Thinking

Centennial Post: What I Got Wrong

Reading old essays never fails to elicit embarrassment. As one’s comprehension improves, what once seemed brilliant and full of penetrating insights, looks decidedly shoddy in light of recently acquired knowledge. Embarrassing though it may be, the present author welcomes such moments where one realizes that one’s explication was misconceived, one’s conceptualization was misconstrued, or one was empirically inaccurate. Indeed, it is precisely at such moments that the gains in one’s understanding become manifest. During the past three years, these pages have witnessed very many such moments. For the centennial post, I am going to spell out what I got wrong in the past three years.

There is no way to do this post by post. We shall proceed category by category.  And instead of compiling an exhaustive list of all my errors, I am going to concentrate on the big ones.

Arab Uprisings

Most of my pieces on the Arab uprisings were essentially reporting. Even so, I managed to make a few big mistakes. In “The Future of Syria,” I said, addressing the Syrian rebels,

I know you know that even the Economist thinks you are going to win. You are. The question in not whether, but when and at what cost.

Oops. At this point, I was convinced that Assad was a goner. To be fair to two-year-younger me, in the summer of 2012, it did look quite likely that Assad’s days were numbered. Assad’s ouster was the appropriate baseline scenario. This underscores the unreliability of forecasting in a complex world. No matter how accurate our understanding, there are severe limits to our predictive abilities. A healthy dose of humility is an absolute essential for the dispassionate analyst.

In a corner

Two months before that, I had made a more serious mistake in the piece, “The Syria Conundrum,” wherein I bought the New York Times explanation:

Mr. Assad oversees a security state in which his minority Alawite sect fears that if his family is ousted, it will face annihilation at the hands of the Sunni majority. That has kept the government remarkably cohesive, cut down on military defections and left Mr. Assad in a less vulnerable position.

This explanation begs the obvious question: if the struggle has become sectarian, then why has the Assad nut not cracked along confessional lines? Investigating this question led me to Volker Perthes’ The Political Economy of Syria Under Assad. I wrote about it at length in “The Syria Conundrum Reconsidered.” For now, suffice it to say that the overthrow of the Assad regime, and the dismantling of large parts of the central components of the authoritarian structure — the security apparatus, the Ba’ath party, and the bureaucracy — would’ve entailed a thorough social revolution; one that would be a direct threat to the entirety of the entrenched interests who owe their status, revenues, wealth, and power to the specific structure of Syrian authoritarianism. Simply put, the Assad nut is welded on personal connections; if the authoritarian structure comes undone, every node in the vast patronage network loses their shirt.

Political Economy

The neoliberal counter-revolution has been an important area of investigation for the present author. I had misunderstood the sequence of events. My initial understanding was that the three pillars of the global economic order — globalized production, neoliberalism, and freely-flowing capital — arose together from the ashes of the New Deal era. Specifically, I thought that the reemergence of global finance was the result of a major policy shift in the United States. In “The Dominance of Finance,” I wrote

The fixed exchange rate system broke down in 1973. Capital controls were relaxed in the US in 1974, Britain in 1975. During the 1970s a significant portion of US capital migrated to the City of London engorging the basically unregulated eurodollar market which freed a giant pile of US dollars from control by the Federal reserve.

The chronology is incorrect. The eurodollar market had been growing at a scorching pace throughout the late fifties and sixties, and already exceeded the world’s official dollar reserves by 1973. In fact, my claim was much worse than a mere chronological error. The causality runs the other way: it was the reemergence of global finance that forced the center countries to relinquish their policy autonomy.

Given the financial repression of the New Deal-era in the US, the reemergence of global finance was effected through the reconstitution of the pre-1931 institutional structures centered at the City of London. Speculators used the eurodollar market to mount attacks on major currencies; forcing a devaluation of the pound sterling in 1967, the German mark in 1969, and the dollar in August 1971. All the initial steps in the neoliberal counter-revolution — 1971 (US goes off gold), 1973 (collapse of the Bretton Woods system of fixed exchange rates), 1974 (US relinquishes capital controls), 1979 (Volcker appointed to the Fed; unleashes draconian monetary tightening), 1980 (deregulation of interest rates) — took place under severe pressure from globally mobile capital. For instance, it was the speculative attack on the dollar in 1979 that forced Carter’s hand. He had to appoint a known monetary hawk to stem the collapse of the dollar.

Globalized production — what Richard Baldwin calls “globalization’s second unbundling”— had to wait on both the intermodal transportation revolution and the telecommunications revolution. For the first, note that the decisive moves towards containerization took place during the late-sixties. Containerization (shipping rates remained more or less flat despite the quadrupling of the price of oil) and the collapse of air freight with the introduction of jet planes, significantly increased geoeconomic competition in the core of the world economy. We traced the collapse of the profit rates of US manufacturers (1966-82) to competition by Japanese firms. This was enabled by the intermodal transportation revolution.

During the seventies and early-eighties, production remained clustered in industrial districts, even as cheap transport favoured large-scale production, because the very complexity of advanced manufacturing required close proximity to keep coordination costs low. The forbidding costs of coordinating far-flung processes incentivized firms to locate all production at one place. Suppliers clustered in regional manufacturing hubs to cater to these manufacturers. Firms remained firmly grounded at home, harnessing their nation’s capabilities into competitive advantage in the global marketplace.

The telecommunications revolution, that unfolded in the decade or two after 1985, undermined the economic geography of industrial production. The fact that component parts could be fabricated or assembled at a fraction of the cost offshore incentivized firms to unpack their production processes relocate them where they could be done cheapest. Distance still dictated the location of the offshore factories and assembly plants. It matters greatly whether engineers and managers from the firm’s headquarters can reach the offshore site within hours. This explains the most striking feature of the current geographic distribution of global supply chains — their regional concentration. The lion’s share is located within a short distance from the three major manufacturing powers: Germany, Japan, and the United States.

The neoliberal counter-revolution was not, by itself, sufficient to restore the profit rates of US firms. The revival of US manufacturing and corporate profitability from the late-nineties onwards was the result of the supply chain revolution. The differential returns to labor and capital in the neoliberal era, and the attendant polarization of the distribution of income, reflect much more than capital-friendly neoliberal policies; they reflect the changed fundamental economic realities of globalized production itself. The emergence of finance-led neoliberal globalization was predicated on a historically contingent sequence of structural transformations — the reemergence of global finance (1962-67), the intermodal transportation revolution (1965-70), the neoliberal counter-revolution in the center countries (1973-1983), and the telecommunications revolution (1985-1995). [Kennedy was the first US president to receive regular updates on the eurodollar market, which is why I choose 1962 as the starting point; 1967 is when the market got so powerful as to force Britain to devalue the pound sterling.] Each of these processes had its own specific historical trajectory that shaped its course. For instance, upper class mobilization played a key role in the rise of neoliberal economic thinking among policymakers — the Bank of Sweden award in economics (“Nobel prize”) was created by the Swedish banking elite in 1968, with predictable results — Samuelson (1970), Arrow (1972), Hayek (1974), Friedman (1976).

Container revolution

Geopolitics

I have reconsidered my position on Spykman’s claim about the unviability of Hemispheric defense. Specifically, I wrote:

The combined war potential of the Eurasian landmass is greater than that of the United States. If Germany and Japan were allowed to consolidate their control over the two extremities of Eurasia, their alliance would become too strong for the United States to take on. The US would face complete encirclement. US power would be bottled up in North America and it would only be a matter of time before the US homeland was threatened by the combined resources of the Eurasian supercontinent. Hemispheric defense, Spykman argued in 1942, is no defense at all.

There is no doubt that the combined war potential of the Eurasian landmass is greater than that of the Western Hemisphere. Eurasia is the seat of a world state. But Germany and Japan would not have been in a position to exploit the war potential of a sufficiently large enough portion of the Eurasian landmass; at least not for decades after conquering all that territory. Even if Japan consolidated control over the Western Pacific and deep inland on the Eurasian landmass, it could not hope to become as strong as the US. This is because colonies are very poor substitutes for national power. The British empire, at 33 million sq. km, was many times larger than Germany’s 357,000 sq. km; with a much larger economy and population to boot. Yet, Britain could not prevail militarily against Germany by exploiting the resources of her empire.

Had Operation Barbarossa succeeded in the summer of 1941 and Soviet Russia eliminated as a polar power, the world would’ve become bipolar, to use Schweller’s definition — a polar power is a state that is at least half as strong as the strongest state in the system. Even together, Germany and Japan never had the wherewithal to project enough power across the oceans to threaten the US homeland. What was at stake was not the security of the United States, but the US’ position on the world stage. The US would’ve been reduced to a regional power. Germany and Japan, had they prevailed in World War II, would’ve worked together to try keep the Americans out of Eurasia. In any case, such a world would’ve been run from Berlin.

This was certainly a good enough reason for the United States to weigh in the Eurasian balance. The United States stayed out of the polar war in Europe until it reached a decision. American troops joined the fight on the continent five years after the onset of World War II — finally moving in in 1944 to contain the victor. On the Pacific front, Japanese hopes for a limited war were dashed with the US decision to eliminate its much weaker rival as a great power, and replace it as the regional hegemon in the Western Pacific. This enabled the United States to emerge as the dominant state in the world. It is interesting to note that, in its career as a pole of the international system (1898-2014), the United States has never been in a polar war; again using Sweller’s definition. US power was enough to deter Soviet Russia throughout the bipolar era (1945-89), since the US was the more powerful of the two rivals.

Rimland

The United States’ greatest geostrategic advantage is the impregnability of its homeland due to the ‘stopping power of water,’ to use Mearsheimer’s phrase. Unlike any other state in the international system, the US can therefore choose if, when, and where to fight another powerful state. The strongest state the US has ever fought was Imperial Japan, which was perhaps not even a quarter as powerful as the United States; Spain was perhaps a tenth as strong when the two fought in 1898. Americans fought a Germany whose military power had been destroyed on the eastern front, at a time when the Soviet steamroller had already pushed the Germans back all the way to the German border. Never fought the British. Soviet Russia was a peer competitor that balanced the United States in its extensive ‘near abroad’ all over the Eurasian landmass. The closest the world came to war in the bipolar era was during the Berlin Crises of 1958-61 — which happened in the tense period of transition from US nuclear primacy to MAD. Basically, the Soviets finally acquired a survivable deterrent; a credible second-strike capability. Preventive nuclear war was never considered seriously by US policymakers. American strategists realized the folly of trying to destroy Soviet Russia’s capability to produce a nuclear deterrent.

In the unipolar era, the US has found it equally hard to put its nuclear primacy to any use. As of early 2014, China is roughly half as strong as the United States. US strategists surely know that if there is ever going to be a military contest with China — as it catches up and possibly surpasses the United States in war potential — the earlier the better for the US. It is simply better to fight a weaker opponent than one as strong as you, or worst of all, a mightier one. China’s rapid rise creates enormous systemic pressure — perfectly captured by Copeland’s theory of dynamic differentials — on the US to launch a preemptive war, or at least a cold war to contain China. Should the US try to maintain its nuclear primacy? Short of launching a preventive first-strike, it is unclear how the US can disarm another major power that is nuclear capable. Surgical strikes cannot prevent China or India to obtain a credible second-strike capability against the United States; only weaker states can be disarmed easily.

iran

Do nuclear weapons make hegemonic war impossible? No. Under conditions of mutual deterrence, the international order may be redrawn through a series of localized conflicts. In fact, by ensuring that the homeland will be largely protected from conquest due to nuclear deterrence, nuclear weapons make limited wars likelier. Two nuclear armed states can still have a localized military conflict, with stakes limited below the strategic level by mutual deterrence. Take the Kargil conflict in the summer of 1999. The fact that both regional powers had nuclear weapons prevented the war from escalating to the strategic level; it also made it more likely. Since India could not threaten to escalate to the strategic level, it could not deter Pakistan from launching a ‘limited war.’

Going back up to the system level, a stalemate at the strategic level means that, especially in regions away from a polar power’s immediate vicinity, the regional balance of power will be decisive. For instance, the Soviets positioned tens of thousands of troops in Egypt and Syria to compete in the regional balance, while the US relied (at different times) on Britain, Iran, and Israel. In its own vicinity on the other hand, a polar power can be expected to be possess a strong logistical advantage. There are limits to this logic however. The United States still managed to deter a Soviet absorption of Berlin into the GDR by using the threat of escalation, even after it lost nuclear superiority right before the Berlin Crisis of 1961. The evident success of extended deterrence in Berlin may not be repeated in Taiwan. Simply because Berlin was German not Russian, while Taiwan is Chinese.

Natural History of Capitalism

In the “The Longue Durée,” a piece I wrote in August 2011 — after reading Arrighi but before reading Braudel — I argued that because “Atlantic capital will remain twice the size of Pacific capital for the rest of this century, we will not see the end of American hegemony before we are all dead.” Oops. I cannot, in good faith, lay this on Arrighi; it was my own naiveté. Indeed, the Dutch had more capital than the British when the mantle moved across the Channel in the early eighteenth century. Similarly, Britain has more capital than the United States in the earlier twentieth century, when the baton was silently crossing the Atlantic. [Braudel likes the date 1929. I prefer 1925 when Britain painfully returned to gold to no avail. In any case, British naval mastery was ancient history at this point, having been surrendered by the Admiralty in 1901.]

Global Financial Assets

Primacy in world affairs depends on a concatenation of factors — geostrategic location, size of population and territory, industrial might, economic size and efficiency, technological prowess, financial muscle — none of them are, by themselves, decisive. In fact, the most important factor has always been geostrategic location. For instance, the Genoese were much more advanced, more efficient, and had much more money than the Venetians. Yet, Venice prevailed over Genoa. She was protected by the Adriatic, while Genoa was exposed to the sea. In the eighteenth century, Britain’s geostrategic advantage over her continental rivals proved decisive. Even though she was weaker than France or Russia, her position on the “flank of the continent” enabled her to “isolate the world overseas from her rivals.” The United States was separated from other great powers by two great oceans. This enabled it to emerge as a great power without threatening any powerful neighbours. No great power on the continent — certainly not Russia, which was everyone’s neighbour — had such an overwhelming advantage. No wonder that the insular powers have prevailed in the last 250 years. It is this that I called Braudel’s corollary.

The rise and fall of world powers is driven by more fundamental processes than capital accumulation. I had the causal sequence in reverse. If there is a natural history of capitalism, it is the story of the repeated capture of maritime hegemons by merchant oligarchies. Analyzing the distribution of plutocrats gives us a good idea of the degree of centeredness of global capitalism. But plutocratic wealth is a lagging indicator of reorientation of the world economy. To wit, if and when the center of gravity of the world economy shifts from the Atlantic to Asia, we would know years, if not decades, before the accumulated wealth of Asian plutocrats becomes larger than their counterparts on the Atlantic seaboard.

Realism

I save for the last the most embarrassing post of all time on this blog: “The Theory of Centered Realism.” There are many credible theories that seem to account for the strongly centered system we see around us today — in terms of economic output, the distribution of global income, militarily, in terms of scientific-technological capabilities, and so on and so forth. Those who believe in the primacy of economics would say that US’ central politico-military role in world affairs is merely an artifact of American preponderance in the world economy. Other, more reasonable folk, believe that politico-economic-military affairs are codetermined. Then, there are others, like the present author, who argue for the primacy of politics.

If the centeredness of the system was merely an artifact of unipolarity, there would be nothing to explain. Yet, even before the advent of unipolarity in 1990, we find that the international system was firmly centered for centuries. But it is not centered at the dominant military power. For instance, during the Bismarckian era, the strongest state in the international system was Germany, while the world continued to be centered at London. Similarly, Russia was the strongest power in the quarter century after 1815; not to mention the Dutch experience. What’s going on is that there are two images — the balance of power and the world economy.  We must distinguish between great powers (states that are militarily competitive) and the dominant states in the core of the world economy — what I have called center countries. My cardinal error was to define center countries in monetary-financial terms. Specifically, I defined center country as a state that satisfies at least one of the following: it’s currency serves as the hard currency for a larger volume of international transactions than that of any other state, it’s financial market is larger than that of any other state, or it’s share of overseas investment is larger than that of any other state. This is erroneous.

A considerably better way to reformulate this is to think of world powers are thalassocracies. That is, empires of the sea whose trading and economic prowess, and therefore, wealth and revenue, is founded on maritime strength. The balance of power is determined principally by land-based military power, as demonstrated conclusively by Mearsheimer in The Tragedy of Great Power Politics. This frees up the distribution of maritime strength as an independent variable that can be used to pin down the degree of centeredness of the system. We can then simply call an international system centered if it exhibits a maritime hegemon, and decentered otherwise. By maritime hegemony we mean something weaker than Kennedy’s notion of naval mastery: it is sufficient for the maritime power to exercise naval preponderance over the core network of sea-lanes that constitute the plumbing of the world economy. Specifically, we don’t require the state to possess sufficient maritime strength so that it can put down any naval challenge anywhere merely by the dispatch of sufficient squadrons. Thus, by our definition, we can identify an array of historical maritime hegemons: United States, Britain, United Provinces, Portugal (as well as Spain after it took over Portugal’s navy), Venice, Carthage, and Tyre. [There are others such as Rome, which we exclude because it was a world empire not a maritime hegemon in a state system.]

Note that both the balance of power and primacy in the maritime realm depend critically on the geostrategic location of different powers. We thus arrive at the theory of centered geopolitical realism. This theory of international politics has three variables: the distribution of war-making capabilities on land, geostrategic location of major powers, and the distribution of maritime strength. The key insight of this theory is that the stability of the international system depends critically on the degree of centeredness of the system. In particular, hegemonic wars are considerably more likely in a decentered system, when the money spinner is up for grabs, so to speak. Owing to the existence of natural control points, the maritime realm is a natural monopoly; which means that naval competition is a strong sign of disequilibrium. This formulation is much more satisfactory for another reason. We can think of capitalism as a centered system characterized by the capture of the maritime hegemon by a merchant oligarchy. This is the iron law of capitalism — the nexus between power and profit.

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