Global Market Failure and the Future of World Order: The Impact of Global Externalities on International Relations.
Global Market Failure and the Future of World Order: The Impact of Global Externalities on International Relations.
Marko Beljac.
Market failure has now become one of the world's hottest topics, much to chagrin of neoclassical economists.
One form of market failure is due to what economists call "externalities". These arise when the rational, profit driven, actions of economic agents have deleterious and uncompensated impacts on third parties. When externalities are present market outcomes are not socially optimal.
Two of the most important global crises today, the financial crisis and climate change, can be seen to a significant degree as being market failures where the presence of externalities are robust.
As we increasingly move towards a global economy, which includes the development of more globally integrated markets, we would expect externality effects to become increasingly global. Although much has been written about both crises, little attention has been directed towards this broader issue.
Milton Friedman, the noted free-market economist, had surmised that externalities are small and not that much of a problem. Boy was he wrong! Globalisation now means that externalities will become even huger as they correspondingly become global. That, in turn, poses a macroeconomic stability problem that challenges our international political architecture.
The global financial crisis, to a very significant extent, can be described as a global externality because crucial to its development was the under pricing of risk by financial institutions. That is to say, risk was under priced from the point of view of society. From our perspective consummately rational financial market entities took on far too much risk, enabled by both deregulation and lax regulation, in the pursuit of dazzling short term profits.
Recognising the presence of an externaility does not necessarily tell us much about its underlying cause. The best casual explanation that accounts for the global financial crisis is the Post Keynesian Financial Instability Hypothesis of Hyman Minsky.
It was the under pricing of risk that paved the way for the rise of systemic risk, the crucial impost on society. That the under pricing of risk in financial markets could lead to systemic instability, which then impacts the real economy through liquidity and solvency crises, was in fact an important, though ignored, staple of Post Keynesian economics.
What has made this crisis decidedly global is that the financial system created in the wake of the "Nixon shocks" of the early 1970s, the crucial acts that enabled financial liberalisation, has led to the development of a global financial market characterised by tight coupling between its constituent parts. Even relatively well regulated and sound domestic markets can be impacted by financial shocks originating from elsewhere through feedback loops.
Greater economic integration also means that the impact of financial instability upon the real economy that Post Keynesians warned us about will also become increasingly global. In the wake of the financial crash in 2008 the Baltic Dry Index, which provides an insight into global trade and production trends, went into a downward spiral much like the US real estate market. Perhaps Japan illustrates this point best. The Japanese financial system was relatively insulated from the worst excesses of Wall Street, but Japan’s dependence upon exports to the US to drive economic growth has seen Tokyo take an almighty hit.
When the world's two leading economies, at the very least, go down into deep simultaneous recessions a global recession becomes difficult to avoid. It would appear that we were indeed headed for a Great Depression like contraction, but for a coordinated global Keynesian stimulus of great force.
Globalisation now requires that Keynesian demand management needs to shift upwards and become internationalised.
Sir Nicholas Stern, upon handing down his era defining report on the economics of climate change, described it as the "greatest market failure the world has ever seen." This failure is also due to an externality. This is of the familiar type arising from pollution, in this case the emission of greenhouse gases. Here the externality is global, but not because of a global economy. The problem arises as a result of the emission by many individual firms and householders of greenhouse gases into a globally integrated climate system. This integration also results in global feedback loops and other knock-on effects; as such the externality becomes global.
Economists have identified three main ways of mitigating externalities. The strategy is to internalise the external effects of individual actions upon others either through taxes, market based schemes that try and develop price signals, and regulation. It is the purpose of our political institutions to craft and enforce these remedies.
However in international relations governance is weak. The international political order has been characterised by the "Westphalian" system that places state sovereignty at its core. This means that the amelioration of global externalities becomes decidedly problematical, as the international negotiations over both financial market regulation and a global emissions trading regime demonstrate.
In the case of financial markets we have the added problem that financial instability is endogenous to capitalism. An implication of the Financial Instability Hypothesis in the context of globalisation would be the need for a global financial authority to enforce systemic stability at the international level.
So, what are the prospects for reform?
Two developments in the evolution of world order are of first importance here. Firstly, the global economic order, from 1945 to the early 1970s, had moved from unipolarity to tripolarity. The development of tripolarity was a key motivating factor behind the Nixon shocks. Now we are slowly starting to see the emergence of a classically multipolar economic order, where the major poles are not allied states moreover, given the rise of the BRIC economies. Multipolar orders are the most difficult to manage if the major powers within that order are not allied. The US, Europe and Japan were and are allied powers.
Secondly, there exists an important fissure within this emergent multipolar economic order, namely between developed and developing economies which makes matters worse. Some label this cleavage as constituting an "international division of labour". This division means that the polar powers of the economic system have structurally divergent interests, one of the reasons for the lack of progress in the Doha round of world trade talks.
The G20 summit on the global financial crisis and the significant differences between the developed and the developing states pre-Copenhagen can be invoked as evidence supporting the case for pessimism.
Regulatory reforms to the financial system have not gone far enough (barely even started), another financial shock is still possible, whilst China and India have been digging their heels on climate change. The developed states, for their part, do not show much interest in helping either India or China adequately overcome the very large opportunity costs that retooling their energy systems poses.
The global political economy can be described as a type of state enabled corporate mercantilism, which poses another important barrier against international coordination in response to global market failure. Globalisation has been hitherto concerned with dismantling state based regulations over corporations. We now see, however, that global market failure will require extending global regulations over corporations. The economists John Eatwell and Lance Taylor have called for a world financial authority to regulate the global financial system and the head of the UK Financial Services Authority has made a case for the introduction of a global Tobin Tax.
It is doubtful that such measures will be enacted through elite coordination at the international level.
It is interesting to reflect that states and markets, both based on rational utility maximisation, so badly re-enforce each other. On the one hand rational self regarding actions within markets may not be socially optimal. On the other rational amoral states that tend to be geared toward relative gains are not terribly well disposed towards achieving socially optimal outcomes at the global level.
The reforms required to remedy this re-enforcing contradiction will not be easy to achieve. If we want to deal with global externalities properly the reform of the Westphalian system of international relations will be required. The same applies to the current corporate dominated form of globalisation. The role of social movements within and across states will be critical.
There appears to be a profound link between global justice and the major challenges facing mankind.
Iran’s Walkout From Code 3.1 and the Qom Enrichment Facility: A Response to US Strategic Posture?
The IAEA's inspectors are on the job re the Qom enrichment "thingy" in Iran. The next safeguards report from the board of governors promises to be a must read.
One interesting thing here, at least for yours truly, is that Gareth Porter seems to have come around a bit towards my way of seeing things. In his latest article he spells out his central thesis pretty early
...The Iranian decision to withdraw from the earlier agreement with the IAEA was prompted, moreover, by the campaign of threats to Iran's nuclear facilities mounted by the George W. Bush administration in early 2007, as a reconstruction of the sequence of events shows...
If you read the whole article you will see that Porter has done a good job at reconstructing those events. He goes on
...The Iranian decision to withdraw from the "subsidiary agreement" to which it had agreed in February 2003 requiring it to inform the IAEA of any new nuclear facilities as soon as the construction decision was made occurred in the context of a series of moves by the Bush administration to convince Iran that an attack on its nuclear facilities was a serious possibility...
He spells out these moves which ended with
...Finally, on Mar. 27, the United States began a naval exercise in the Gulf involving both aircraft carriers and a dozen more warships already in the Gulf, along with about 100 aircraft...
...A front-page article in the New York Times called it a "calculated show of force" which was "part of a broader strategy to contain Iranian power in the region"...
Porter observes that two days later Iran walked from its Code 3.1 Sub Arrangement with the IAEA.
He also cites a political figure involved in the pro-government coalition in Tehran as drawing an explicit link between the Code 3.1 walkout and a potentially threatening US strategic posture.
He ultimately concludes
...The sequence of events surrounding the Iranian policy change and the subsequent beginning of construction on a second enrichment facility suggests that Iran was hedging its bets against a U.S. air attack, while retaining the obligation to provide detailed information six months before the introduction of nuclear material – if the threat of an attack were to subside...
That's closer to my position but I still think he goes too far. I do not believe that this was supposed to be an overt facility; Porter still seems to imply here that Qom was to be overt but for the US threats.
I believe Qom was covert and was meant to be covert because of the US threats and that they (Iran) came clean prior to the Pittsburg G20 Summit because they knew they were going to get busted. That's still a big difference and still doesn't mean a bomb program.
Porter seems to be falling for the non-proliferation communitie's and the White House's trick on this. The argument is; does Iran have a bomb program? Some say yes, some say no. Some say no because they want to mount a case against a bombing campaign.
People who argue no need to be careful what they say, because it is very easy to tacitly presume that if they do have a bomb program then let's bomb the shit out of them. That's the arms control and non-proliferation communitie's trick too because they want you to believe that everything revolves around arms control and non-proliferation. It doesn't.
My position on Iran is; it makes sense to engage Iran as part of a broader full on diplomatic offensive designed to reach a comprehensive peace in the region. Settle the West Bank and Gaza by putting the hammer down on Israel, the real rejectionist party. Settle the Golan Heights with Syria and engage with Iran on talks that go beyond just the nuclear program.
That way we can do something about WMD proliferation in the Middle East and take away the strategic demand factors pushing Iran towards nuclear proliferation.
That's good policy whether Iran has a bomb program or not. In fact it is good policy especially if Iran has a bomb program.
Is Russia’s Nuclear Strategy Further Moving Towards US Style Intra-War Deterrence?
In the past week or so there have appeared a few interesting reports on Russian military doctrine, especially its nuclear weapons doctrine. Currently most attention is being focused on the Obama administration's Nuclear Posture Review. However, Russia is due to complete a review at the end of 2009 as well.
The Russian review is no less important than the US policy review. Everybody likes to discuss nuclear warheads, missiles, arms control and so on but nuclear doctrine doesn't get that much air time in comparison.
We observe an interesting little relationship here.
Washington and Moscow's strategic nuclear arsenals have been in decline since the end of the cold war. In fact, in both cases well below their respective cold war era peaks. However, on both sides doctrine, which presumably governs the principles of nuclear weapons use, has been progressively evolving in more permissive directions.
According to the Kremlin's national security chief, Nikolai Patrushev, as reported by the Global Security Newswire, the new doctrine might include
..."Conditions of using nuclear weapons to repel an aggression with the use of conventional weapons not only in a large-scale but also in a regional and even local war have been revised," Patrushev said, failing to specify what events might trigger a Russian nuclear backlash.
"Moreover, different variants are considered to allow the use of nuclear weapons depending on a certain situation and intentions of a would-be enemy. In conditions critical for national security one should not also exclude a preventive nuclear strike on the aggressor"...
There is a very good discussion of Russia's nuclear weapons employment policy at the NTI's home website written by Nikolai Sokov. In the 2000 Russian military doctrine it states,
...The Russian Federation reserves the right to use nuclear weapons in response to the use of nuclear weapons or other weapons of mass destruction against itself or its allies and also in response to large-scale aggression involving conventional weapons in situations that are critical for the national security of the Russian Federation and its allies...
Notice the bit about "large-scale aggression involving conventional weapons."
The 2003 military doctrine, according to Sokov, started to really head down the road towards becoming something akin to US style intra-war deterrence. Sokov states
...Like the 2000 Military Doctrine, the "White Paper" postulates two missions for nuclear weapons: deterrence of a large-scale attack against Russia and de-escalation of a limited conflict in case deterrence fails. In contrast to the earlier document, the new guidance elaborates on these missions in considerable detail...
He goes on
...The White Paper’s guidance on strategies for fighting regional and local wars suggests ways in which nuclear weapons might be utilized for the purposes of de-escalation...
Readers familiar with US nuclear strategy will recognise that limited nuclear strikes in the context of escalation control are a staple of intra-war deterrence.
The Soviet Union, on current understanding, never bought into US notions of limited nuclear war. Both Moscow and Washington are both into intra-war deterrence now, which is new. That needs to be taken into account in relative studies of strategic stability.
My guess is that Patrushev's comments might be signalling that hawks in Russia's strategic nuclear rocket forces want to incorporate a Georgia type scenario in Russian intra-war deterrence doctrine, rather than just "large scale conventional aggression." The Georgian war occured after the last doctrine was put in place.
The Georgia gambit and NATO expansion create strong push factors for Russia's strategic rocket forces to do this. This all very bad for strategic stability, in my opinion.
Of course, US strategists always recognised that a strategy of escalation control requires escalation dominance. That Russia does not have and will not have. The Russian strategy is incoherent.
Clearly US nuclear strategy has not "dissuaded" Russia from adopting such policies, however.
Also, the hawks in the Pentagon must love this Russian doctrine. It comes smack bang when the administration is drawing up its own nuclear posture review. This can be used internally to argue against the US revising of Washington's own intra-war deterrence based nuclear strategy.
A New B61 Mod, B61-12 LEP or Does the RRW Strike Back!
Now it's (almost) official.
The Reliable Replacement Warhead is back! But it's a semantic RRW that reminds one of Clinton; you know, he didn't inhale, didn't have sexual relations with Monica. You get the drift.
This time we are talking the B61-12; that's the earth penetrater. Notice that's the B61-12, not the B61-11. There has been some change in a "plastic component" to the B61-11 already. We know the impetus for that came from US Strategic Command. I've blogged on this before. It's late and I can't be bothered finding the link.
It could argued that what is involved here is not really an RRW because it does not involve replacing the physics package of the B61. What is at issue here is replacing non-nuclear components. So you could argue this is really a B61-12 LEP.
That's crap, in my book. The B61-12 is an earth penetrater. The juice in an earth penetrater comes from the non-nuclear components. The B61-11 warhead is based on the physics package of the B61-7. It's the changes that were made to the non-nuclear components of the B61-7 that made the B61-11 and turned the Mod 7 into an earth penetrater.
Going from the Mod 7 to the Mod 11 WAS NOT AN LEP GIG. Ok, technically going from 7 to 11 was a "modification" not a "replacement" hence usage of the term "Mod." I'll get to what I mean here in a jiffy, but first some detail.
This story comes from the master himself (naturally), Walter Pincus
...The first step toward rebuilding one of the nation's tactical nuclear weapons so it could be put in the stockpile well into the 21st century has been approved by House and Senate conferees.
The lawmakers permitted $32.5 million to be spent next year on feasibility, design and cost studies for the non-nuclear components of the B61-12 tactical nuclear bomb, according to their report released this week on the fiscal 2010 Energy and Water Appropriations Bill. The measure contains funds for the nation's nuclear weapons programs....
This is important because the move is coming from Congress. As Pincus correctly points out Bob Gates has spoken of something akin to RRW to replace the B61-12 and the W-76.
That's where Bush was at. Not even Bush was talking W-88 and the W-87.
Now this bit in the Pincus report is worth citing
...The conferees said in their report that after that review, the National Academy of Sciences would look at the deterrence value of the B61 against nuclear terrorism and other military threats, and that the independent JASON Defense Advisory Group would determine whether the B61-12 can be considered reliable without nuclear testing...
The National Academy brief is silly. What precisely would be the deterrent value of a B61-12 for nuclear terrorism exactly?
Actually this bit is important though. Why? Because this shows that what is at issue here is mission set centric. We are talking here not about an LEP for a warhead. That's simply a technical issue about warhead stockpile stewardship.
What is at issue here is modifiying, if not replacing, a warhead to gear it for new missions. Just like going from the Mod 7 to the Mod 11. For me that's a new warhead. I don't give a shit if people say that the fissile primary will remain the same so that it's a "Mod" not a replacement.
Changing the components of a warhead so that it can be used for new missions makes it new, in my opinion. That's especially the case with the B61 series because the main beef here is precisely the non-nuclear components.
Thinking out loud at a late hour and therefore speculating without really thinking I suppose that what STRATCOM wants is an agent defeat earth penetrating nuclear warhead.
Decoupling and Australia’s National Security Policy
The Age today quotes the deputy head of the Reserve Bank, Phillip Lowe as stating
...Mr Lowe stressed that Australia’s economic prospects are more closely aligned with Asia’s – led by China – “than has been the case ever before.”
Asia’s demand for Australian resources, along with the relative health of the local banking sector, has helped the local economy avoid the worst impact of the financial crisis in the past year...
There's more on decoupling
...Australia’s four most important merchandise export destinations this year have been China, Japan, South Korea and India, said Mr Lowe, with the US ranked fifth.
“Just six years ago the United States was ranked second.”...
The Australian economy is decoupling from the US economy. Investment is still an important issue as is the import of capital goods from the US, which tempers the decoupling argument somewhat.
Decoupling does not mean decoupled.
The issue is not just about decoupling. We have to also take into account greater economic integration in Asia
There was a good article at Foreign Policy by Daniel Sneider and Richard Katz on "the new Asianism" and the Democratic Party of Japan. There it was argued that,
...Far from wanting to disengage from the United States...
...the DPJ wants a paradigm shift in Japanese foreign policy, one which makes it a more equal partner to the United States and puts greater emphasis on Japan's ties to the rest of Asia, particularly China and South Korea...
There are two important regional issues currently under tentative development. Firstly, the decoupling of the Asian economy from that of the US. That includes Australia. Secondly, greater economic integration within Asia. That also includes Australia, given decoupling.
For Australian strategic policy the development of both in tandem is important. They undercut the absurd level of priority given to the so-called "alliance" with the US during the Howard years. When the UK joined the EEC that had a big impact on Australia's world outlook.
These two slowly emerging developments promise to do the same over the medium term.
But it seems that they aren't paying attention at the Department of Defence, now led by a left winger from the NSW Labor Party. You wouldn't notice that if you looked at policy though.
According to The Australian
...THE Rudd government is pushing to rebuild its defence ties with India, risking the potential ire of China by formally requesting Australia be allowed to participate in the annual India-US joint naval exercise Malabar.
Visiting Foreign Minister Stephen Smith said yesterday he had discussed the possibility of Australia rejoining the massive war games exercise during his meeting with his Indian counterpart, S.M. Krishna, this week..
...But analysts say the Australian government was concerned its participation in an exercise obviously intended by the US to be a foil to China's strategic military might could offend one of our largest trading partners....
There seems to be a view in some circles in the US and Australia that India can be used as a foil to contain China. That is absurd. India has an independent foreign policy; Delhi is one of the only 5 sovereign states in the world as Vladimir Putin put it. India is pursuing its own interests in a non-aligned fashion. I don't see any major change to the non-aligned structural basis of India's foreign policy. The states of the non-aligned movement played the superpowers off each other during the cold war. India continues the tradition. It makes a nuclear deal with Russia (also defence) and China there. A nuclear and defence deal with the US here. An energy deal with Iran, Burma, Russia etc.
India is pursuing its national interests in a non-aligned fashion. In addition India is not immune to the developments in Asia. India's future is in Asia, not the US. India doesn't want to turn into Pakistan i.e. a defacto neo-colonial dependency of the US.
We might recall that when in opposition Rudd said he didn't want Australia to be dragged into the "strategic vortex" of Northeast Asia. But that's exactly what he is doing.
Australia should be pursuing a cooperative security policy in Asia. Cooperative security is in sync with the emerging developments in the political economy of Asia.
Australia should have an independent and non-aligned foreign policy; like India.
Contact.
Categories
Archives
About the Author
Marko is also interested in philosophy, especially the theory of knowledge, and science, especially physics, and considers himself to work within the naturalist and enlightenment tradition. He is writing a book on nuclear terrorism.