucked in indirectly. I mean, America didn't declare war on Germany. Germany declared war on the United States. One always has to remember that. And then the attack on the Soviet Union brought them into Central Europe.
And then you had the new hegemony. That's a way of interpreting things. I'm not saying it's the only way.
FREDRIK LOGEVALL: Yes. Yes, [INAUDIBLE].
SPEAKER 4: How do you explain the [? home ?] of Lord Keynes, the current government in the [? home of ?] Lord Keynes, doesn't understand your graph about stimulus and is cutting budgets severely? And the second and corollary or the second question is how do you justify your association with the Conservative Party?
LORD ROBERT SKIDELSKY: Well, it did stop in 2000. Well, let's take the first one first. I was never a member of the Conservative Party. But I took the Conservative whip in the House of Lords for nine years when my own party disappeared. And I had to make a choice, did I want a political career or not? And I thought I did at that time. But then I realized it was a terrible mistake to even--
And I'd better finish Keynes. That was a far more important thing to do. So I played my cards in such a clever way that I was dismissed from any office I occupied and got the time to do something which I think is the important bit of my life, to write that book and get it done.
But at that time, I mean, the-- well, after that, in 2000, I went into an area of British political life known as the Crossbenchers, and they're Independents. So I sit in the House of Lords as an Independent and have done for the last 12 years.
And then I'm free to say what I think and vote the way I want. And I'm not whipped, which is the correct parliamentary expression of being corralled into one lobby rather than another. So I think I found my right place.
And I've actually, on a number of occasions since, particularly in the last three or four years, I've been asked very strongly would I join the Labor Party, and I said no. I'm going to stay where I am.
Now, on the second question, which is the stimulus question, yeah, there's a whole history of the repudiation of Keynes that goes back to the 1970s when the Keynesian system did get into trouble. There was a crisis of Keynesism. Whether it was a crisis of the theory or whether it was a crisis of the way it was implemented is obviously debated. But it seemed to be unable to control inflation except by prices and incomes policies which seemed to threaten even Keynes' idea of a free market and the free movement of prices.
Keynes was a believer in the price mechanism. And he said, my aim is not to destroy the price system but to fill gaps in the system, in other words, to provide some public goods to enable this system to work properly and without severe fluctuations. So you had the repudiation of Keynes.
You had the triumph of Friedman in the big battle between the monetarists and the Keynes. [INAUDIBLE] Friedman won. And then you had the new dispensation. Well, then you had the crisis of 2008, 2009, and everyone went back to Keynes for a bit. And Bob Lucas, who's the high priest of the Chicago School, said we're all Keynesians in the foxhole, you see.
But his theory actually didn't explain how you got into the foxhole because you shouldn't have been if you were a believer in rational expectations. I didn't see how you could've been in the foxhole.
But anyway, so they that. And then I think there was an objective and a subjective reason for the reversal of engines. The objective reason was that in the course of rescuing the banking system and stimulating the economy, you had very large increase in worsening of government finances. And so the figures just seemed to be enormous.
And there was a feeling that you had to break that in and start on deficit reduction, or the markets would crucify you. And that was particularly so when so much of the debt was held by foreigners and foreign banks. I mean, a much larger proportion of the national debt today is held by foreigners because capital is much more mobile than it used to be.
I mean, Britain's enormous foreign debt. If you look at Britain's national debt incurred during the Second World War, all of it was either raised from its own citizens or from its colonies or empire. None of the foreign debt was held by foreign countries. And this was during the war. It's a misconception that America loaned Britain money in the Second World War. It didn't.
Lend-Lease was not a loan. It was a gift for which there were certain closes for post-war policy. The big American loan occurred after the Second World War. Keynes negotiated that in the autumn of 1945.
So national debt was a national thing at one time. It was nationally held. Now it's held by anyone. And this is obviously true of the American national debt. A lot of it's held by the Chinese.
But that imposes some constraints on the conduct of your fiscal policy, I think, which were not there to nearly the same degree. And so that's the objective reasoning, I think, for the emphasis on deficit reduction.
The subjective reasoning is a lot of people who had only accepted the stimulus very reluctantly because they had to do something. They feared the worst. Once the worst was over, they reverted very much to the view, well, what we're seeing is a big expansion of government. That's bad. We've got to get government down to size again. And it's an opportunity to do that.
Also, and it's a very complicated-- sorry, I'm going on, but it's very complicated question. There was the recurrence of a basic puritanism, I think, in the population, the idea that debt is bad to get into debt. The fact is, of course, that everyone got frightfully into debt beforehand, including households. As you know, the US household saving rate turned negative in the period leading up to the recession.
But then the sense of guilt that they'd been sort of-- oh, we've got to return to true and tried morality. And the governments have to because the households and governments are really the same sort of things. So all that.
I think a lot of good academic work still has to be done on the switch between 2008, 2009, and 2010. In America, it hasn't happened so much as it has in Europe. I think there is still a stimulus going on in the United States and in the UK and in Europe, but it's a monetary stimulus. Fiscal stimulus is downgraded. Monetary stimulus is huge. And that's keeping us going really.
FREDRIK LOGEVALL: Let's go over here. Yes, sir.
SPEAKER 5: In your view looking at the movements of Occupy Wall Street and the movements that are coming up in the United States and the free rider problem that you mentioned before, to what extent do you think Americans are starting to recognize sort of corporate free riding on US defense spending in terms of keeping global security [? protection? ?]
LORD ROBERT SKIDELSKY: I hope so. But you could answer that better than me probably. I think very little actually. I think campuses are one thing. But if I talked to corporate leaders, which I do from time to time, there's no recognition of that at all. After all, what's good for General Motors is good for the United States. Who said that? Once president of General Motors.
And America's business is business. America's a business society. It's the most business society in the world. All the elites are business elites. And making money is what America's about.
So I think it's going to be very hard to sort of make-- grew up against the resistance of a traditional order, an aristocracy and an intelligentsia, which sort of attacked it right from the beginning. And that's why you had political conflict in Europe, which sort of didn't occur to the same extent in the United States. I know it did. I know there were real radical periods in American history.
But it wasn't nearly as ideologically savage, I don't think, as it was in Europe. And that's because I think there was no counter-tradition to the corporate tradition in the United States. I don't think I'm alone in saying this. I mean, it's all there in Galbraith and many other people. So I don't know that this recognition is going to come easily.
FREDRIK LOGEVALL: Professor Bunce gets the last question.
SPEAKER 6: OK. I perceive the tension in your talk between thinking about [INAUDIBLE] and domestic political economists. And yet, so many examples you've given seem to be when you look at Britain post-World War I, when you talked, I think, about France and its response in the inter-war period as being distinctive, et cetera, and you [INAUDIBLE] at China and the kinds of crises it faces, it seems to me you're saying that domestic political economies matter a great deal.
LORD ROBERT SKIDELSKY: Well, I'm trying to combine Waltz and Carr. I mean, Carr also said that the international system heavily influences the domestic. But he had an idea of your rank in the international system was the crucial thing. And in the inter-war years, I mean, his explanation for international affairs was in terms of the conflict between have and have power, status quo and revisionist powers.
And which camp you fitted into, you could predict which political system you would be likely to follow. So I thought of it in that sense. And I think I would always want to combine the Waltz. I think Waltz is too sweeping. But if you introduce the Carr variation and introduce your place in the economic system or in the political system, you've got a more rounded story. And some of that place may be simply a perception that you're wrongly placed, and you've got to do something about it.
I didn't think all revisionist policies are rational for the people pursuing them. Some of them may be. But a lot of them aren't. And therefore, I'm very [INAUDIBLE] about the argument that that was a rational case for the Japanese to invade Manchuria in 1931. I was born in Manchuria. And I spent the first three years of my life under Japanese rule. So I've thought a bit about Manchuria.
But, you know, there was a case, though. They were being cut off from their markets. At that point they weren't bad guys. They were trying to play the rules of the liberal system. And then US put up a huge tariff, and the British put up a huge tariff. And their European and American markets were gone. And their markets to India because India was under British tariff rule.
And so what do you do? You have very little territory, very few resources. And you try to create the hope of prosperity sphere. But unfortunately, what they should have done, they should've done it by agreement, or tried to, by sort of becoming the hegemon of the area and not actually starting to invade everyone. But China and Japan could hardly have reached an agreement at that time.
Now, China has a similar choice, I think. As globalization, I think, retreats somewhat, it will be the-- it is already the regional hegemon. But it'll have problems with Japan. So these things are difficult to sort out. It's best if you run a system that avoids these collapses.
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Before the 2008 financial crisis, says Lord Robert Skidelsky, many economists based their analyses on theoretical models in which unregulated markets resulted in the most productivity. But according to Skidelsky, relying on these models to guide real-life economic decisions can have a disastrous effect on international policy.
Skidelsky, professor of political economy at the University of Warwick, delivered his first lecture as an A.D. White Professor-at-Large on April 18, 2012. The talk was given as part of the Einaudi Center's Foreign Policy Distinguished Speaker Series.