The Myth of the Free Market: BOOK REVIEW

Tuesday, December 8, 2009

BOOK REVIEW

The Myth of the Free Market by Mark A. Martinez is exceptionally well researched and written. It reads more like a text book than a casual reader and, as such, should be required reading for every senior high school student in America. It thoroughly demolishes the concept that free markets exist on anything larger than a local scale and cogently explains why free markets on a larger scale are probably not possible. Beyond high school, it should be taught in every MBA and graduate economics program so that those who manage the financial empire actually have some relevant information about how things really work and are better able to cope with day to day reality. It is high time that delusional thinking stop being the core operating mode in both the private and public policy sectors of our economic world.

John Hemington,
McMurray, PA
Posted on Amazon.com / Dec. 7, 2009

2 comments:

PainesrightFebruary 8, 2010 at 3:02 PM
The free market (Laissez-faire Capitalism) did not cause this crisis, the government (CRONY Capitalism/Socialism/Communism) did.

The free market did not create Fannie Mae, Freddie Mac, Ginnie Mae and Sallie Mae, the government did.

The free market did not pass laws that force banks to lend to those who do not qualify for a loan, the government did.

The free market did not take us off the gold standard, the government did.

The free market did not dump trillions of dollars of cheap money into the system causing the largest asset bubble in history, the government did.

The free market did not create multiple multi-trillion-dollar unfunded entitlement programs, the government did.
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PainesrightFebruary 8, 2010 at 3:03 PM
The free market did not write a 60,000+ page tax code that punishes work, rewards sloth and buys the votes of special interest groups, the government did.

The free market did not destroy our public school system and graduate (or fail to graduate) generations of civically and financially illiterate citizens, the government did.

The free market did not drive our jobs overseas and kill our entrepreneurial spirit with over-taxation, over-regulation and frivolous lawsuits, the government did.

The free market did not ban drilling for oil, vilify coal and block the building of nuclear power plants in the United States, thereby transferring hundred of billions of dollars of American wealth and many thousands of energy-industry jobs to foreign countries, the government did.

This crisis is the result of a giant social engineering experiment and vote-buying scheme gone tragically wrong.

The free market does not try to engineer society or buy votes, the government does.

The government caused this crisis, the free market did not.

The government cannot fix the crisis, the free market can.
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BOOK CHAPTERS

THE MYTH OF THE FREE MARKET: The Role of the State in a Capitalist Economy

Introduction
UNDERSTANDING STATES AND MARKETS

Chapter 1
MILTON FRIEDMAN GOT IT WRONG: Politics is at the Heart of Market Capitalism

Chapter 2
FREE MARKETS AND WEALTH (RE)CONSIDERED

Chapter 3
THE VERY POLITICAL ROOTS OF MARKET CAPITALISM: Embracing Individual Achievement and
Vanity

Chapter 4
MANIAS AND THE PHILOSOPHER'S STONE: The Road to Wealth and Regulated Money

Chapter 5
WAR MADE THE STATE AND THE STATE MADE WAR

Chapter 6
HOW MEDIEVAL ORGANIZED VIOLENCE LED TO MERCANTLISM, MIDDLE CLASS BARGAINS, AND
MARKET CAPITALISM

Chapter 7
TOWARD 'FREER' INTERNATIONAL TRADE

Chapter 8
AMERICA’S POST-WWII GRAND LIBERAL STRATEGY

Chapter 9
FROM KEYNES TO DEREGULATION, AND EXPLODING CAPITAL FLOWS

Chapter 10
AN EMPIRE OF DEBT: Violating the Laws of Nature?

Chapter 11
THE DEREGULATION GAME

Chapter 12
FROM DEREGULATION TO THE MOTHER OF ALL
BAILOUTS

Introduction: UNDERSTANDING MARKETS AND STATES

NOTES

1. Hernan de Soto writes, “The major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. Capital is the force that raises the productivity of labor and creates the wealth of nations. It is the lifeblood of the capitalist system." Hernan de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).
2. Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Random House, 2002), 26.
3. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, The Harvard Classics, Vol. 10, Charles Bullock, ed. (New York: PF Collier & Son Company, 1909), 24.
4. Robert Gilpin argues that the defining characteristics of capitalism are the private ownership of the means of production, the existence of free or wage labor, the existence of the profit motive, and the drive to amass capital. This is the definition of capitalism used throughout this work. Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 15.
5. De Soto, The Mystery of Capital, 45–47.

Chapter 1: MILTON FRIEDMAN GOT IT WRONG ...

NOTES

1. William H. Gates Sr. and Chuck Collins, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Boston: Beacon Press, 2003), 68.
2. Gates and Collins, Wealth, 73. Blog Commentary ... More recently, the Environmental Working Group presented “EWG Farm Bill 2007: Policy Analysis Data Base” which showed that between 2003 and 2005 the Cornwell Ranch received $103,741 in federal subsidies, available on line.
3. Blog Commentary ... This question is not new, especially since “the study of political economy focuses on the market and its relationship to the state.” Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 15. Advances in game theory and political economy modeling have contributed to a more specific understanding of the relationship between states and markets by focusing on actors, especially leaders. In the process, the political economy approach argues that “relations among nations are produced by the normal pulls and tugs of domestic affairs, taking into account the domestic and international constraints under which leaders in contending states operate.” Bruce Bueno de Mesquita, “Game Theory, Political Economy, and the Evolving Study of War and Peace,” American Political Science Review, 100 (2006), 638. Drawing attention to leaders allows researchers to focus on the role election cycles, political coalitions, institutional accountability, and transparency play in determining policy outcomes. Again, this is not new. More than 200 years ago Adam Smith wrote: “Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign” Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, The Harvard Classics, Vol. 10, Charles Bullock, ed. (NY, NY: PF Collier & Son Company, 1909), 325.
4. Vernon W. Ruttan, Is War Necessary for Economic Growth? Military Procurement and Technology Development (New York: Oxford University Press, 2006). Blog Commentary ... Vernon Ruttan argues that while technological developments may have occurred without war, it would have done so at a much slower pace – and perhaps not at all in the case of nuclear energy. Specifically, without war the mass production of aircraft, nuclear energy, computers and the internet would have stalled.
5. Ayn Rand, Atlas Shrugged (New York: Plume, 1999).
6. Friedrich A. Hayek, The Road to Serfdom, Introduction by Milton Friedman (Chicago: University of Chicago Press, 1994), xvi.
7. Hayek, The Road, xi.
8. Milton and Rose Friedman, Free to Choose: A Personal Statement (New York: Harcourt, Brace, Jovanovich, 1990), 4.
9. Friedman, Free, 5.
10. Susan Strange, States and Markets, 2nd edition (London, UK: Pinter Publishers, 1994); Ethan Kapstein, Sharing the Wealth: Workers and the World Economy (New York: Norton, 1999); John D. Nagle, Introduction to Comparative Politics: Challenges of Conflict and Change in a New Era, 4th edition (Chicago: Nelson-Hall Publishers, 1996).
11. Robert Putnam, Bowling Alone: The Collapse and Revival of American Community (New York: Simon & Schuster, 2001); Dan G. Blazer, The Age of Melancholy: Major Depression and Its Social Origins (Sussex, UK: Routledge, 2005).
12. Paul Starr, Freedom’s Power: The True Force of Liberalism (New York: Basic Books, 1997), 53.
13. Friedman, Free, 2.
14. Friedman, Free, 1–3. Blog Commentary . . . To bolster his point, Friedman discussed how the Declaration of Independence helped freedom develop in the United States. Commenting that economic freedom “is an essential requisite for political freedom” Friedman argued that “dispersing power” to individuals pursuing their own ends would reduce the “area over which political power is exercised,” Friedman, 1-3.
15. Friedman, Free, 3.
16. Writings and policy papers that advocate this approach can be found on the Web site of the Ludwig von Mises Institute.
17. Friedman, Free, ix, xi, xvii.
18. Duncan K. Foley, Adam’s Fallacy: A Guide to Economic
Theology (Cambridge, MA: Belknap Press, 2006), xiv–xv; Robert Gilpin, Global Political Economy: Understanding the International Economic Order (Princeton, NJ: Princeton University Press, 2001), f.13, 311; George Soros, Open Society: Reforming Global Capitalism (New York: Public Affairs, 2000), 41–53. Blog Commentary . . . A strong case has been made that the field of economics is no more scientific than any of the other disciplines in the social sciences. There is perhaps no better example of this than when the Nobel Prize for economics was given jointly in spite of the fact that the views of the awardees contradicted one another. As Robert Gilpin put it, “It is hardly conceivable that two physicists would get the physics prize for research that came to opposed conclusions about the nature of the universe,” Robert Gilpin, Global Political Economy: Understanding The International Economic Order (Princeton, NJ: Princeton University Press, 2001), f.13, 311. What this means to me is that while there’s no doubt that the methods used by economists may follow sound scientific principles their economic theories are hardly like the “laws of gravity.” Finally, George Soros is among the many who question the utility of using the economist’s concept of “equilibrium” in a market setting. Soros argues that equilibrium is often treated as sacrosanct because the price at “which demand and supply are brought into balance” (equilibrium) often “lends itself to mathematical treatment.” Because mathematics can be “expressed in the form of equations” the models acquire an aura of logical construction, rigor and truth. According to Soros there are two problems with this. First, equilibrium is like a moving target, and can change with unforeseen political, emotional, or natural events. For economists (and second) these events are simply “assumed away” because many of these developments or values cannot “find expression” in the equations that chart market behavior. On this see George Soros, Open Society: Reforming Global Capitalism (NY, NY: Public Affairs, 2000), 41-53.
19. Friedman, Free, 4.
20. Friedman, Free, 4–5, 6.
21. Robert E. McGinn, Science, Technology, and Society (Englewood Cliffs, NJ: Prentice-Hall, 1991). Blog Commentary . . . Science and technology have forcefully transformed societal relations. Imagine how social relationships have been altered since the time of hunter & gathering societies. After the discovery of the plow and the domestication of animals (a form of intellectual technology) came the Agricultural Revolution. The industrial revolution that followed altered societal roles, jobs, and levels of financial interaction. This has served to make society so complex that it has given rise to both new pleasures (because of increased productivity, free time and consumer choices) and new areas of conflict (over resources and legal considerations).
22. Friedman, Free, xii.
23. Blog Commentary ... An example of this was when Milton Friedman proposed abolishing Social Security because it discourages employment. Specifically, abolishing Social Security would “add to national savings” and “stimulate the development and expansion of private pension plans and so add to the security of many workers,” Friedman, 124. Lost in the analysis was that people don’t automatically save what they earn, and that the bond package Friedman promoted at the time as part of the package of reforms (for private pensions) was just another form of state managed finance. The difference was the state would manage the transfer of funds into the private sector. In another area, Friedman’s desire to create a market-driven "all-volunteer" military ran into different problems. In the late 1960s Friedman was contracted to study the feasibility of an all-volunteer military versus compelled national service, which included a draft. He was asked to look at budget costs, which reflected the amount of money Congress would have to appropriate. Friedman insisted on using economic costs. This meant Friedman included how much each drafted soldier lost by not being employed in the private sector. By using economic costs Friedman’s approach helped the Gates Commission claim that “the output of the civilian economy” would decline which meant the overall economy suffered from a draft. On this see Bernard Rostker, I Want You! The Evolution of the All-Volunteer Force (Santa Monica, CA: RAND Corporation, 2006), 48-49, 78-80. In spite of the need to provide more incentives, more benefits, increased PR, and more pay to induce people to enlist in an all-volunteer military, the costs of compulsory national service (i.e. the draft) in the military was deemed more expensive because of the methods (economic costs over budgetary costs) employed by Mr. Friedman. Ignored by Friedman and others was a lack of consensus on both the information used and practicality of applying Friedman’s market approach to national security. Also downplayed was the role race, ethnicity, demography, etc. played in pushing recruits into the military. Finally, it was determined that enlistees don’t always understand the costs and sacrifices necessary until after enlisting in the military, which undermines the idea of transparency. After years of discussion, and with Friedman’s approach used as evidence, the recommendation for an all-volunteer military was made.
24. Foley, Adam’s, xiv.
25. Friedman, Free, 2.
26. Friedman, Free, 3.
27. Foley, Adam’s, 220.
28. Friedman, Free, 2.
29. Starr, Freedom’s, 53.
30. Foley, Adam’s.
31. Starr, Freedom’s.
32. Blog Commentary ... Kevin Phillips shows how absurd favoritism can get when he profiled the tax exemption granted to one Beverly Hills securities dealer, who didn’t want to pay taxes on earned interest. The legislation, in part, read: “Special Rules for Brokers-Dealers - In the case of a broker-dealer which is part of an affiliated group which files a consolidated Federal income tax return, the common parent of which has incorporated in Nevada on January 27, 1972, the personal holding income (within in the meaning of Section 543 of the Internal Revenue Code of 1986) of such broker-dealer, shall not include any interest received after the date of enactment of this Act …”, Phillips, Wealth, 221f.
33. Starr, Freedom’s, Chapter 6.
34. E. E. Schattschneider, The Semisovereign People: A Realist’s View of Democracy in America, with an Introduction by David Adamany (Hinsdale, IL: The Dryden Press, 1975), xiv.
35. Blog Commentary . . . E.E. Schattschneider had a particular disdain for “groupists” because of the pro-business and upper class bias that dominated. He wrote, “The flaw in the pluralist heaven is that the heavenly chorus sings with a strong upper-class accent. Probably about 90 percent of the people cannot get into the pressure system,” Schattschneider, The Semisovereign, xix.
36. See Gates and Collins, Chapter 3, Wealth; Thomas Dye, Top Down Policy Making (New York: Catham House Publishers, 2001); David Sirota, Hostile Takeover: How Big Money and Corruption Conquered Our Government—and How We Take It Back (New York: Crown Publishers, 2006).
37. Friedman, Free, 3.
38. Hayek, The Road, xii. Blog Commentary . . . On another level, it also ignores that Friedman acknowledges there is a caveat to being free to choose because our “emotional faculties are more highly developed … than the rational," Hayek, xii.
39. Foley, Adam’s.
40. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, The Harvard Classics, Vol. 10, Charles Bullock, ed. (New York: PF Collier & Son Company, 1909), 466.
41. Smith, The Wealth, 466.
42. Smith, The Wealth, 466.
43. Smith, The Wealth, 477.
44. Smith, The Wealth, 466–467.
45. The Federalist Papers, #10, in Karen O’Connor and Larry J. Sabato, American Government: Continuity and Change, 2004 edition (New York: Pearson-Longman, 2004), 536–540.
46. The Federalist Papers, #10.
47. Starr, Freedom’s, 80.
48. The Federalist Papers, #51, in Karen O’Connor and Larry J. Sabato, American Government: Continuity and Change, 2004 edition (New York: Pearson-Longman, 2004), 541–543.
49. The Federalist Papers, #10.
50. Starr, Freedom’s.
51. Lawrence Herson, Politics of Ideas: Political Theory and American Public Policy (Chicago: Dorsey Press, 1984), 56, 63. Blog Commentary . . . Article I, Section 8 of the Constitution is clear: Congress has the power to regulate commerce “with foreign nations and among the several states.” According to Herson this “political arrangement” has been characterized as a form of “political capitalism” that would stand “as a bulwark against populist impulses,” 56, 63.
52. Blog Commentary . . . In Federalist #10 Madison wrote that talent deserved to be rewarded and protected. He wrote “The diversity in the faculties of men from which the rights of property originate” must protected because the “protection of these faculties is the First object of Government.”
53. Starr, Freedom’s, 52.
54. Schattschneider, The Semisovereign, xxii–xxiii.
55. Robert B. Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (New York: Knopf, 2007).
56. This story is drawn from Arthur Levitt (with Paula Dwyer), Take on the Street: What Wall Street and Corporate America Don’t Want You to Know (New York: Pantheon Books, 2002), 165–167.
57. Levitt, Take, 167.
58. Levitt, Take, 167.

Chapter 2: FREE MARKETS AND WEALTH (RE)CONSIDERED

NOTES

1. Arthur Levitt (with Paula Dwyer), Take on the Street: What Wall Street and Corporate America Don’t Want You to Know—What You Can Do To Fight Back (New York: Pantheon, 2002), 22–24.
2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, The Harvard Classics, Vol. 10, Charles Bullock, ed. (New York: PF Collier & Son Company, 1909), 466.
3. Hernan de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2002); Paul Starr, Freedom’s Power: The True Force of Liberalism (New York: Basic Books, 2007).
4. Starr, Freedom’s, 55. Blog Commentary . . . According to Starr one of the primary problems with the mercantile system was how it privatized opportunities for select groups who had access to government players. This often led to the arbitrary and unauthorized use of power because well connected players received special favors, timely information, and immunities. To dispense with these injustices the Framers of the U.S. Constitution did two things. First, they “sought to suppress private armies, private justice (revenge), and private ownership of governmental office” by putting justice, public office, and the military in the hands of the state, and then (secondly) “subjecting its performance to public examination.”
5. Jeremy Bentham, “Bentham on Utilitarianism,” Liberal Democrat History Group, available online.
6. Norton Garfinkle, The American Dream vs. The Gospel of Wealth: The Fight for a Productive Middle Class (New Haven, CT: Yale University Press, 2006), 14.
7. De Soto, The Mystery, 6.
8. Garfinkle, The American, 5. Blog Commentary . . . Norton Garfinkle wrote every “important economic policy has three kinds of consequences: factual, moral, and political” and that when we evaluate “economic policy, we have to ask three questions: (1) Does it work? (2) Is it fair? and (3) Will it sustain the democratic structure of our society?”
9. The first and second quotes are attributed to former representatives Dick Armey and Newt Gingrich; the third is attributed to former Reagan treasury official, Paul Craig Roberts. See James Carville, We’re Right, They’re Wrong: A Handbook for Spirited Progressives (New York: Random House, 1996), 57, 60.
10. Carville, We’re Right, 34–35.
11. Carville, We’re Right, 35.
12. Robert D. Atkinson, Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer (New York: Rowman Littlefield, 2006), 14, 58. Blog Commentary.
13. Walter La Feber, The American Age: U.S. Foreign Policy at Home and Abroad, 1750 to the Present (New York: Norton, 1994), 102. Blog Commentary . . . A casual reading of the first century after the American Revolution strongly suggests that, in spite of the outward claim to Manifest Destiny, little faith was actually placed in Divine Providence (or in the market’s invisible hand) when it came time to securing markets. Walter La Faber demonstrates that a series of treaties, wars, strategoc diplomacy, the Open Door Policy, tariffs, a vibrant transportation policy (rail, shipping, canals, etc.), and the creation of state-sanctioned limited liability companies all contributed to making America’s markets work. The great impetus for these and other policies was recognition the United States needed to find markets for surplus goods, or it would face problems at home. In 1842 President Tyler stated, “the greatest evil which we have to encounter is a surplus of production beyond the home demand, which seeks, and with difficulty finds, a partial market in other regions.”
14. Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Random House, 2002), 93.
15. William H. Gates Sr. and Chuck Collins, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Boston: Beacon Press, 2003), 112.
16. The many works that make it clear that social networks and family contacts—as opposed to hard work alone—are critical to making it in America include Pamela Walker Laird, Pull: Networking and Success Since Benjamin Franklin (Boston: Harvard University Press, 2006) and, more recently, the 2007 “Economic Mobility Project” put together by the Pew Foundation, available online.
17. Phillips, Wealth, 117.
18. Gates Sr. and Collins, Wealth, 112.
19. Ben S. Bernanke, “The Level and Distribution of Economic Well-Being,” Board of Governors of the Federal Reserve System, Speech before the Greater Omaha Chamber of Commerce, February 6, 2007, available online.
20. Gates Sr. and Collins, Wealth, 134.
21. An icon of American capitalism, John D. Rockefeller, admiringly noted that Napoleon Bonaparte was “virile because he came direct from the ranks of the people. There was none of the stagnant blood of nobility and royalty in his veins,” Gates Sr. and Collins, Wealth, 39.
22. Lawrence J. Herson, Politics of Ideas: Political Theory and American Public Policy (Chicago: Dorsey Press, 1984), 41.
23. Blog Commentary . . . We often fail to realize that democracy in America as we understand it today did not happen over night. White male land owners were the first to secure the right to vote. Then all white males. One Civil War later, the franchise was extended to recently freed Black Americans. In the 20th century, women and 18 year olds were also granted the right to vote. In between, because things didn’t work out the first time for Black Americans, the Civil Rights movement was reborn in the 1950s and 1960s to, once again, grant Black America what had been denied 100 years earlier. Democracy, like free markets, is not an easy achievement.
24. Christine Daniels, “Liberty to Complaine: Servant Petitions in Maryland, 1652–1797,” in The Many Legalities of Early America, ed. Christopher L. Tomlins and Bruce H. Mann (Chapel Hill: University of North Carolina Press, 2001), 219; Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation (New York: Plume, 2000). Blog Commentary . . . The tendency to defraud has occurred throughout history. In America, for example, the earliest efforts of widespread fraud occurred when Masters and homeowners took their time registering indentured servants. An extra six months to a year of “free” labor was too attractive to pass up. See Christine Daniels, “Liberty to Complaine: Servant Petitions in Maryland, 1652-1797,” in The Many Legalities of Early America, eds., Christopher L. Tomlins & Bruce H. Mann, eds., 219 (Chapel Hill, North Carolina: The University of North Carolina Press, 2001). For an excellent review of cheating and defrauding entire societies through market schemes see Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation (NY, NY: Plume, 2000).
25. Daniels, “Liberty,” 242. Blog Commentary . . . Depending on the region and circumstances under which labor was contracted or agreed to, there were numerous approaches for dealing with women and slaves in early America. These approaches established cultural habits and patterns that existed well into the 20th century. As well, the type of work available also helped determine how women and slaves were dealt with. For example, customary servants (those without contracts), apprentices (with obligations to Masters), indentured servants (specified periods of time), and slaves were guided by a wide variety of customs and statutes. However, women and African slaves were systematically denied rights and privileges that existed for others. Some rights were denied because of law, others by custom. For example, while avenues for complaints were available many women servants were less likely to complain about being denied an education because they were expected to marry. As a result, most were never promised an education by their Masters beyond learning to read the Bible. Math and writing were also regularly denied to women. Daniels, 242.
26. Smith, The Wealth, 466.
27. Blog Commentary . . . An excellent introduction to this point is made in Nancy Maclean, Freedom is Not Enough: The Opening of the American Workplace (NY, NY: Russell Sage, 2006). By the end of the 19th century the work environment began to change. In the United States slavery was replaced by racism and Jim Crow, while gender roles continued to be limited by family wage laws. These developments were hardly conducive to making market rewards more equitable, or fair. This not only skewed compensation, but altered our sense of values on many levels. For example, we know that Babe Ruth is considered by many as perhaps the greatest baseball player ever. But was he? Black players were prohibited from playing in the Major Leagues. So, we have to ask ourselves, was Josh Gibson better than Ruth? Gender and racial prejudice, like favorable legislation and market subsidies, do not speak to or advance the market principles discussed by Adam Smith, or his disciples.
28. Smith, The Wealth, 454. Blog Commentary . . . While discussing compensation for three different labor classes, Adam Smith was clear that bias had to be eliminated if all groups were to prosper. He wrote, “The establishment of perfect justice, of perfect liberty, and of perfect equality, is the very simple secret which most effectually secures the highest degree of prosperity to all the three classes.” Smith, 454.
29. David Sirota, “Caught on Tape: Tom Friedman’s Shocking Admission,” available online.
30. Levitt, Take, 24–28.
31. Blog Commentary . . . Robert Gilpin argues the defining characteristics of capitalism are the private ownership of the means of production, the existence of free or wage labor, the existence of the profit motive, and the drive to amass capital, Robert Gilpin, The Political Economy of International Relations, (Princeton, NJ: Princeton University Press, 1987), 15.
32. Blog Commentary . . . After establishing the benefits of the division of labor (which is crucial to expanding the number of goods produced per labor unit), Adam Smith argued “the division of labor itself is largely determined by the extent of the market.” Quoted in Duncan K. Foley, Adam’s Fallacy (Cambridge, MA: Belknap Press, 2006), 8.
33. Smith, The Wealth, 466.
34. Gilpin, The Political, 18–19. Blog Commentary . . . Robert Gilpin writes that there have been three prevalent economic systems throughout history: Localized exchange systems, command economies, and long-distance trading systems which focused on high value goods, 18-19.
35. Gilpin, The Political, 18.
36. Blog Commentary . . . Caricatures, while oversimplified, operate much like the “ideal types” that sociologist Max Weber helped popularize. Weber argued that because social, economic, and historical research can never be fully descriptive, or inductive (if “A” happens in this instance then it will happen again), we must use “ideal types.” Ideal types are abstractions, or approximations of a phenomena, that allow us to visualize and make predictions about the human condition. We need ideal types because, unlike the physical sciences, researchers in the social sciences have to work with humans, who are flawed.
37. Smith, The Wealth, 137.
38. George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (New York: Publica Affairs, 2008). Blog Commentary . . . Understanding the interplay between special interests and bias, and how they affect the integrity of markets is not new. George Soros has been writing about these dynamics – what he calls “reflexity” – since 1987. Simply stated, Soros’ approach to markets tells us that no market participant can ever have perfect information. As well, individual beliefs, bias, and actions distort markets too much for markets to operate “rationally.” Put another way, market behavior does not always trend towards efficient outcomes, which means that markets won’t always trend toward equilibrium. This is why we get herd behavior and other “irrational” market behavior, both good and bad. For his latest discussion on reflexivity and how it affects markets see George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, (NY, NY: Publica Affairs, 2008).
39. The information for this section was drawn primarily from Liz Pulliam-Weston, “The Basics: Does Your Boss Want You Dead?” MSN.Money, available online.
40. Smith, The Wealth, 25.
41. Administrative Office of the U.S. Courts, “Bankruptcy Filings Continue to Increase, Records Broken for Total Filings and Non-Business Filings,” May 15, 2003, available online.
42. National Bureau of Economic Research, “Did Bankruptcy Reform Increase Financial Distress?” November, 2007, available online.
43. UPI.com Business News, “U.S. Personal Bankruptcy Growing,” 2008, available online.
44. American Bankruptcy Institute, “Total Bankruptcy Filings Increase to Nearly 27 Percent over First Quarter 2007,” press release, June 3, 2008, available online.
45. Leon D. Bayer, “Bankruptcy Quiz: Passing the Means Test,” in Newswire.com, October 16, 2006, available online.
46. Demos: A Network for Ideas and Action, “Households at Risk: The Bankruptcy ‘Reform’ Bill and Its Impact on American Families,” press briefing kit, February/March 2005, available online, 4.
47. Lucy Lazarony, “Credit Card Penalties Get More Severe,” Bankrate.com, March 7, 2002, available online.
48. Demos, “Households,” 14.
49. Bayer, “Bankruptcy.”
50. Michael Simkovic, “The Effect of 2005 Bankruptcy Reforms on Credit Card Industry Profits and Prices,” July 8, 2008. Available online.
51. National Bureau of Economic Research.
52. William Branigin, “Consumer Debt Grows at Alarming Pace,” MSNBC, via the Washington Post, January 12, 2004, available online.
53. Gretchen Morgenson, “Given a Shovel, Americans Dig Deeper into Debt,” New York Times, July 20, available online.
54. Charles R. Morrison, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, 2008), 121–122.
55. David Lazarus, “Bankers Love Bailout, Hate Credit Card Curbs,” Los Angeles Times, September 28, 2008, available online.
56. Morgenson, “Given.”
57. Alan Greenspan, “The Roots of the Mortgage Crisis,” The Wall Street Journal, December 12, 2007, Opinion, available online.
58. Alan Greenspan, “The Fed Is Blameless on the Property Bubble,” Financial Times, April 6, 2008, available online.
59. Edmund L. Andrews, “Greenspan Concedes Error on Regulation,” New York Times. October 23, 2008, available online.
60. Paul Krugman, “Greenspan Lectures Us Again,” New York Times. March 16, 2008, Opinion, available online.
61. Dana Milbank, “Buddy, Can You Spare a Billion?” The Washington Post, April 4, 2008, Washington Sketch, available online.
62. Money Crashers: The Guide to Financial Fitness, “What We Can Learn from the Bear Stearns Down Fall,” March 26, 2008, available online; Julie Satow, “Ex-SEC Official Blames Agency for Blow-Up of Brokers-Dealers,” in the New York Sun, September 18, 2008, available online.
63. MSN.Money, “Bear Stearns Cos Fundamentals,” available online.
64. Jaymes Song, “FBI Director: Mortgage Fraud Substantial,” Federal News Radio, February 1, 2008, available online.
65. Benton Ives, “Senate Reverses on Housing Measure," Congressional Quarterly Today, April 1, 2008, available online.
66. Smith, 137.
67. Gretchen Morgenson, “Borrowers and Bankers: A Great Divide,” New York Times, July 20, 2008.
68. Bryan Caplan, The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton, NJ: Princeton University Press, 2007). Blog Commentary . . . For years there has been a tendency to euphemistically label billion dollar bail-outs as “moral hazard.” This happens when bankers recklessly make loans and then get bailed out at taxpayer expense. So they take on big risks and make dumb decisions. What they're really doing is privatizing the profits when the going is good, and socializing the losses when the going gets tough. Former Labor Secretary, Robert Reich, offers an interesting take on these dynamics. Specifically, he points out that many pundits and government leaders will shamelessly criticize homeowners for taking on loans they can not afford, and then argue they deserve whatever losses come their way. Yet, at the same time, the Federal Reserve made it clear that it would do what’s necessary to save “the lenders, the credit-rating agencies, financial intermediaries, and hedge funds” who made the dumb decisions to lend to undeserving home owners. At the end of the day no one compelled banks to underwrite loans without documentation of income, jobs, assets, etc. See Robert Reich’s Blog, “Moral Hazard,” September 7, 2007, available on line.
69. See Robert Reich’s Blog, “Moral Hazard,” September 7, 2007, available online.
70. Smith, The Wealth, 353.
71. Smith, The Wealth, 368.

Chapter 3: THE VERY POLITICAL ROOTS OF CAPITALISM ...

NOTES

1. Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Free Press, 1992), 47.
2. Yergin, The Prize, 250, 251.
3. Yergin, The Prize 250, 251.
4. Yergin, The Prize 254.
5. Yergin, The Prize 257.
6. Yergin, The Prize 258.
7. Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 16.
8. Paul Starr, Freedom’s Power: The True Force of Liberalism (New York: Basic, 2007), 15.
9. Robert Heilbroner, The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers (New York: Touchstone, 1986), 23.
10. Blog Commentary . . . Initiative and innovation don’t necessarily require the promise of monetary compensation. History is full of examples where significant inventions were created for reasons beside monetary gain. National security (nuclear weapons), concern over health (medicines), the arts, and simple accidental discoveries illustrate this (reproducing music wasn’t what Thomas Edison had in mind when he invented the phonograph). An example of this is the story of the AK-47. Around the world today between 75-100 million AK-47s are in use, making it perhaps the most popular gun in the world. Mikhail Kalashnikov, a Russian tank driver came up with the idea for the AK-47 while recovering in a military hospital during World War II (“A” represents the Russian word for “automatic” while “K” represents “Kalashnikov.” The “47” is for the year 1947). Kalashnikov did not get rich off of the idea, nor intended too. On this see Larry Kahaner, AK-47: The Weapon That Changed the World (NY, NY: Wiley & Sons, 2006). Finally, historians of technology tell us that a society’s receptivity and proclivity to innovate are also tied to factors like life expectancy and longevity (necessary for accumulating knowledge), political and economic organization (which establish systems of reward) and ideological factors (which promote individualism and risk taking). On this see Jared Diamond, Guns, Germs, and Steel: The Fates of Human Societies (NY, NY: Norton, 1999).
11. Antony Jay, The Oxford Dictionary of Political Quotations (New York: Oxford University Press, 2001), 229.
12. Jay, The Oxford, 473.
13. Glenn Blackburn, Western Civilization: A Concise History—From Early Societies to the Present, combined volume (New York: St. Martin’s Press, 1991).
14. These groups of people (mostly men) were known by their Latin name, universitas, Blackburn, Western, 188.
15. Blackburn, Western, 189.
16. Blackburn, Western, 189, 191. Blog Commentary . . . So, for example, rather than viewing a rainbow as a symbol of hope – and simply transferring this knowledge to the next generation – the Franciscan tradition encouraged scholars to ignore empty symbolism. Rather they were encouraged to study and see rainbows as an opportunity to understand optics. Robert Grosseteste (c. 1169-1253) looked at rainbows as an object that could reveal the secrets of nature. One of the most prominent early scholars who used rational analysis to examine the Bible, in an attempt to dispel its apparent contradictions, was Peter Abelard (c. 1079-1142). He believed revealing and settling contradictions in the Bible strengthened Christianity. This contrasted with those who believed Church authorities should have the final word on God, Blackburn, 189, 191.
17. Starr, Freedom’s, 62.
18. Andrew Wheatcroft, The Habsburgs: The Embodying Empire (London, UK: The Folio Society, 2004), 124.
19. Wheatcroft, The Habsburgs, 129–130.
20. Albert O. Hirschman, The Passions and the Interests: Political Arguments for Capitalism before Its Triumph (Princeton, NJ: Princeton University Press, 1977), 34.
21. Hirschman, The Passions, 10, 34.
22. Hirschman, The Passions, 9.
23. Hilaire Belloc, Richelieu (Norfolk, VA: Gates of Vienna Books, 2006), 72.
24. Hirschman, The Passions, 10.
25. Albert M. Craig et. al., The Heritage of World Civilizations, 3rd edition (New York: Macmillan, 1994, 501–502). Blog Commentary.
26. Much of this section is drawn from Robert H. Bates, Prosperity and Violence: The Political Economy of Development (New York: Norton, 2001), 77–83.
27. Mark A., Kishlansky, Patrick Geary, and Patricia O’Brien,
Civilization in the West: Since 1555, Vol. II, 4th edition, (New York: Addison-Wesley-Longman), 548.
28. Kishlansky, Civilization, 544.
29. Blog Commentary . . . Additional restrictions on royal authority – or the state – included preventing the sovereign from: (1) suspending laws passed by parliament, (2) levying taxes without parliamentary consent, (3) infringing on the right to petition, (4) raising a standing army during peacetime without parliamentary consent, (5) denying the right to bear arms to Protestant subjects, (6) unduly interfering with parliamentary elections, (7) punishing members of either House Parliament for anything said during debates, (8) requiring excessive bail or (9) inflicting cruel or unusual punishments.
30. For a historical review of sovereigns reneging on their debts see Benjamin J. Cohen, In Whose Interests: International Banking and American Foreign Policy (New Haven: Yale University Press, 1986), 83–118.
31. Bates, Prosperity, 83.
32. Jay, The Oxford, 337.
33. Jay, The Oxford, 337.
34. Kishlansky, Civilization, 234.
35. Fernand Braudel, The Structures of Everyday Life: Civilization and Capitalism, 15th—18th Century, Vol. I (New York: Harper & Row Publishers, 1979).
36. Starr, Freedom’s, 21.
37. Starr, Freedom’s, 21.
38. Starr, Freedom’s, 21.
39. Starr, Freedom’s, 22.
40. Starr, Freedom’s, 23.
41. Starr, Freedom’s, 18.
42. Blog Commentary . . . Redemption is critical for understanding the political and commercial successes that we have seen in the United States. Freed from religious, cultural, ethnic, and economic customs that funneled peoples from around the world into a lifetime of spiritual monotony and mind-numbing tradition, those who landed in the New World were able to build their own lives and their own fortunes. To help put energy into this spirit the Framers of the Constitution desired to do away with one of the scourges of the Old World: debtor’s prisons. Noted bankruptcy attorney Leonard Welsh argues that the Framers understood that throwing people who owed debts into prison was both unethical and counterproductive to promoting risk taking. Welsh argues that while the Framers were not inspired by visions of creating a Christian nation, they did draw legal guidance from the Bible (Deuteronomy 15) which called for releasing individuals from debts they could not pay after seven years. Referred to as the “LORD’s release” the principle behind creating “uniform Laws on the subject of Bankrupticies” (Art. I. sec. 8) was to insure that citizens weren’t hunted down and incarcerated for financial losses, many of which might occurr through “acts of God” (weather, plagues, the death of a loved one, etc.). The result has been a generally risk supporting system that encourages entrepreneurship and commercial initiative. The success of Henry Ford – who went bankrupt before he hit it big – and other icons of American industry are indicative of the power of redemption in America’s Constitution. On the relationship between redemption, bankruptcy law, and entrepreneurialism see Aparna Mathur, "Forgive Us Our Debts," The American, January/February 2007, available on line. Relatedly, David M. Primo and Bill Green suggest economic growth can be enhanced by factors other than successful entrepreneurs. Specifically, Primo and Green argue that entrepreneurialism is “not internal” and that state institutions and laws can help promote entrepreneurialism and growth. At the same time they make it clear that more generous laws are linked to lower levels of “innovative” entrepreneurship. Their research suggests that while redemption is an important element in markets, societies which encourage too much “failure” – by creating bankruptcy conditions that are too accomodative, for example – can be counter productive. David M. Primo and William S. Green, “Bankruptcy Law, Entrepreneurship, and Economic Performance.” Working Paper, University of Rochester, 2008.
43. Starr, Freedom’s, 53.
44. Starr, Freedom’s, 53.
45. Starr, Freedom’s, 53–54.
46. Unless otherwise noted, the following is drawn from Mark A. Martinez, review of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes by William H. Gates Sr. and Chuck Collins in Kern Economic Journal, 9, no. 1 (First Quarter 2007): 19–20.
47. Kevin Phillips, Wealth and Democracy in America: A Political History of the American Rich (New York: Random House, 2002), 26.
48. Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, 2008), 147.
49. Smith, The Wealth, 476.

Chapter 4: MANIAS AND THE PHILOSOPHER’S STONE ...

NOTES

1. Glyn Davies, History of Money: From Ancient Times to the
Present Day (Cardiff, UK: University of Wales Press, 2002), 510.
2. The quotes from the first paragraph are from Milton and Rose Friedman, Free to Choose: A Personal Statement (New York: Harcourt, Brace, Jovanovich, 1990), 91, 71. The quotes from Paul Samuelson and Kenneth Arrow in the second paragraph are drawn from Elton Rayack, Not So Free to Choose: The Political Economy of Milton Friedman and Ronald Reagan (New York: Praeger, 1987), 117–118. The last quotes in the second paragraph are from Gary M. Walton and Ross M. Robertson, History of the American Economy, 5th edition (New York: Harcourt Brace Jovanovich, 1983), 510–520.
3. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Viking, 1993), 26–34.
4. Blog Commentary . . . To help bring stability to markets made unstable by drought, floods, Indian Wars, Civil War, locusts, unproductive prairie sod, and prairie fires grain merchants and other traders created the futures market in Chicago. Traders didn’t want to worry about sudden price spikes caused by unforeseen events, like grasshopper infestations. But the Deere plow, the McCormick reaper, the removal of the Indians, agriculture science, knowledge of weather patterns, government reports, infrastructure investments, bank improvements, pesticides, and government price supports all helped to stabilize crop prices. Because of this risk was reduced and the Chicago exchange in futures, as Millman put it, “almost ceased to function,” Gregory J. Millman, The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks. NY, NY: The Free Press, 1995), 101-109.
5. Millman, The Vandal’s, 108–110.
6. Millman, The Vandal’s, 110.
7. Peter F. Drucker, “The Changed World Economy,” Foreign
Affairs, 64, no. 4 (Spring 1986): 768–791.
8. Galbraith, A Short History, 13.
9. Blog Commentary . . . The state’s role in facilitating trade didn’t stop with minting coins. The state made sure trade worked by underwriting the physical conditions for exchange to occur. Apart from securing treaties and guaranteeing the merchant’s safety, the state established and sanctioned trading monopolies, which allowed trade to flourish, Robert Sobel, The Pursuit of Wealth: The Incredible Story of Money Throughout the Ages of Wealth (New York: McGraw-Hill, 2000), 6.
10. Blog Commentary . . . While currency in the form of coins and paper notes create the actual cash that enables transactions to occur, money also gets created by depositing and then lending money. Basic Economics 101 explains how banks and other creditors create money by making loans. Suppose I deposit $100 in my checking account. The bank assumes I won’t spend my $100 any time soon, and/or is compelled by the state to keep at least $10 of my deposit (a “reserve requirement”). The bank then loans out $90.00 to someone who then spends the money. Just like that, the money supply (or M1) that exists and can be spent (M2 is M1 plus savings). In this manner, governments don’t create money alone, private banks and other credit institutions help.
11. Joseph Wechsberg, The Merchant Bankers (Boston: Little, Brown and Company, 1966), 11.
12. Sobel, The Pursuit, 8.
13. Davies, History, 25–26.
14. Davies, History, 108, 111.
15. Susan Strange, States and Markets, 2nd edition (London: Pinter Publishers, 1994), 91.
16. Stange, States, 91.
17. Strange, States, 90.
18. John Locke, “Further Considerations Concerning Raising the Value of Money, Wherein Mr. Lowndes’s Arguments for it in his late Report concerning An Essay for the Amendment of Silver Coins, are particularly Examined,” 1824, The Avalon Project at Yale University, Documents in Law, History and Diplomacy, Yale University, available online, 8.
19. Locke, “Further.” Whether driven by Locke’s concerns or not, a “fine and imprisonment” appears to have been replaced by harsher sentences when more than three hundred people were hanged for counterfeiting Bank of England notes during the “Restriction Period” (1797–1921). The Bank of England, “About Money: Timeline (3),” available online.
20. Locke, “Further,” 23.
21. Locke, “Further,” 10.
22. Locke, “Further,” 46, 11.
23. Millman, The Vandal's, 38.
24. Millman, The Vandal’s, 29–39; Galbraith, A Short History, 34–42.
25. Robert Gilpin, War and Change in World Politics (Cambridge, MA: Cambridge University Press, 1987), 164–165.
26. Davies, History, 231.
27. Davies, History, 231.
28. Ha-Joon Chang offers an interesting contrast on the financial solutions practiced between the developed and underdeveloped states: Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New York: Bloomsbury Press, 2008), 152–154.
29. Joel Kurtzman, The Death of Money: How the Electronic Economy Has Destabilized the World’s Markets and Created Financial Chaos (New York: Back Bay, 1993).
30. Drucker, “The Changed.”
31. Blog Commentary . . . Joseph Nye, Jr. makes this point. Arguing that context matters, Nye explains that the agenda of world politics has become increasingly complex. Solving matters in dispute can’t be done with military might alone. Rather, the agenda is like a “three-dimensional chess game in which one can win only by playing vertically as well as horizontally.” On the top board are classic military issues, where the U.S. reins supreme. On the middle board are economic issues, where a number of players have increasingly larger slices of power. On the bottom level are “transnational issues like terrorism, international crime, climate change, and the spread of infectious diseases.” Here power isn’t so clear and probably even chaotically distributed, Joseph Nye, Jr., Soft Power: The Means to Success in World Politics. NY, NY: Public Affairs, 2004), 4-5.

Chapter 5: WAR MADE THE STATE AND THE STATE MADE WAR

NOTES

1. Robert Baer, Sleeping with the Devil: How Washington Sold Our Soul for Saudi Crude (New York: Crown Publishers, 2003), 62.
2. Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Free Press, 1992), 755–758. Blog Commentary . . . The complex but intertwined relationship between oil producing states and oil firms is critical. Daniel Yergin writes of then Vice-President George H.W. Bush bucking the Reagan administration’s position on the price of oil in the mid-1980s. Convinced low prices were not only hurting the domestic oil industry, VP Bush argued low prices also undermined national security by jeopardizing the long-term viability of U.S. oil companies. Without U.S. oil firms then Vice President Bush argued America would become even more dependent and exposed to Middle Eastern oil threats. Bush’s moment of candor was revealing – it told the world “market forces had gone too far,” Daniel Yergin, The Prize: The Epic Quest for Oil, Money & Power. NY, NY. Free Press, 1992), 755-758.
3. Baer, Sleeping, 39–60.
4. Baer, Sleeping, 135.
5. Robert Gilpin, Global Political Economy: Understanding the International Economic Order (Princeton, NJ: Princeton University Press, 2001), 234, 240; Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 315–316.
6. Chalmers Johnson, Nemesis: The Last Days of the American Republic (New York: Metropolitan Books, 2006); David Barstow, “Behind TV Analysts, Pentagon’s Hidden Hand,” New York Times, April 20, 2008, available online; Robert Gilpin’s War and Change in World Politics (Cambridge, MA: Cambridge University Press, 1987). Blog Commentary . . . The culture of war cultivated by this group can be found in the Bush administrations aggressive use of retired military officers to act as “objective” media analysts to sell the war in Iraq when many were already under contract working with defense contractors, David Barstow, “Behind TV Analysts, Pentagon’s Hidden Hand”, NY Times, April 20, 2008, available on line. For a historical perspective on how embracing war occurs in hegemonic powers see Chapters 4 and 5 in Robert Gilpin’s War & Change in World Politics (Cambridge, MA: Cambridge University Press, 1987).
7. Nicholas Rummell, “Regulators Target Sovereign Wealth Funds: Oil Rich Investors from China to Dubai Suddenly Must Bring an Unknown Factor into Their Deal Math: Washington Politics,” Financial Week, February 11, 2008, available online; Robert Kimmitt, “Public Footprints in Private Markets,” Foreign Affairs, 87, no. 1 (January/February 2008):
119–130. Blog Commentary . . . Presently the U.S. depends on other nations to help prop up the dollar, to fund national budget deficits, to provide investment capital, and to sustain our nation’s energy needs. These are all indicators that the U.S. no longer controls its own destiny. The increasing dependence of U.S. markets on foreigners for capital has exposed the U.S. to concerns over the political use of sovereign wealth funds – state funds employed for investment purposes. On this see Nicholas Rummell, “Regulators target sovereign wealth funds: Oil rich investors from China to Dubai suddenly must bring an unknown factor into their deal math: Washington politics,” Financial Week, Feb. 11, 2008, available on line, and Robert Kimmitt, “Public Footprints in Private Markets,” Foreign Affairs, January/February, Vol. 87, no. 1: 119-130. On another level, over 25 percent of U.S. Treasury notes are held by foreigners.
8. John Keegan, A History of Warfare (New York: Alfred A. Knopf, 1993), 283–284.
9. Keegan, A History, 283.
10. Keegan, A History, 281–282.
11. Douglass C. North, Structure and Change in Economic History (New York: Norton, 1981), 126, 136–137.
12. “Roturier” refers to the land offered to soldiers in lieu of monetary payments. Another problem was that townsmen were averse to increasingly longer military campaigns, according to Samuel E. Finer, “State- and Nation-Building in Europe: The Role of the Military,” in The Formation of National States in Western Europe, ed. Charles Tilly, (Princeton, NJ: Princeton University Press, 1975), 100.
13. Finer, “State,” 100.
14. Perez Zagorin, Rebels and Rulers, 1500–1660: Society, States, and Early Modern Revolution, Vol. I (New York: Cambridge University Press, 1982), 89. Blog Commentary . . . What the European monarchs did to accomplish this goal has been referred to as “revolutionary.” This assessment, however, is dismissed by Perez Zagorin who argues that “if such change is achieved more or less peacefully through consensus and the adaptive devices of the political system, then it is a reform …” He quotes Proudhon: “To suggest that government can ever be revolutionary implies a contradiction, for the simple reason that it is government,” Perez Zagorin, Rebels and Rulers, 1500-1660: Society, States, and Early Modern Revolution, Vol. I. (NY, NY: Cambridge University Press, 1982), 89.
15. The subtitle and most of the information for this section are drawn from Jack Weatherford, Genghis Khan and the Making of the Modern World (New York: Three Rivers Press, 2004). Although I have synopsized Weatherford’s review, only quotes and specific points made by Weatherford are cited.
16. Fareed Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role (Princeton, NJ: Princeton University Press, 1998).
17. Noted war historian Lynn Montross wrote that “the men of Jenghiz [sic] Khan appear little better than bandits and slave drivers,” Lynn Montross, War through the Ages, 3rd edition (New York: Harper & Row, Publishers, 1960), 157.
18. Weatherford, Genghis Khan, xxiii.
19. Weatherford, Genghis Khan, 44–45.
20. Charles Tilly, 1990. Coercion, Capital and European States, AD 990–1990 (Cambridge, MA: Basil Blackwell, 1990), 70–71.
21. Tilly, Coercion, 74–75.
22. Herman M. Schwartz, States Versus Market: The Emergence of a Global Economy (New York: St. Martin’s Press, 2000), 15.
23. Schwartz, States, 16.
24. Fernand Braudel, The Structures of Everyday Life: Civilization and Capitalism, 15th–18th Century, Vol. I (New York: Harper & Row Publishers, 1979), 510–511. Blog Commentary.
25. Tilly, Coercion, 74–75.
26. Tilly, Coercion, 75.
27. Tilly, Coercion, 74.
28. Tilly, Coercion, 75.
29. Braudel, The Structures, 510.
30. Schwartz, States.
31. Finer, “State,” 99.
32. Finer, “State,” 99.
33. Braudel, The Structures, 510.
34. Zagorin, Rebels, 88.
35. Tilly, Coercion, 75.
36. Finer, “State,” 102.
37. Zagorin, Rebels, 92–93.
38. Schwartz, States, 21.
39. Zagorin, Rebels, 130–134.
40. Zagorin, Rebels, 132.
41. Zagorin, Rebels, 93.
42. Zagorin, Rebels, 93.
43. Schwartz, States, 21.
44. Schwartz, States, 20.
45. Noting that “state-building was at first a form of organized crime,” Schwartz paraphrases Charles Tilly to argue that the state’s growing “bureaucracies of violence” owe their life to constitutions driven by lawyers, guns, and money, Schwartz, States, 20.
46. Blog Commentary . . . Being broke and in debt helped convince the framers of the United States Constitution to require that Congress vote to appropriate money for an army every two years. Because they viewed a standing army as a potential threat to personal and political liberty the framers believed Congress (via Art. I, Sec. 8) should have the authority to raise and pay for a military. In part to make sure the nation was prepared when Congress didn’t appropriate money for a national army they added the 2nd Amendment to the Bill of Rights, which granted citizens the right to own fire arms and form state militias. The Framers reasoned that while the U.S. might not find it economically feasible to raise and fund a standing national army for prolonged periods, the nation could always call on armed citizens (militias) to wage war until a national army could be raised.
47. Charles Tilly, “Reflections on the History of Europeans State-Making” in The Formation of National States in Western Europe, ed., Charles Tilly, (Princeton, NJ: Princeton University Press, 1975), 42.
48. Tilly, Coercion, 20–21.
49. Tilly, “Reflections,” 42.
50. Tilly, “Reflections,” 42.
51. Weatherford, Genghis Khan, xix.
52. Gilpin, The Political, 1987.

Chapter 6: HOW MEDIEVAL ORGANIZED VIOLENCE LED TO MERCANTILISM, MIDDLE-CLASS BARGAINS ...

NOTES

1. Lynn Montross, War through the Ages, 3rd edition (New York: Harper & Row, Publishers, 1960), 325.
2. Montross, War, 326.
3. Montross, War, 330.
4. Herman M. Schwartz, States Versus Market: The Emergence of a Global Economy (New York: St. Martin’s Press, 2000), 11–21.
5. Anthony D. Smith, National Identity (Reno, NV: University of Nevada Press, 1991), 59.
6. Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 31. Blog Commentary . . . The idea that economic activity is subordinate to the goals of the state isn’t novel. Economic nationalism, much like economic liberalism, has changed as much as its labels have to include statism, protectionism, the German Historical School, and New Protectionism, among others. On this see Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 31.
7. Mark A. Kishlansky, Patrick Geary, and Patricia O’Brien, Civilization in the West: Since 1555, Vol. II, 4th edition (New York: Addison-Wesley-Longman, 2001), 548.
8. Schwartz, States, 12.
9. Schwartz, States, 12.
10. Kishlansky et al., Civilization, 549. Blog Commentary . . . It is not clear that a growing bureaucracy was always a positive state development. First, sovereigns used official offices, like record keeping and tax collecting, as sources of general income. Sold to the highest bidder, in the early 1620s France’s revenue from the sale of office accounted up to “one-third of the crown’s income,” Kishlansky, et. al, 549. Second, while sons who inherited offices that their parents had purchased “could be trained for their posts” there was always the problem of inefficient and corrupt office holders. This was “an acute source of aristocratic and legal complaint,” Kishlansky, et. al, 549. Finally, there was always the danger of sovereigns creating useless offices simply to sell them to the highest bidder.
11. Gilpin, The Political, 31.
12. Schwartz, States, 280.
13. Gilpin, The Political, 32.
14. The argument presented here is drawn from Robert Heilbroner, The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers (New York: Touchstone, 1986).
15. Kishlansky et al., Civilization, 512.
16. Glen Blackburn, Western Civilization: A Concise History—From Early Societies to the Present, combined volume (New York: St. Martin’s Press, 1991), 207–208. Blog Commentary . . . Peasants began to leave their condition when the manorial system declined, which occurred between 1300 and 1450 AD. While the privatization of property occurred across Europe at different times, the result was “many peasants lost their land while many peasant villages simply disappeared” as large landowners forced peasants off the land, Glen Blackburn, Western Civilization: A Concise History – From Early Societies to the Present, Combined Volume (NY, NY: St. Martin’s Press, 1991), 207-208.
17. Arthur A. Stein, “The Hegemon’s Dilemma: Great Britain, the United States, and the International Economic Order.” In Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen. (Cambridge, MA: MIT Press, 1999), 290.
18. Heilbroner, The Worldly, 24.
19. Adam Smith, The Wealth of Nations, Complete and Unabridged, Introduction by Robert Reich (New York: Modern Library, 2000), 156.
20. Fred Block and Margaret R. Somers, “Beyond the Economistics Fallacy: The Holistic Social Science of Karl Polanyi,” Vision and Method in Historical Sociology, ed., Theda Skocpol, (Cambridge, MA: Cambridge University Press, 1991), 54–58.
21. Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New York: Bloombury Press, 2008), 40.
22. Block and Somers, “Beyond,” 54–58.
23. Block and Somers, “Beyond,” 63–64.
24. The general outline for the rise of the three middle classes is drawn from Michael Lind, “Are We Still a Middle-Class Nation?” Atlantic Monthly, January-February 2004, available online.
25. Lind, “Are We,” 2004; Gary M. Walton and Ross
M. Robertson, History of the American Economy, 5th edition
(New York: Harcourt-Brace-Jovanovich, 1983), 187–193.
26. Walton and Robertson, History, 187–188.
27. Walton and Robertson, History, 187–188.
28. Walter La Feber, The American Age: U.S. Foreign Policy at Home and Abroad, 1750 to the Present, 2nd edition (New York: Norton, 1994).
29. Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000), 149.
30. Walton and Robertson, History, 187.
31. De Soto, The Mystery.
32. Norton Garfinkle, The American Dream vs. the Gospel of Wealth: The Fight for a Productive Middle Class (New Haven, CT: Yale University Press, 2006), 28–30.
33. Garfinkle, The American, 30. Blog Commentary . . . In Lincoln’s message to Congress at the beginning of the Civil War, he wrote: “On the side of the Union is a struggle for maintaining in the world that form and substance of government whose leading object is to elevate the condition of men to lift artificial weights from all shoulders; to clear the paths of laudable pursuit for all; to afford all an unfettered start, an a fair chance in the race of life.” Emphasis added by, and quoted in, Garfinkle, 30.
34. De Soto, The Mystery, 120.
35. Walton and Robertson, History, 187.
36. Lind, “Are We.”
37. Douglass C. North, Structure and Change in Economic History (New York: Norton, 1981), 24–25. Blog Commentary . . . Douglass C. North argued that getting property rights correct is necessary because, like other laws and services provided by the state, they make up “the underlying rules of the game.” Once institutionalized these rules are important because they allow states to either exploit the gains of production and/or reduce “transaction costs” in society by taking the guesswork out of compliance and the enforcement. In this way legal institutions help (1) determine levels of economic growth, (2) gauge the level of state legitimacy (via power delegated to agents), and (3) determine whether expenditures for military outlays are “efficient,” Douglass C. North, Structure and Change in Economic History (NY, NY: Norton, 1981), 24-25.
38. Lind, “Are We”; Walton and Robertson, History, 436.
39. Stein, “The Hegemon’s,” 283, 302, Table 3. G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major Wars (Princeton, NJ: Princeton University Press, 2001), 86, Table 4-1. Blog Commentary . . . One of the reasons that this state of affairs may have been tolerated in Europe was because England was trying to promote free trade regimes and because the U.S. share of global manufacturing output was just 7.2 percent as late as 1860 G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars (Princeton, NJ: Princeton University Press, 2001), 86, Table 4-1.
40. Walton and Robertson, History, 257
41. Apart from Western Union and retailers such as Montgomery Ward, before 1880 there were no large firms, let alone industrial ones, operating on a national scale in America, Alfred Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Belknap Press, 1977), 64–74, 288.
42. Walton and Robertson, History, 436.
43. Arthur M. Schlesinger Jr., The Age of Jackson (Old Saybrook, CT: Konecky & Konecky, 1971), 129–130. Blog Commentary . . . More specifically, at the beginning of the 19th century the U.S. Treasury accepted notes (of dubious value) drawn from local banks for the purchase of government land. This subsidized local banks, helped the railroads (with future customers), propped up real estate prices, and pushed Westward expansion before the railroads expanded, Arthur M. Schlesinger, Jr., The Age of Jackson (Old Saybrook, CT: Konecky & Konecky, 1971), 129-130.
44. LaFeber, The American, 158; Schlesinger Jr., The Age, 130; Walton and Robertson, History, 321–322, Figure 17-1. Blog Commentary . . . As noted historian Walter LaFeber put it, the Civil War “provided the running start for such triumphs” by industry, LaFeber, 158. In the real estate sector alone by taking in bank notes of all kinds the federal government created a clearinghouse of sorts that provided “capital for seven or eight hundred institutions to bank on, and filling the Treasury with more or less worthless paper,” Schlesinger, Jr., 130. However, it would be a mistake to suggest that growth in the money supply led to increases in industrial production. In fact, growth in the money supply parallels industrial growth from 1860-1915, Walton & Robertson, 321-322, Figure 17-1.
45. Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Random House, 2002); La Faber, The American, 157–159.
46. Phillips, Wealth, 33.
47. LaFeber, The American, 157.
48. Phillips, Wealth, 39.
49. Ikenberry, After, 120, Table 5-1.
50. Phillips, Wealth, 39.
51. LaFeber, The American, 158–163.
52. Jeff Frieden, “Sectoral Conflict and U.S. Foreign Economic Policy, 1914–1940,” in G. John Ikenberry, American Foreign Policy: Theoretical Essays, 4th edition (New York: Longman, 2002), 138–167.
53. Robert E. McGinn, Science, Technology, and Society (Englewood Cliffs, NJ: Prentice-Hall, 1991), 107–108.
54. Walton and Robertson, History, 436.
55. Walton and Robertson, History, 436–437.
56. Lind, “Are We.”
57. Garfinkle, The American, 54–61; Walton and Robertson, History, 441. Blog Commentary . . . While industrialists liked to promote the image of independent and free worker “craftsmen” who had the right to work as much or as little as they chose during this period the reality was quite different. Gone was the pre-Civil War American agriculture and small crafts economy. Replaced by the “hard new economic realities of a factory-based economy,” the notion that laborers had significant negotiating power “was simply a convenient upper-class myth,” Garfinkle, 54-55. Working against the common laborer were liberal immigration policies, business friendly courts, corrupt legislators, racism, sexism, and a very strong Social Darwinist trend that claimed poverty and economic suffering were a product of moral and spiritual weakness. Success and failure in life were viewed as entirely connected to character issues, Garfinkle, 55-61. Public sentiment was generally opposed to creating work conditions that we take for granted today. In fact “the idea of protecting employees against the hazards of sickness, superannuation, and economic fluctuations were preposterous to most Americans” right up until around WWI, Walton & Robertson, 441.
58. McGinn, Science, 1991.
59. Lind, “Are We.”
60. John D. Nagle, Introduction to Comparative Politics: Challenges of Conflict and Change in a New Era, 4th edition (Chicago: Nelson-Hall Publishers, 1996), 50. Blog Commentary . . . These are conceptually similar to the “Keynesian” policy prescriptions designed to help maintain economic prosperity: (1) regulation, (2) welfare spending, (3) military spending, and (4) government employment. John D. Nagle, Introduction to Comparative Politics: Challenges of Conflict and Change in a New Era, 4th Edition (Chicago, IL: Nelson-Hall Publishers, 1996), 50.
61. The term “sweat equity” is drawn from Alvin Toffler, Previews and Premises. A Penetrating Conversation about Jobs, Identity, Sex Roles, the New Politics of the Information Age and the Hidden Forces Driving the Economy (Boston: South End Press, 1983).
62. Phillips, Wealth, 123, 137, Tables 3.5 and 3.14.
63. Phillips, Wealth, 78.
64. Phillips, Wealth, 78–79.
65. Ross Douthat, “Does Meritocracy Work? Not If Society and
Colleges Keep Failing to Distinguish between Wealth and Merit,” Atlantic Monthly, November 2005, available online. Blog Commentary . . . Without assistance, the same can be said about access to higher education today. Students from financially well off families have a big advantage in getting a bachelor’s degree by the time they’re 24 years old, especially when compared to less wealthy families. If your family income is over $90,000 your chances of getting a BA is about 50 percent. It’s about 25 percent if your family’s income falls between $61,000 and $90,000. It drops to about 10 percent if your family earns between $35,000 and $61,000. For families making less than $35,000 a year the chances of getting a college degree is about 1 out of 17, Ross Douthat, “Does Meritocracy Work? Not if Society and Colleges Keep Failing to Distinguish Between Wealth and Merit,” The Atlantic Monthly, Vol. 296, No. 4, November 2005.
66. Phillips, Wealth, 76; Lind, “Are We.”
67. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, The Harvard Classics, vol. 10, ed., Charles Bullock (New York: PF Collier & Son Company, 1909), 466.
68. William C. Blizzard, When Miners March: The Story of Coal Miners in West Virginia (Gay, WV: Appalachian Community Services, 2004). Although the details of the story presented here are drawn from William C. Blizzard’s book, additional information can be found at “West Virginia’s Mining Wars,” State of West Virginia, Archive and History, available online.

Chapter 7: TOWARD "FREER" INTERNATIONAL TRADE

NOTES

1. David Rock, Argentina, 1516–1982 (Berkeley: University of California Press, 1985), 245.
2. Rock, Argentina, 258. Blog Commentary . . . The British didn’t share the same view as the Americans. For them neutrality allowed Argentine beef exports to travel the seas unimpeded by German U-Boats. They also viewed domestic sympathies toward Germany as the cost of a developing plural democracy. Rock, 246-247.
3. Rock, Argentina, 292.
4. Rock, Argentina, 292.
5. Rock, Argentina, 292–293.
6. Arthur A. Stein, “The Hegemon’s Dilemma: Great Britain, the United States, and the International Economic Order,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen (Cambridge, MA: MIT Press, 1999), 290, Table 1.
7. Charles P. Kindleberger, “The Rise of Free Trade in Western Europe,” in International Political Economy: Perspectives on Global Power and Wealth, ed. Jeffrey A. Frieden and David A. Lake (New York: St. Martin’s Press, 1995), 78.
8. Baron De Montesquieu, The Spirit of the Laws, Vol. 1 (New York: Hafner Press, 1975), 16.
9. Herman M. Schwartz, States Versus Market: The Emergence of a Global Economy (New York: St. Martin’s Press, 2000), 105.
10. Kindleberger, “The Rise,” 77.
11. Kindleberger, “The Rise,” 77–79, 81.
12. Kindleberger, “The Rise.”
13. This review of Richard Cobden is drawn from “Cobden’s Biography,” The London School of Economics and Political Science, available online.
14. Schwartz, States, 105.
15. Schwartz, States, 105.
16. Alexander Wendt, “Anarchy Is What States Make of It: The Social Construction of Power Politics,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen, 75 (Cambridge, MA: MIT Press, 1999). Blog Commentary . . . This argument is a fundamental departure from the Realist school of thought in international relations. What I am suggesting is states choose their policies and/or their identities as a result of external developments as much as by internal domestic political considerations. States don’t develop ideologies in isolation. According to Alexander Wendt, sovereignty (which depends on “mutual recognition” of rights that helps stabilize state interaction), the evolution of cooperation (with trade), and the trend toward global, or collective, identities are all indications of this. Put another way, “anarchy is what states make of it,” Alexander Wendt, “Anarchy is what states make of it: the social construction of power politics,” in Theory and Structure in International Political Economy: An International Organization Reader, eds., Charles Lipson and Benjamin J. Cohen, 75 (Cambridge, MA: The MIT Press, 1999). In the examples provided here, Europe’s embrace – and Britain’s adoption – of freer trade reflect the state’s ability to interpret and construct their social environment. States can transform their environment and themselves along more constructive and progressive lines.
17. Arthur A. Stein, “The Hegemon’s Dilemma: Great Britain, the United States, and the International Economic Order,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen, (Cambridge, MA: MIT Press, 1999), 286–287.
18. This section is drawn from Stein, “The Hegemon’s.”
19. Stein, “The Hegemon’s,” 291.
20. Kindleberger, “The Rise,” 79.
21. G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major Wars (Princeton, NJ: Princeton University Press, 2001), 85. Blog Commentary . . . In many respects the nation’s commercial and diplomatic confidence in the 1830s and the 1840s came from the fact that between 1760 and 1820 “Britain was responsible for about two-thirds of Europe’s growth in industrial production,” G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars (Princeton, NJ: Princeton University Press, 2001), 85.
22. Ikenberry, After, 82.
23. Joseph T. Salerno, “Comment on the French Liberal School,” Journal of Libertarian Studies, 2, no. 1 (1978): 65–68, available online.
24. Stein, “The Hegemon’s,” 292.
25. Henry Kissinger, Diplomacy (New York: Simon & Schuster, 1994), 93–95.
26. Stein, “The Hegemon’s,” 292–293.
27. Kissinger, Diplomacy, 93.
28. Schwartz, States, 151.
29. Seeking redemption though a unified Europe was used to describe the rationale for Germany’s postwar support for the European Union in Zbigniew Brzezinski’s The Grand Chess Board: American Primacy and Its Geostrategic Imperatives (New York: Basic Books, 1998).
30. Stein, “The Hegemon’s,” 292.
31. Stein, “The Hegemon’s,” 293.
32. Philip G. Cerny, “Globalization and the Changing Logic of Collective Action,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen (Cambridge, MA: MIT Press, 1999), 111; Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987); G. John Ikenberry, After. Blog Commentary . . . Philip G. Cerny discusses the changing nature of collective action as society and international relations have become increasingly complex. This, in turn, has placed great strains on states to reinvent itself and to act collectively in response to changing realities abroad, Philip G. Cerny, “Globalization and the Changing Logic of Collective Action,” in Theory and Structure in International Political Economy: An International Organization Reader, eds., Charles Lipson and Benjamin J. Cohen, 111 (Cambridge, MA: The MIT Press, 1999). Our understanding of leadership at the global level – to obtain cooperation and collective action – is also outlined in theories of hegemony in the field of international relations. On this see G. John Ikenberry and Robert Gilpin, The Political Economy of International Relations.
** Blog Commentary ... While many observers have suggested that Cordell Hull made reference to soldiers crossing borders if goods could not in many different ways, the exact quote from Hull has been elusive, and is most often directly attributed to 19th century French economist and liberal theorist Frederic Bastiat (1801-1850). I have attributed it to Hull here because it reflects his sentiments, and many works that reference Cordell Hull trace his position on trade to this popular aphorism. On this see, Greg Behrman's The Most Noble Adventure: The Marshall Plan and the Time When America Helped Save Europe (NY, NY: Free Press, 2007: 48), Gregory J. Millman, The Vandals' Crown: How Rebel Currency Traders Overthrew the World's Central Banks (NY, NY: Free Press, 1995: 70). Apologies for not getting this footnote - and greater clarification in the text - into the publisher on time. This will be addressed in the text should there there be a second edition.
33. Initially implemented by President Truman under JCS 1067, the subsequent raiding of German industry by the allies was documented by C. Lester Walker in “German War Secrets by the Thousands,” Harper’s Magazine, October 1946, 329, available online.
34. Ikenberry, After, 171.
35. The outline and general information for the following two sections are drawn from Alfred E. Eckes, “Trading American Interests,” Foreign Affairs, 71, no. 4 (Fall 1992): 135–154. Only specific quotes and economic data are cited.
36. Ikenberry, After, 4–6.
37. Ikenberry, After, 12.
38. Eckes, “Trading,” 135.
39. For an intriguing argument that highlights pressing security needs, see Melvyn P. Leffler, “The American Conception of National Security and the Beginnings of the Cold War, 1945–1948,” in American Foreign Policy: Theoretical Essays, 4th edition, ed. G. John Ikenberry (New York: Longman, 2002).
40. For two excellent discussions on the roots and potency of America’s “liberal grand strategy” and “national security liberalism,” see Tony Smith, “National Security Liberalism and American Foreign Policy,” in American Foreign Policy: Theoretical Essays, 4th edition, ed. G. John Ikenberry (New York: Longman, 2002).
41. Benjamin J. Cohen, “A Revolution in Atlantic Economic Relations: A Bargain Comes Unstuck,” in Crossing Frontiers: Explorations in International Political Economy (Boulder, CO: Westview Press, 1991), 94, 101. Blog Commentary . . . As Benjamin J. Cohen put it, “Economic programs were continuously subordinated to the broader considerations of its general foreign policy; commercial and financial interests were frequently sacrificed for purposes of national security,” Benjamin J. Cohen, “A Revolution in Atlantic Economic Relations: A Bargain Comes Unstuck,” in Crossing Frontiers: Explorations in International Political Economy, (Boulder, CO: Westview Press, 1991), 94, 101.
42. Thomas D. Lairson and David Skidmore, International Political Economy: The Struggle for Wealth and Power, 2nd edition (New York: Harcourt Brace, 1997), 66.
43. Smith, “National,” 260.
44. Eckes, “Trading,” 138
45. Eckes, “Trading,” 137.
46. Eckes, “Trading,” 140.
47. Eckes, “Trading,” 140.
48. Eckes, “Trading,” 141.
49. “History of the United States Trade Representative,” Office of the United States Trade Representative, available online. Blog Commentary . . . The Trade Expansion Act of 1962 required the President to appoint a Special Representative for Trade Negotiations and established an interagency trade organization to make recommendations to the President on trade policy issues. In 1963 President Kennedy created a new Office of the Special Trade Representative (STR) and designated two new deputies, one in Washington, D.C. and the other in Geneva, Switzerland. The 1974 Trade Act made the STR directly accountable to both the President and Congress. Executive Order 11846, under President Ford, elevated the Special Trade Representative to cabinet level. See “History of the United States Trade Representative,” Office of the United States Trade Representative, available on line.
50. Eckes, “Trading,” 135–136.
51. David Sirota, “Where Economics Meets Religious Fundamentalism,” David Sirota Blog, August 11, 2006, available online.
52. Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (New York: Bloombury Press, 2008), 20–21.
53. Blog Commentary . . . Thomas L. Friedman not only supported the invasion of Iraq in 2003 (excited with President Bush’s “audacious shake of the dice”) but – to deflect increasing criticism of the war’s failures – he consistently referred to “the next six months” after the war started as the critical moment(s) in the war. As the months turned into years, Friedman’s “next six months” forecasts (which he made at least fourteen times) were picked up by the blogosphere and, by 2006, had been officially labeled a “Friedman Unit.” Generally, the term refers to a six month period, and more specifically is used “to describe any pronouncement of a critical period for the U.S. occupation of Iraq,” available on line.

Chapter 8: AMERICA'S POST-WORLD WAR II GRAND LIBERAL STRATEGY . . .

NOTES

1. T. R. Reid, The United States of Europe: The New Superpower and the End of American Supremacy (New York: Penguin Press, 2004), 94–105.
2. Tony Smith, “National Security Liberalism and American Foreign Policy,” in G. John Ikenberry, ed., American Foreign Policy: Theoretical Essays, 4th ed. (New York: Longman, 2002), 268–269, 273; G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major Wars (Princeton, NJ: Princeton University Press, 2001), 287. Blog Commentary . . . For an excellent review of how American post-war ideas prospered see Tony Smith, “National Security Liberalism and American Foreign Policy,” in G. John Ikenberry, ed., American Foreign Policy: Theoretical Essays, 4th Edition. NY, NY: Longman, 2002). Here Smith argues that while “ideas make history” they only do so if there is a convergence of aspirations. He writes the U.S. position was embraced because “many world forces have found an affinity between their ambitions and American policy.” From this perspective, “liberalism’s strength came not only from the power of the American government and those like the British who fought with it, but from aspects of American policy that fell on fertile ground with peoples much farther afield.” In short, “ideas make history,” Smith, 268-269, 273. G. John Ikenberry takes a more plural perspective to argue that the “distinctively American liberal grand strategy” was built around (1) a new understanding of legitimacy (tied to openness and participation), (2) new assumptions of cooperation tied to complex interdependence (competing but complimentary institutions that reinforce democratic principles) and (3) a more sophisticated understanding of power (based on restraint). American foreign policy then – open trade, multilateral institutions, human rights, etc. – proved to be attractive because it helped “echo the American political tradition” of institutional restraints, constitutionalism, separation of powers, and institutional layers and limits on authority, G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars (Princeton, NJ: Princeton University Press, 2001), 287.
3. Arthur A. Stein, “The Hegemon’s Dilemma: Great Britain, the United States, and the International Economic Order,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen (Cambridge, MA: MIT Press, 1999). Blog Commentary . . . Arthur Stein argued the creation of bi-lateral trade treaties draw much of its energy and impulse from political goals (stability) rather than economic considerations (efficiency). More specifically, he argued having economic goals serve political ends in the post-war era was neither coincidental, nor novel. It was not coincidental because post-war victors understood future Stalin’s and Hitler’s (and their political extremism) could only be avoided if economies could be stabilized. This required creating a stable international trading regime, which only governments could negotiate. It was not novel in that the Cobden-Cevalier Treaty of 1860 drew its inspiration from political rather than economic considerations, Arthur A. Stein, “The Hegemon’s Dilemma: Great Britain, the United States, and the International Economic Order,” in Theory and Structure in International Political Economy: An International Organization Reader, eds., Charles Lipson and Benjamin J. Cohen, (Cambridge, MA: The MIT Press, 1999).
4. David P. Calleo, Rethinking Europe’s Future (Princeton, NJ: Princeton University Press, 2001). Blog Commentary . . . Specifically, Calleo writes that the political partition of the globe into three postwar systems – the Atlantic Alliance, the Common Market, and an American-led global economy – derived its strength from past political failures and a common enemy, the Soviet Union. While I don’t emphasize the North Atlantic Treaty Organization (NATO), the “three postwar system” that Calleo outlines is a theme that runs throughout this chapter.
5. For a highly accessible and historical approach to understanding the key players and the framework created on the road to the European Union, see David M. Wood and Birol A. Yesilada, The Emerging European Union, 2nd ed. (New York: Longman, 2002). For a review of the North Atlantic Treaty Organization, see Ronald D. Asmus, Opening NATO’s Door: How the Alliance Remade Itself for a New Era (New York: Columbia University Press, 2002).
6. Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 131.
7. David N. Balaam and David Veseth, Introduction to International Political Economy, 4th ed. (New York: Prentice Hall, 2004), 236.
8. Quoted in Ethan Kapstein, “Workers and the World Economy,” Foreign Affairs, no. 3 (May/June 1996): 20.
9. G. John Ikenberry, “America’s Liberal Grand Strategy: Democracy and National Security in the Post-War Era,” in American Foreign Policy: Theoretical Essays, 4th ed., 274 (New York: Longman Publishers, 2002); Joseph Nye Jr., Understanding International Conflicts: An Introduction to Theory and History, 3rd ed. (New York: Longman, 2000), 43; Robert Pastor, Toward a North American Community: Lessons from the Old World for the New (Washington DC: Institute for International Economics, 2001), 171. Blog Commentary . . . G. John Ikenberry, America’s Liberal Grand Strategy: Democracy and National Security in the Post-War Era,” in American Foreign Policy: Theoretical Essays, 4th edition, 274 (NY, NY: Longman Publishers, 2002). Here it is important to understand that institutions stabilize expectations in four ways. They provide (1) a sense of continuity, (2) opportunities for reciprocity, (3) networks for a flow of information, and (4) another venue for resolving conflict, Joseph Nye, Jr., Understanding International Conflicts: An Introduction to Theory and History, 3rd Edition (NY, NY: Longman, 2000), 43. For a historical and philosophical perspective on the importance of international institutions see Immanuel Kant, who wrote of a “perpetual peace” founded upon states cooperating within a larger federal body. As well, for all his inflated notions of personal power, Napoleon noted that, “Men are powerless to secure the future; institutions alone fix the destinies of nations,” quoted in Robert Pastor, Toward a North American Community: Lessons from the Old World for the New (Washington, D.C.: Institute for International Economics, 2001), 171.
10. Gregory J. Millman, The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks (New York: Free Press, 1996), 73. Blog Commentary . . . During the 1930s a cycle of competitive, and predatory, devaluations emerged as one state after another tried to battle off “competitive tariffs” put in place after the depression. Post-war planners feared this would occur again and reduced the power of states to set currency values by granting the IMF “sovereignty” over the world’s money, Gregory J. Millman, The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks (NY, NY: The Free Press, 1996), 73.
11. Ikenberry, After, 165.
12. Jeff Frieden, “Sectoral Conflict and U.S. Foreign Economic Policy, 1914–1940,” in G. John Ikenberry, American Foreign Policy: Theoretical Essays, 4th ed. (New York: Longman, 2002), 156–157.
13. Ikenberry, After, 166.
14. Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 72–80. Blog Commentary . . . The willingness and ability to establish order in Europe demonstrated the U.S. would provide global “public goods” like stability and security management. Providing security, promoting liberalism, and encouraging common interests among states are not only the cornerstone of what political economists call the Theory of Hegemonic stability, but are the necessary prerequisites for the emergence and expansion of the liberal market system, Robert Gilpin, The Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987), 72-80.
15. Walter La Feber, The American Age: U.S. Foreign Policy at Home and Abroad, 1750 to the Present (New York: Norton, 1994), 344–345.
16. Frieden, “Sectoral,” 155.
17. Roy Jenkins, “Special Relationships: The Postwar Bequest,” Foreign Affairs, Marshall Plan Commemorative Section, 76, no. 3 (May/June 1997): 201.
18. Jenkins, “Special Relationships,” 201.
19. Gilpin, The Political, 312.
20. Benjamin J. Cohen and Charles Lipson, “Money and Finance,” in Issues and Agents in International Political Economy: An International Organization Reader, Benjamin J. Cohen and Charles Lipson, eds. (Cambridge, MA: MIT Press, 1999), 185–186. Blog Commentary . . . At the beginning of the 21st century MDBs have been criticized for subsidizing poor business decisions and creating “moral hazard,” which occurs when private firms take unnecessary risks because they are reasonable confident that they will get bailed out by public institutions if things should collapse.
21. Cohen and Lipson, Issues, 185; Ikenberry, After, 8–12. Blog Commentary.
22. Blog Commentary . . . While many casual observers think GATT was a rigid trade regime – tied to an inflexible framework of tariffs rules, rigid reciprocity, and seldom-offered MFN status – the reality is quite different. In fact, the GATT has allowed many exceptions to the MFN principle, meaning it never came close to producing the classic free trade system hoped for by free market utopians. Gilpin, The Political, 191.
23. Gilpin, The Political, 311.
24. David Reynolds, “The European Response: Primacy of Politics,” Foreign Affairs, Marshall Plan Commemorative Section, 76, no. 3 (May/June 1997): 171–184.
25. Helmut Schmidt, “Miles to Go: From American Plan to European Union,” Foreign Affairs, Marshall Plan Commemorative Section, 76, no. 3 (May/June 1997): 216.
26. Schmidt, “Miles,” 216.
27. Klaus Stegemann, “Policy Rivalry among Industrial States: What Can We Learn from Models of Strategic Trade Policy?” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen (Cambridge, MA: MIT Press, 1999); Judith Goldstein, “International Law and Domestic Institutions: Reconciling North American ‘Unfair’ Trade Laws,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Charles Lipson
and Benjamin J. Cohen (Cambridge, MA: MIT Press, 1999). Blog Commentary . . . Several approaches seek to explain what motivates policy-makers to intervene in the economy. Perhaps the most cited is the mercantilist approach, which focuses on enhancing the competitiveness of national economies by protecting or subsidizing industrial sectors. A variant of this was presented by Klaus Stegemann, who argued that differences in production levels, barriers to entry, economies of scale, and the like, insure that a country’s comparative advantage is not always favorable (nor fixed) and that states must shape industrial policies. Rather than vindicating protectionism, however, Stegemann argues we should not accept abstract trade models (like neoclassicism) as realistic, and that real world conditions require states become proactive. The primary weakness of classical trade models, according to Stegemann, is they are based on assumptions of perfect competition. On this see Klaus Stegemann, “Policy Rivalry Among Industrial States: What Can We Learn from Models of Strategic Trade Policy?” in Theory and Structure in International Political Economy: An International Organization Reader, Charles Lipson and Benjamin J. Cohen, eds. Cambridge, MA: The MIT Press, 1999). Similarly, Judith Goldstein argues that states might attempt to enhance the strength of their economies for internal political reasons, Judith Goldstein, “International Law and Domestic Institutions: Reconciling North American ‘Unfair’ Trade Laws,” in Theory and Structure in International Political Economy: An International Organization Reader, Charles Lipson and Benjamin J. Cohen, eds. Cambridge, MA: The MIT Press, 1999).
28. Ikenberry, After, 209.
29. Calleo, Rethinking.
30. Blog Commentary . . . The ECSC’s goal of joining coal and steel markets was also seen as a way for integrating regional security and transportation policies over time. Indeed, proponents, like France’s Jean Monnet, argued that once member states saw the economic benefits produced by the ECSC, European participants would be willing to give the organization broader authority, James Lee Ray, Global Politics, 6th Edition (Boston, MA: Houghton Mifflin, 1995), 382.
31. Ikenberry, After, 209.
32. Calleo, Rethinking; Ray, Global Politics, 384.
33. Calleo, Rethinking, 4.
34. Calleo, Rethinking, Chapter 6.
35. For an interesting take on how World War II and the Cold War created the political conditions for market liberalism to prosper (over authoritarian market systems), see Azar Gat, “The Return of Authoritarian Great Powers,” in Foreign Affairs, 86, no. 4 (July/August 2007): 59–69; Gilpin, The Political, 191.

Chapter 9: FROM KEYNES TO DEREGULATION AND EXPLODING CAPITAL FLOWS

NOTES

1. Office of the Press Secretary, “President Bush Discusses Housing,” The White House, December 6, 2007, available online.
2. Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, 2008).
3. Greg Ip and Joellen Perry, “Central Banks Launch Effort to Free Up Credit,” The Wall Street Journal online, Dec. 13, 2007, available online; David Frazier, “Government Bails Out Stock Market . . . For Now,” MoneyNews.com, 2008, available online; David Nason, “Subprime Bailout Helps the Greedy,” The Australian, December 6, 2007, available online.
4. CNBC quotes, Countrywide Financial Corporation, NYSE, available online.
5. “Countrywide Bigs Now Vultures for Your Mortgage,” Moneynews.com, March 28, 2008, available online.
6. “Ponzificating: Is the Financial System a Confidence Trick?” The Economist, March 20, 2007, available online.
7. John G. Ruggie, “International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order,” in Theory and Structure in International Political Economy: An International Organization Reader, ed. Benjamin J. Cohen and Charles Lipson (Cambridge, MA: MIT Press, 1999), 259.
8. Ethan Kapstein, Sharing the Wealth: Workers and the World Economy (New York: Norton, 1999).
9. J. Bradford De Long, review of John Maynard Keynes: Fighting for Britain, by Robert Skidelsky. Discussion blog. Available online.
10. De Long, review of Keynes.
11. De Long, review of Keynes. This is significant because, as Douglass C. North points out, to be legitimate all ideologies must explain the rules of the game, account for the past, and be flexible. See Douglass C. North, Structure and Change in Economic History (New York: Norton, 1981), 45–53.
12. The general outline for the following two sections is drawn from Chapter 9, “The Heresies of John Maynard Keynes,” in Robert L. Heilbroner’s The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, 6th edition (New York: Simon & Schuster, 1986). Citations are used where appropriate.
13. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Viking, 1993), 80.
14. John Maynard Keynes, A Tract on Monetary Reform (London: Macmillan, 1924).
15. Walter LaFeber, The American Age: U.S. Foreign Policy at Home and Abroad, 1750 to the Present. (New York: Norton, 1994), 316. Blog Commentary . . . Historians have often commented on the personalities of the principle negotiators at Versailles. President Woodrow Wilson, for example, believed he was the “personal instrument of God” at Versailles and pushed for solutions that Europeans viewed as messianic and utopian. Contemporaries said the “crusty” and aged premier of France, Georges Clemenceau, was driven by “centuries of French history” and had an entirely unrealistic view of France’s position in the post-WWI order. British Prime Minister Lloyd George, who understood his contemporaries well, offered his interpretation of the egos and personalities involved at the Paris Conference (and one of the great all time quotes) when he commented: “I think I did as well as might be expected, seated as I was between Jesus Christ and Napoleon Bonaparte,” Walter LaFeber, The American Age: U.S. Foreign Policy at Home and Abroad, 1750 to the Present. NY, NY: Norton, 1994), 316.
16. Robert Heilbroner, The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (New York: Simon & Schuster, 1986), 260.
17. Blog Commentary . . . An interesting critique of Keynes’ position on this is offered in Shawn Ritenour, “Keynes the Great?” in The Free Market, The Mises Institute monthly, Vol. 16, No. 11, November, 1998, available on line. Responding to an article written by Paul Krugman – “Why Aren’t We All Keynesians Yet?” 1998, available on line – Ritenour challenged Krugman by arguing that Keynes got several aspects “wrong about the strictly economic consequences of the Treaty of Versailles.” For my part, this is the beauty of Keynes. He was not trying to reinforce classical interpretations of economics. He didn’t adhere to classic interpretations, and wasn’t trying to reinforce them. He was trying to explain the big “political” picture, which economists don’t always understand and rarely incorporate into their understanding markets. Moreover, Ritenour’s suggestion that Krugman didn’t do his homework because he didn’t consider the “pre-Keynesian business-cycle literature” made by Ludwig von Mises and Friedrich von Hayek lacks substance and, perhaps more importantly, relies largely on Ritenour pointing out that Hayek won a Nobel Prize in economics. Ritenour needs to do more than point to Hayek’s Nobel prize, especially when we know that Nobel Prizes have gone to economists making diametrically opposed arguments, in the same year no less, Robert Gilpin, Global Political Economy: Understanding The International Economic Order (Princeton, NJ: Princeton University Press, 2001), 311, f13.
18. Heilbroner, The Worldly, 275.
19. Blog Commentary . . . Specifically, as firms and household became “liquidity-constrained” they will either reduce what they put into the economy or withhold it entirely. This flies in the face of Say’s Law, which argues that in the aggregate there cannot be a chronic excess supply of labor because the financial system is flexible enough to allocate capital to other areas in the economy. In this scenario displaced workers will move to other areas of the economy. On this see Duncan K. Foley, Adam’s Fallacy: A Guide to Economic Theology (Cambridge, MA: The Belknap Press, 2006), 10-12, 184-188.
20. Robert B. Reich, “John Maynard Keynes: His Radical Idea That Governments Should Spend Money They Don’t Have May Have Saved Capitalism,” TIME, March 29, 1999, available online.
21. Heilbroner, The Worldly, 249, 253.
22. Heilbroner, The Worldly, 271.
23. Heilbroner, The Worldly, 271.
24. Heilbroner, The Worldly, 272.
25. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Viking, 1993), 75–85.
26. Blog Commentary . . . Unfortunately, it also helped lay the groundwork for the extravagant and shrill claims that Keynesianism was synonymous with socialism or communism. As noted above, Keynes supported market capitalism. He simply wanted to make sure that it worked the way it was supposed to work, and that it worked for everyone. Indeed, having made millions in currency markets on his own, Keynes was adamant about personal responsibility, writing it was “better that a man should tyrannize over his bank-balance than over his fellow citizens,” Heilbroner, The Worldly, 279.
27. Benjamin J. Cohen, In Whose Interest? International Banking and American Foreign Policy (New Haven, CT: Yale University Press, 1986), 18.
28. Cohen, In Whose.
29. Gregory J. Millman, The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks (New York: Free Press, 1995), 57–58.
30. Michael C. Webb, “International Economic Structures, Government Interests, and International Coordination of Macroeconomic Adjustment Policies,” in Issues and Agents in International Political Economy: An International Organization Reader, ed. Charles Lipson and Benjamin J. Cohen (Cambridge, MA: MIT Press, 1999).
31. Benjamin J. Cohen refers to this as “disaster myopia,” Cohen, In Whose, 44.
32. G. John Ikenberry, “America’s Liberal Grand Strategy: Democracy and National Security in the Post-War Era,” in American Foreign Policy: Theoretical Essays, 4th edition, ed. G. John Ikenberry (New York: Longman, 2002), 274–296.
33. Tony Smith, “National Security Liberalism and American Foreign Policy,” in American Foreign Policy: Theoretical Essays, 4th edition, ed. G. John Ikenberry (New York: Longman, 2002).
34. Ikenberry, “America’s Liberal.”
35. Much of what is provided in the following three paragraphs was taken from Chapter 3 of “The Incredible Quarter Century,” Cohen, In Whose.
36. Blog Commentary . . . The British were trying to protect their currency. Demand for British traded dollars created the “Eurocurrency” or “Eurodollar” market. Since these markets are global “Euro” denotes the markets origins, not its location. While the Eurodollar market has expanded to include transactions for other currencies because the dollar dominated transactions early on the market is still labeled as the “Eurodollar” market. Cohen, In Whose, 18-21.
37. Cohen, In Whose, 25.
38. Cohen, In Whose.
39. Webb, “International Economic.”
40. Blog Commentary . . . A lack of clear banking standards is not new. Well into the 20th century England’s “banking students had both laughed at and admired the circularity and the foggy imprecision of the accepted definition [of bankers] in the Bills of Exchange Act 1882” that claimed “bankers” are “simply those people ‘who carry on the business of banking’.” Glyn Davies, History of Money: From Ancient Times to the Present Day (Cardiff, UK: University of Wales Press, 2002), 425.
41. Davies, History of, 430.
42. Webb, “International Economics,” 217–218.
43. Joseph E. Stiglitz, Globalization and Its Discontents (New York: Norton, 2002), 249.
44. Blog Commentary . . . Paul Krugman discusses the market developments that contributed to global market instability in the 1990s and referred to lack of oversight and accountability as creating the conditions for “depression economics” at the global level, Paul Krugman, The Return of Depression Economics. NY, NY: Norton, 2000).
45. De Long, “Book Review,” 2001.
46. Keynes, A Tract.
47. De Long, “Book Review,” 3–4.
48. Stiglitz, Globalization, 249.
49. See Robert O. Keohane and Joseph Nye Jr., Transnational Relations and World Politics (Cambridge, MA: Harvard University Press, 1972); Robert O. Keohane, After Hegemony (Princeton, NJ: Princeton University Press, 1990); Smith, “National”; Ikenberry, “America’s.”
50. Stiglitz, Globalization, 195.
51. These insights are the basis for what G. John Ikenberry refers to in his discussion as “liberal internationalism,” Ikenberry, “America’s,” 274–296.
52. Ikenberry, After, 12.
53. Stiglitz, Globalization, 196.
54. Blog Commentary . . . This is curious since one of the more interesting developments has been the number of caveats and holes that have been attached to the Heckshire-Ohlen model of international trade. The H-O model tells us that David Ricardo’s fluid trading system – focus on what you produce best because to do otherwise robs the economy of efficiency – remains valid. The H-O model also tells us that the Ricardian approach has been strengthened by a greater understanding of transportation costs, factor of production mobility, increasing returns to scale, labor, etc. Put another way, the H-O model is still viewed as a practical and appropriate guide for understanding the logic behind international trade. While the concept of comparative advantage and H-O may offer insight into trade, it falls short of explaining trade between developed nations. A better understanding of monopolistic or imperfect trade competition (OPEC, for example), industry or intrafirm trade (within and between transnational corporations and joint ventures), the role of international treaties, government subsidies, historical accident, cumulative causation, and strategic trade theory, have all worked to alter our understanding of trade. Where the classical Ricardo and H-O approach assumed immobile capital and labor, static comparative advantage, and the trading of finished products newer approaches tell us that trade theory must also include industrial organization patterns, national conditions, and government policies. More succinctly, comparative advantage “is now regarded as dynamic and is also considered to be arbitrary and a product of corporate and state policies.” This means the argument used to promote neoclassical versions of free trade has lost some of its efficacy and has become less relevant. Still, in spite of the difficulties of incorporating these new develoments into a formal model the lack of alternative approaches makes comparative advantage and H-O the default standard for understanding international trade. More appropriately, H-O continues to be used not because it’s always right (it’s not) but because, as long as it maintains its relevancy under many circumstances, it’s always relevant. See, Gilpin, The Political, 175-177; Gilpin, Global, 206-211; Stigliz, Globalization.
55. Kevin Phillips, Wealth and Democracy; Thomas R. Dye, Top Down Policymaking (New York: Chatham House, 2001); William E. Hudson, American Democracy in Peril: Seven Challenges to America’s Future, 3rd edition (New York: Chatham House, 2001); Robert Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (New York: Knopf, 2007); David Sirota, Hostile Takeover: How Big Money and Corruption Conquered Our Government—and How We Take It Back (New York: Crown Publishers, 2006).
56. With apologies to Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000). On market “genius” failing, see also Michael Lewis, “The End,” Portfolio.com, December, 2008, available online.
57. Eric Janszen, “The Next Bubble: Priming The Markets for Tomorrow’s Big Crash.” Harper’s Magazine, February, 2008, available online.
58. Phillips, 2001; William E. Hudson, American Democracy in Peril: Seven Challenges to America’s Future (New York: Chatham House Publishers, 2001), 202–214.
59. Janszen, “The Next.”

Chapter 10: AN EMPIRE OF DEBT: VIOLATING ADAM SMITH'S LAWS OF NATURE?

NOTES

1. Martin Mayer, “Bailing Out Billion-Bettors,” Los Angeles Times, October 5, 1998, A15.
2. Mayer, “Bailing Out.”
3. Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).
4. To arrive at this point, as we saw in Chapter 1, the U.S. Constitution filled political gaps that the Articles of Confederation had demonstrated needed filling. By protecting liberty and freedom, over time the Constitution made it possible for opportunity and creativity to flourish. As Paul Starr put it, public policy in the United States “did not merely support the rights of individual property owners; it supported the rights of a particular kind” that allowed property and initiative to prosper. Paul Starr, Freedom’s Power: The True Force of Liberalism (New York: Basic Books, 1997), 71.
5. In the process, the Framers empowered Congress to encourage commerce and competition by promoting the sciences, regulating the value of money, and giving it control over piracy and counterfeiting, among other powers. Implied in Article I, Section 8 of the Constitution was that individual effort paid off if the state were vigilant in opening opportunities and keeping a level playing field, Lawrence Herson, The Politics of Ideas: Political Theory and American Public Policy (Chicago: Dorsey Press, 1984).
6. Helen Simon, “Are Derivatives Financial ‘Weapons of Mass Destruction’?” Investopedia.com, available online.
7. David Leonhardt, “Can’t Grasp Credit Crisis? Join the Club,” New York Times, March 19, 2008, available online.
8. Robert Kuttner, “Little Orphan Fannie,” The Huffington Post, September 11, 2008, available online.
9. “Ponzificating: Is the Financial System a Confidence Trick?” The Economist, March 20, 2007. Available on the CFO.com Web site. Hyman Minsky, “The Financial Instability Hypothesis,” The Jerome Levy Economics Institute of Bard College, Working Paper No. 74, May 1992, available online.
10. Worse, presidential candidate John McCain claimed that market fundamentals were sound.
11. Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Broadway Books, 2002), 105–106.
12. For a quick overview of the financial conditions that enveloped the globe by late 2008, see Nouriel Roubini, “The Coming Financial Pandemic,” Foreign Policy, no. 165 (March/April 2008): 44–48.
13. The dynamics described here refer to the classic concern and battle that states have over maintaining currency stability (necessary for confidence), capital flows (for investment and growth), and monetary policy autonomy (to manage jobs, inflation, and debt). On this see Benjamin J. Cohen, “The Triad and the Unholy Trinity: Problems of International Monetary Cooperation,” in International Political Economy: Perspectives on Global Power and Wealth, ed. Jeffry A. Frieden and David A. Lake (New York: St. Martin’s Press, 1995), 255.
14. Dean Acheson, Present at the Creation: My Years in the State Department (New York: Norton, 1987).
15. Blog Commentary . . . The power to make credit available on a wide scale is important to expanding trade. But this is not sufficient for expanding global trade. While describing the modern global capitalist system George Soros, who made a fortune in international markets, wrote that “the mobility of capital, information, and entrepreneurship …” are also necessary. To date, only liberal “open” societies have been able to guarantee these arrangements. On this see George Soros, The Crisis of Global Capitalism: Open Society Endangered (NY, NY: Public Affairs, 1998), 106.
16. Blog Commentary . . . What’s presented here is not new. Susan Strange discussed the “Structure of Power in the World Economy” by outlining the importance of the security structure, the production structure, the financial structure, and the knowledge structure in the modern world many years ago in Susan Strange, States and Market, 2nd Edition (London, UK: Pinter Publishers, 1994). Embracing the perspective of the nation-state, James Fallows wrote about the role of the state in promoting national development (and the common good) in James Fallows, “How the World Really Works,” The Atlantic Monthly, December 1993, available on line.
17. To be sure, all types of economic activities are not necessarily good for society. On this see Clifford Cobb, Ted Halstead, and Jonathan Rowe, “If GDP Is Up, Why Is America Down?” in The Atlantic Monthly, October 1995, available online.
18. Kevin Phillips, “Why Wall Street Socialism Will Fail,” Huffington Post, April 15, 2008, available online.
19. Walter La Feber, The American Age: U.S. Foreign Policy at Home and Abroad, 1750 to the Present (New York: Norton, 1994), 615.
20. Blog Commentary . . . Walter La Faber noted that by 1970-71 the U.S. had “spent too many dollars. Some $40 billion was held overseas, but only $10 billion in gold remained in the United States to support it. Foreigners began to doubt that the dollars they held were truly ‘as good as gold,’ ” La Faber, The American, 644.
21. Benjamin J. Cohen, In Whose Interest? International Banking and American Foreign Policy (New Haven, CT: Yale University Press, 1986), 227.
22. Cohen, In Whose, 224.
23. Cohen, In Whose, 227.
24. Thomas J. Schoenbaum, Waging Peace and War: Dean Rusk in the Truman, Kennedy and Johnson Years (New York: Simon & Schuster, 1988), 420–421.
25. Schoenbaum, Waging, 421.
26. Cohen, In Whose, 19.
27. Harold Macmillan, Riding the Storm, 1956–1959 (New York: Harper & Row, 1971), 164–165; Peter Clarke, Hope and Glory: Britain, 1900–1990, (London, UK: Allen Lane, 1996), 261.
28. Blog Commentary . . . Once the “dollar glut” emerged as an issue President Kennedy imposed several measures to help stabilize the value of the dollar, including an “interest equalization” tax on foreign borrowers of dollars in 1963. While it discouraged borrowing in U.S. capital markets, it did nothing to stop borrowing in offshore dollars. Later, to help stem the demand for gold, the U.S. implemented “swap agreements” that allowed the U.S. to draw loans in foreign currencies and instead of repayment in gold, as might have been demanded, the U.S. could pay in the currency of the note issuer. Then the U.S. helped create a “gold pool,” where 8 countries agreed to intervene and artificially keep gold in the London gold market close to $35 per once. Problems arose when the other nations purchased U.S. gold cheaply and then turned around and sold it (mostly to each other), in the process making money and inflating demand for U.S. gold – exactly what the agreement was supposed to prevent, Gregory J. Millman, The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks (NY, NY: Free Press, 1995), 83-86.
29. Blog Commentary . . . The genesis of the European Union may be found here as well. German Chancellor Konrad Adenauer viewed America’s Suez diplomacy in grim terms. According to French Foreign Minister Christian Paneau, Adenauer said: “France and England will never be powers comparable to the United States and the Soviet Union … There remains to them only one way of playing a decisive role in the world; that to unite to make Europe. England is not ripe for it but the affair of Suez will help prepare her spirits for it. We have no time to waste: Europe will be your revenge.” Quoted in Henry Kissinger, Diplomacy (NY, NY: Simon & Schuster, 1994), 547.
30. Soros, The Crisis, 103–104.
31. La Feber, The American, 561.
32. Cohen, In Whose.
33. Phillips, Wealth, 138–147.
34. Soros, The Crisis, 108.
35. Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Free Press, 1992), 508–523. Unless otherwise noted, this section is drawn from Yergin’s book.
36. Blog Commentary . . . When trying to determine why events happen, or why certain decisions are made, constructivist theory argues that it is important to take into consideration the ideas and preferences of experts, what shaped their ideas and preferences, and how their ever-changing knowledge environment impacts decision-making. In the examples provided here, the personal histories and shared attitudes towards the United States (and the West) go a long way in explaining the decisions made. For constructivists, it is not sufficient to say increased consumption in the West explains the increased importance of oil from the Middle East, and the rise of OPEC. Rather, constructivists argue we need to understand how ideas, values, and beliefs construct new realities that compel actors to act in ways that made oil so important. The difference is that while standard theories seek to explain “causality” (if “A” happens, “B” will follow) constructivism seeks to explain the context which shapes the decision-making environment (because “A” saw things a certain way “B” happened).
37. Yergin, The Prize, 523.
38. Yergin, The Prize, 567.
39. Robert D. Atkinson, Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer (New York: Rowman Littlefield, 2006).
40. “Rating Bush’s Jobs Record,” The Wall Street Journal, 2005, available online.
41. The Fact Book, 1997 Edition: Federal Civilian Workforce Statistics. United States Office of Personnel Management. Washington DC, 9, available online.
42. Tax and Budget Bulletin. “Number of Federal Subsidy Programs Is Soaring,” Cato Institute, no. 41, October 2006, available online.
43. Fortune, “How To Cut the Budget,” in Fortune, CNNMoney.com, (March 4, 1985), available online.
44. U.S. Census Bureau, “Federal Budget Debt: 1960–2007,” in The 2008 Statistical Abstract: The National Data Book, Table 456, available online.
45. Yergin, The Prize, 659–664.
46. Blog Commentary . . . Here, we want to keep in mind that the primary culprits behind runaway inflation in the 1970s were deficit spending – which spread dollars around the world – and the sudden spike in oil prices by OPEC in 1973. Because OPEC operated in a non-competitive market (Americans weren’t prepared to look for alternatives, like walking to work, or riding bikes to the store), and because everything in America is effectively tied to petroleum, when OPEC spiked the price of oil (and caused it to jump 3-4 times pre-1973 levels) Americans had to pay more to travel, to transport goods, to heat their homes, and to conduct virtually every other activity that keeps the economy churning. This had the effect of undermining the business investment environment in the 1970s. It also had another effect. It transferred massive amounts of wealth from American consumers into the coffers of OPEC producers, which they dumped in Western banks. Generally speaking, inflation is defined as a general rise in prices, even though it is acknowledged that prices never rise uniformly. At one time it was believed that the amount of money circulating in an economy was the primary factor driving price levels (the quantity theory of money). Today, economists argue that inflation is largely demand driven, which means that certain products will have more consumers than there is a product (although there is a vibrant debate about the sources of excess demand). So, when there are many customers for money, for example, the price of money will be reflected in higher interest rates. On this see Frederick S. Weaver, Economic Literacy: Basic Economics with an Attitude, Second Edition (NY, NY: Rowman & Littlefield, 2007), 160-161, and Thomas Sowell, Basic Economics: A Common Sense Guide to the Economy, Third Edition (NY, NY: Basic Books, 2007), 283-286. Contrasting the quantity and demand approach, is the supply side of inflation. Simply put, if noncompetitive markets exist – OPEC in the early 1970s, for example – sudden surges in prices will not be undercut, thus creating inflationary pressures. Because oil is such an important component of modern markets, virtually everything in the economy is affected as well, Weaver, 160-161.
47. The price drop acted like an “OPEC tax cut” that resulted in billions of dollars transferred back to American consumers through the mid-1980s. Yergin, The Prize, 764.
48. Blog Commentary . . . While discussing the policy formulation process Thomas R. Dye argued that the conservative policy network derives its intellectual life from conservative foundations, or “think tanks” which are funded by some of the wealthiest citizens in the country. Focusing on the subordination of “lesser values” like politics and legal principles, the goal of these foundations is to elevate the role of markets, while reinforcing suspicion of government. Kevin Phillips argues that this “public choice” movement sought to discredit the impact of government institutions, and the role of American democracy (for bringing affirmative action, supporting unions, etc.), by arguing that America’s legal and political system worked against the natural logic of the market, Phillips, 336-337. Their efforts have “succeeded in creating new policy agendas in social welfare, federal entitlements, privatization of public functions, charter schools and vouchers, deregulation …” and in other policy areas, Thomas R. Dye, Top Down Policymaking (NY, NY: Chatham House, 2001), 52-57. The end result, however, has been almost three decades of failed conservative policies that have brought record deficits, increased the size of government, numerous industry bailouts, and a tax code that completely misses the mark on what drives the modern American economy, Elton Rayack, Not So Free to Choose: The Political Economy of Milton Friedman and Ronald Reagan (NY, NY: Praeger, 1987); William H. Gates Sr. and Chuck Collins, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Boston, MA: Beacon Press, 2003); Phillips; and, Atkinson.
49. Blog Commentary . . . One of the first to provide protection were those that sought portfolio insurance, which sells stock index futures or buys stock index put options. The idea is to limit how much a client loses by shifting them out of a market position, via computer, when the investment instrument begins to fall. Hayne E. Leland and Mark Rubenstein, “The Evolution of Portfolio Insurance,” available on line.
50. George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (New York: Public Affairs, 2008), 106–110.
51. Soros, The New, 96–97.
52. Federal Reserve, “Report to the Congress on Practices of the Consumer Credit Card Industry in Soliciting and Extending Credit and Their Effects on Consumer Debt and Insolvency,” The Federal Reserve Board, June 2006, available online.
53. Ben S. Bernanke, “The Level and Distribution of Economic Well-Being.” Speech given before the Greater Omaha Chamber of Commerce, Omaha, Nebraska, February 6, 2007, available online.
54. Bernanke, “The Level,” 4.
55. Businessweek, “How Wal-Mart Keeps Unions at Bay,” Businessweek.com, October 28, 2002, available online.
56. U.S. Census, “Labor Union Membership by Sector: 1983–2006,” Table 642, available online.
57. Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States,” University of California, March 15, 2008, available online.
58. Paul Krugman, “State of the Unions,” New York Times, December 24, 2007, available online.
59. Jeanne Sahadi, “CEO Pay: Sky High Gets Even Higher,” CNNmoney.com, Jobs and Economy, August 30, 2005, available online; Lawrence Michel, “CEO-to-Worker Pay Imbalance Grows,” Economic Policy Institute, Economic Snapshots, June 21, 2006, available online.
60. John McNeil, “Changes in Median Household Income: 1969 to 1996,” U.S. Department of Commerce, Economics and Statistics Administration, Bureau of the Census, Current Population Reports, P23-196, July 1998, available online.
61. Bob Davis, “Lagging Behind the Wealthy, Many Use Debt To Catch Up,” The Wall Street Journal, May 17, 2005, available online.
62. Federal Reserve, “Consumer Credit,” in Federal Reserve Statistical Release, G. 19, September 8, 2008, available online.
63. Porter Anderson, “Study: U.S. Employees Put in Most Hours,” CNN.com/Career, August 31, 2001, available online.
64. Davis, “Lagging.”
65. Louis Uchitelle, “A False Sense of Security? You Must Own a Home,” New York Times, July 1, 2007, available online.
66. Bureau of Economic Analysis, “Personal Income and Outlays,” U.S. Department of Commerce, National Economic Accounts, July 2008, available online.
67. Mara Der Hovanesian, Christopher Palmeri, Nanette Byrnes, and Jessica Silver-Greenberg, “Over the Limit,” BusinessWeek, February 7, 2008, available online.
68. Bank for International Settlements, 78th Annual Report 2007/2008 (Basel: Bank for International Settlements, 2008), 88, available online.
69. Bank for International Settlements, Annual Report, 88.
70. See “The LTCM Bailout” at the beginning of this chapter.
71. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000).
72. Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, 2008), 37–58.
73. U.S. Census Bureau, “Historical Census of Housing Tables: Homeownership,” Housing and Household Economic Statistics Division, Historical Census of Housing Tables, available online.
74. Morris, The Trillion, 40–41.
75. Steven D. Levitt, “Diamond and Kashyap on the Recent Financial Upheavals,” The New York Times, September 18, 2008, available online.
76. Levitt, “Diamond.”
77. Federal Reserve System, Flow of Funds Accounts of the United States, “U.S. Credit Market Debt as a Percentage of GDP,” March 2008, available online.
78. Robert Kuttner, “Little Orphan Fannie,” in “The AmericanProspect, Tapped,” The Group Blog of the American Prospect, September 8, 2008, available online.
79. Phillips, Wealth, 138–147.
80. Blog Commentary . . . Using debt to generate profits and create an aura of genius is not new. Having experienced their own real estate bubble and crash the Japanese lowered interest rates to zero in an attempt to jump start their economy. This encouraged foreigners to arrrive and borrow yen while Japanese citizens, for their part, would take their savings and invest in higher yielding currencies, often on a leveraged basis. Soros, The New, 97.
81. Morris, The Trillion, 61.
82. Morris, The Trillion, 75; Karen Freifield and Shannon D. Harrington, “Cuomo Investigates Credit-Default Swaps along with Short Sales,” Bloomberg.com, News, September 27, 2008, available online.
83. Boyd Erman, “Counterparty Risk and Credit Default Swaps,” ReportonBusiness.com, September 17, 2008, available online. Blog Commentary.
84. Soros, The New, 98.
85. Federal Reserve System, Flow of Funds Accounts of the United States, “U.S. Credit Market Debt as a Percentage of GDP,” March 2008, available online.
86. Bank for International Settlements, Annual Report, 92, 95.
87. Sheryl Gay Stolber, “A Private, Blunter Bush Declares, ‘Wall Street Got Drunk’,” New York Times, July 23, 2008, available online.
88. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Viking, 1993), 79–80.
89. Peter F. Drucker, “The Changed World Economy,” Foreign Affairs, 64, no. 4 (Spring 1986): 768–791.
90. Morris, The Trillion.
91. Drucker, “The Changed,” 781–783.
92. Sowell, Basic Economics, 261–266. Thomas Sowell provides perhaps the simplest and best argument for the role of speculators in an economy. His examples, however, focus on speculation in the real economy.
93. Strange, States, 91.
94. Strange, States, 92–93.
95. Strange, States, 86.

Chapter 11: THE DEREGULATION GAME

NOTES

1. John Charles Chasteen, Born in Blood and Fire: A Concise History of Latin America (New York: Norton, 2001).
2. Paul Starr, Freedom’s Power: The True Force of Liberalism (New York: Basic Books, 2007).
3. Kevin Phillips, “Bubble and Bail,” The American Prospect, May 2008, 29.
4. Starr, Freedom’s.
5. Starr, Freedom’s, 15–16.
6. Starr, Freedom’s.
7. As Ronald Suskind points out, the Bush administration failed to do anything of substance about Enron because ideology and Republican donor threats had won the day. Ronald Suskind, “The Crisis Last Time,” New York Times, September 25, 2008, available online.
8. Except where specifically referenced, this section is drawn
primarily from Michael Lewis’s Liar’s Poker (New York: Penguin Books, 1990), 87–122, 136–139.
9. Lewis, Liar’s, 100–101.
10. Lewis, Liar’s, 101.
11. Lewis, Liar’s, 100.
12. Amy Waldman, “Move over Charles Keating—Causes of the Savings and Loan Scandal,” Washington Monthly, May 1995, available online.
13. Waldman, “Move.”
14. Blog Commentary . . . Specifically, Michael Lewis writes, "A new accounting standard allowed the thrifts to amortize the losses over the life of the loans. For example, the loss thrift would show on its books in the first year from the sale of a thirty-year loan that had fallen 35 percentin value was a little over 1 percent: 35 / 30. But what was even better is that the loss could be offset against taxes any taxes the thrift had paid over the previous ten years. Shown losses the Internal Revenue Service (IRS) returned old tax dollars to the thrifts ... All they had to do to claw back old taxes was sell off their bad loans; that's why thrifts were dying to sell their mortgages," Lewis, Liars, f. 103-104.
15. Lewis, Liar’s, 103–104f.
16. Frontline, “The Long Demise of Glass-Steagall,” Public Broadcasting Service, available online.
17. Frontline, “The Long.”
18. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Viking, 1993), 12–17.
19. Paul Kasriel, “Regulatory Suasion—An Attempt at Deflating the Housing Bubble,” Northern Trust Company Research Department, May 26, 2005, available online.
20. Morris, The Trillion.
21. Morris, The Trillion.
22. Ari J. Officer and Lawrence H. Officer, “Let Risk-Taking Financial Institutions Fail,” in Time.com, September 29, 2008, available online.
23. Morris, The Trillion, 121.
24. Morris, The Trillion, Chapter 4, 59–85.
25. The Associated Press, “UBS to Buy Back $20 Billion in Securities,” New York Times, August 10, 2008. Blog Commentary . . . To be sure, 12-15 percent “default” rates (for example) were supposed to be paid by the primary issuers of each bond. But most companies or municipal governments never thought that they would have to actually pay the default (or long-term) rate. They didn’t budget for the day when the market dried up so they balked at paying the higher rates. This was especially the case when buyers stopped coming to bond auctions for the Port Authority of New York and New Jersey, which resulted in the state of New York finding itself on the hook for 20 percent interest payments. New York sued. So did the purchasers who couldn’t find buyers for their bonds. Another group that never saw the impact of the 2007-2008 credit crunch were the insurers of the ARS. Many insurers simply went out of business.
26. Global Europe Anticipation Bulletin, “Global Systemic Crisis: Four Big Trends over the 2008–2013 Period,” LEAP/Europe 2020, Public Announcement GEAB, no. 24, available online.
27. Lisa Lerer, “Fannie, Freddie Spent $200 Million To Buy Influence,” Politico.com, July 16, 2008, available online; Mother Jones, “McCain’s Fannie and Freddie Connections,” MojoBlog, September 10, 2008; Jackie Calmes, “ '08 Rivals Have Ties to Loan Giants,” New York Times, September 9, 2008, available online.
28. George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (New York: Public Affairs, 2008), 105–113.
29. Stephen Taub, “Washington Mutual Moves to Insulate Bonuses from Loan Crisis,” CFO.com, March 6, 2008, available online.
30. Jeff Feeley and Steven Church, “Washington Mutual Lists $8 Billion Debt in Bankruptcy,” Bloomberg.com, September 27, 2008.
31. Phillips, “Bubble.”
32. Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Random House, 2002), 138–140.
33. Phillips, Wealth, 138–140.
34. Susan Strange, Casino Capitalism (Oxford, UK: Blackwell Publishers, 1983).
35. Paul Krugman, The Return of Depression Economics (New York: Norton, 1999).
36. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Viking, 1993); Eric Janszen, “The Next Bubble: Priming the Markets for Tomorrow’s Big Crash.” Harper’s Magazine, February, 2008, available online.
37. Ronald Suskind, The Price of Loyalty: George W. Bush, The White House, and the Education of Paul O’Neill (New York: Simon & Schuster, 2004), 291.
38. U.S. Department of Treasury, “Major Foreign Holders of Treasury Securities,” 2008, available online. Sovereign Wealth Funds may also be helpful here, but concerns over national security, nativism, and political influence, pose a problem to SWF as a source of capital.

Chapter 12: FROM DEREGULATION TO THE MOTHER OF ALL BAILOUTS

NOTES

1. The FDIC information for this section is drawn from the February 20, 1998 Federal Register, “FFIEC Supervisory Policy—Repurchase Agreements of Depository Institutions with Securities Dealers and Others,” FDIC Law, Regulations, and Related Acts, 5000-FDIC Statements of Policy, 5265–5271, available online.
2. There are many reasons for this. For example, although mark-tomarket accounting was developed to bring book value (or market value) to the price of assets, the balance sheets of banks are interest-rate sensitive. As interest rates change, so do asset values (often faster than liabilities) as a result of longer maturities. To manage bank balance sheets, bankers are expected to manage assets, liabilities, or both at the same time. If the market asset value drops, the equity drops as well.
3. Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, 2008), 78–79.
4. Morris, The Trillion, 78.
5. One of my colleagues, Ken Shakoori, pointed out that this would not be true if basic credit standards were applied to every loan. But this wasn’t always the case. Forecasts of future economic activity were rosy and viewed as never-ending.
6. Morris, The Trillion, 78.
7. Morris, The Trillion, 78.
8. I want to thank my colleague Ken Shakoori for pointing out that collateralization was not the driving force behind record receipts and growing claims between institutions. Poor lending practices were.
9. Blog Commentary . . . Between 1964 and 1994, for example, the total amount of money spent and put into circulation by the nation’s biggest financial players was equal to roughly three to four times the amount that ordinary Americans were using as they purchased goods (groceries, cars, etc.). Specifically, although every American used cash and checks to make payments and consume $274 billion worth of goods and service in 1974, financial institutions on Wall Street were pushing $1.069 trillion (roughly 3.9 times) around the country in the form of investments. By 1994 the money supply for everyday transactions by American consumers had grown, with the population and new markets, to about $1.150 trillion. For their part, America’s largest financial players followed along, by trading $4.369 trillion (Graph 12.2) worth of product, worth roughly 3.79 times what Main Street was spending. During this period it appeared that there was a symbiosis between Main Street and Wall Street. However, things weren’t what they seemed. By 1988 the gap between what Main Street was spending and what Wall Street was logging on the books had already reached a factor of five (4.99). Figures for 1992 and 1994 were misleading because, as noted in Chapter 10, the S&L debacle and the 1992 recession helped slow down what was happening on Wall Street. But it was only a speed bump.
10. Blog Commentary . . . Not surprisingly, the money supply—beyond checking and cash on hand—grew as more and more receipts (driven largely by repurchase liabilities) were created and converted into savings and other investments. In the money supply this is known as M–2, and it reached $7.670 trillion in 2008 (almost a 10 percent jump from 2006). Presently, information for 2007 and 2008 is not available because the Bush administration, which demonstrated few inclinations to reign in spending before, has determined that it could save the American taxpayer money if it no longer kept track of M–3 after 2006. On this, see Tim McMahon, “Goodbye M–3—What Is the Government Hiding?” Inflation Data.com, March 16, 2006, available online.
11. McMahon, “Goodbye.”
12. Blog Commentary . . . The complex financial instruments that have been developed over the years, however they are finally packaged, go back to well before 1986. Peter F. Drucker looked around and saw the emergence of a global economy in which capital movements rather than trade dominated the world economy. Because capital movement, exchange rates, and credit flows dominate these transactions—and are symbols of activity in the “real” economy—Drucker referred to it all as the “symbolic economy.” On this, see Peter F. Drucker, “The Changed World Economy,” Foreign Affairs, 64, no. 4 (Spring 1986): 768–791.
13. David C. Korten, When Corporations Rule the World (West Hartford, CT: Kumarian Press, 1996), 186.
14. Stephen Labaton, “Agency’s ’04 Rule Let Banks Pile up New Debt,” New York Times, October 3, 2008, available online.
15. Julie Satow, “Ex–SEC Official Blames Agency for Blow–Up of Brokers–Dealers,” New York Sun, September 18, 2008, available online; Labaton, “Agency.”
16. Labaton, “Agency.”
17. Labaton, “Agency.”
18. Labaton, “Agency.”
19. Greg Ip and Joellen Perry, “Central Banks Launch Effort to Free Credit,” Wall Street Journal, December 14, 2007, available online; CNN.com, “Uncle Sam Taps Piggy Bank, Borrows to Aid Market: Uncle Sam’s Financial Promises—More Than $600 Billion in All—Requires Tapping Reserves, Borrowing,” CNN.com, September 17, 2008, available online; Harold Brubaker, “Taxpayers Have $800 Billion at Risk So Far,” Philadelphia Inquirer, September 17, 2008, available online.
20. Benjamin J. Cohen, In Whose Interest? International Banking and American Foreign Policy (New Haven, CT: Yale University Press, 1986), 44–46.
21. Morris, The Trillion, 65.
22. David Goldstein and Kevin G. Hall show that this characterization is false. On this, see David Goldstein and Kevin G. Hall, “Private Sector Loans, Not Fannie or Freddie, Triggered Crisis,” McClatchy News, Washington Bureau, October 12, 2008.
23. Mort Zuckerman, “The Anatomy of the Financial Crisis and Why We Must Get It Right," Huffingtonpost.com, October 22, 2008, available online.
24. Morris, The Trillion, Chapter 4, 59–85.
25. Morris, The Trillion, Chapter 5, 87–105, 121.
26. Morris, The Trillion, 93.
27. Apart from his columns in the New York Times, see Thomas L. Friedman, The Lexus and the Olive Tree (New York: Anchor Books, 2000).
28. Ip and Perry.
29. Morris, The Trillion, 120.
30. Rachel Beck, “Loan Crisis Even Blinded King of Mortgage Securities,” The Record (online edition), available online.
31. Tami Luhby, “Bailout Talks in Disarray,” CNNMoney.com, September 25, 2008; See also “A Common Sense Plan to Have Wall Street Fund the Recovery, Not Taxpayers” Economic Rescue Principles, available online.
32. Luhby.
33. Joseph Stiglitz, “We Aren’t Done Yet: Comments on the Financial Crisis and Bailout,” The Economists’ Voice, 5, no. 5, Article 11. Berkeley Electronic Press, available online.
34. Scott Lanman and Craig Torres, “Bernanke Says Normal Markets Needed or Growth to Halt” (Update 3), Bloomberg.com, September 23, 2008, available online.
35. Ari J. Officer and Lawrence H. Officer, “Let Risk-Taking Financial Institutions Fail,” Time.com, September 29, 2008, available online.
36. This was made possible by the Federal Reserve, which had grafted three additional tools onto its mandate to create money: the Term Securities Lending Facility (TSLF), the Primary Dealer Credit Facility (PDCF), and the Term Auction Facility (TAF). See David Frazier, “Government Bails Out Stock Market . . . For Now,” MoneyNews.com, April 1, 2008, available online.
37. Alistair Barr, “Toxic Export: How America’s Risky Subprime Mortgages Fouled the World’s Markets,” Wall Street Journal, Market Watch, November 15, 2007, available online; Heather Steward, “Markets’ Week of Living Dangerously,” The Observer, Business news and features, August 19, 2007, available online.
38. Newt Gingrich, “Suspend Market To Market Now!” Forbes.com, Commentary, September 29, 2008, available online.
39. Gingrich.
40. Shah Gilani, “Heads I Win, Tails You Lose: Why the Senate Bailout Will Fail Taxpayers,” Money Morning, October 2, 2008 (updated October 7, 2008), available online.
41. Marie Leone, “Fair Value: Now a Little Easier To Swallow?” CFO.com, September 30, 2008, available online; Alan Rappeport, “Investment Pros Like Bailout, Fair Value,” CFO.com, September 26, 2008, available online.
42. Ben S. Bernanke, “The Level and Distribution of Economic Well-Being.” The Federal Reserve, Speech given before the Greater Omaha Chamber of Commerce. Omaha, Nebraska, February 6, 2007, available online.
43. Bernanke, “The Level.”
44. Starr, Freedom’s.
45. Duncan K. Foley, Adam’s Fallacy: A Guide to Economic Theology (Cambridge, MA: Belknap Press, 2006), 39–40.
46. Foley, Adam’s, 43.
47. Foley, Adam’s, 43.
48. Foley, Adam’s, 41.

The Myth of the Free Market