The Other School of Economics

Book review: “The American Empire and the Political Economy of Global Finance”

This post continues the conversation started here on the complex relationship between ‘the American Empire’ (perceived or real) and global finance.  “American Empire and the Political Economy of Global Finance” published by Palgrave MacMillan is a marvellous book that demonstrates the American state’s central place in today’s world of globalized finance. While US military interventions draw most attention to the imperial nature of the American state, the highly original contributions here show how US power is embedded in the structures of global finance.

In the Globalisation process, markets are supposed to be neutral

Two opposite views usually conflict over the analysis of  the relationship between states and markets in the process of globalisation.
On one hand the perception that economic and financial globalization has been undermining the power of nation-states, including that of the US state.
On the other hand the belief for some that the globalisation of financial markets is a neutral process: ie. laws of economics work on the premise that markets are neutral structures. They operate in a depoliticized realm of economic mechanism and need to be left by themselves with as little intervention as possible (the ‘laissez-faire’).

For the supporters of free market this supposed ‘neutral quality’ enhances the legitimacy of globalisation compared to the old age of state intervention, nationalism and imperialism.

However for the critics of neoliberal globalisation, the point is precisely to look behind the neutrality of appearances, i.e. to decode institutions and to conceptualize the patterns of economic power and imperial domination shaped through them.  This is exactly what ‘The American Empire and the Political Economy of Global Finance’ published by Palgrave Macmillan does.

It analyses “how the institutional framework of American finance shaped the system of global finance in the first place as well as how the institutional linkages between the American state and the structural power embedded in the system of global finance have functioned to enhance the power of the US state.”

To be clear, to say that the US influence and dominate the world is indeed not new.  The originality of this volume is to go beyond the usual treatment of the US state’s formal institutions and official representations:  It goes beyond the usual representation of US military interventions, or dominant multinational  corporations. Instead it looks  at how each of the US finance institutions has established linkages with their equivalent in the global world and shaped them to their image. It shows how the US first developed domestically a set of highly distinctive financial practices and institutions and how those later shaped the global financial system.

The origin of the imperial nature of US capitalism

The authors start by looking at how America developed as an internal empire first, before become a new type of external empire in a second phase.

Long before the US was an imperial power in the world it was an imperial power at home. In the 19 century its expansion was marked by speed and rapaciousness that had few precedent in history. This internal expansion was a project to create a new kind of society, breaking away from the Old World: personal autonomy, civic virtues could only be preserved in a republic based on independent yeoman production.

It meant that US settlers were much more connected to markets that European farmers: they understood that to avoid dependency on feudal relations of authority they had to secure independence through the use of market mechanisms.

Fierce independence also meant little taste for centralisation: the federal banking system was only created during the civil war, the Federal reserve in 1913!

The process of getting comfortable with this financial view of society did not happen over-night, but finally after the consolidation of corporate capitalism and the defeat of populism’s programs for a producer’s republic at the end of the 19th century, popular concerns regarding credit shifted towards issues of consumption and distribution.

The building of the nation’s infrastructure and businesses served to embed financial relationship even more deeply into American life. Consumption and consumer credit once a potential arena of political contestation became a world of endless economic opportunities.

Wall-Street, 1911 – pic source: old-picture.com

The age of the empire

The development of the American dream also created a new type of empire – not based on geographic expansion as the European cousins had done in  the past – but on an inward intensification of material life. Financial Markets  - as opposed to traditional and slower trade and commerce – were going to be the means of realizing it. (attention: of course, we are not saying that trade and commerce did not take place in US development, we are saying that Finance took a much important role than ever before)

But building an empire is costly. To do so, much liquidity was needed.  The US economy needed to channel inflows of capital and imports of commodities as well as its own exports.

The US needed to sell dollar debt in order to borrow and to keep consuming. And the internationalisation of American finance provided the mechanism to do this: it had the effect of creating a highly integrated and liquid financial structure that bore the stamp of specifically America practices and institution and was shaped by American techniques to sell this dollar debt. US treasury, Federal Reserve, Bond markets all influenced  the way things relevant to them domestically were to be run globally.

Mobile financial markets promoted the neoliberal restructuring and integration of other economies  to make the empire easier to manage. In the process, finance evolved far beyond its classical role of credit provision and was placed directly at the heart of the accumulation process, “essentially introducing a sector that straddled credit and production”. Financial services were packaged with tasks performed by other sectors: payroll, accounting, information systems, consulting and distribution (think of FedEx or DHL).

Indeed… 1+1=2 accounting was going to be changed too

The field of accounting provided an unexpected illustration of the case in a powerful manner. You would think that the law dictating that 1+1=2 is fairly immutable, bar a few adjustments to arbitrage various tax regimes. As the attached chapter shows, think again.

As financial markets developed new accounting standards reflecting the transition from a bank-based to a market-based financial system.

In the paper enclosed below we see how rules moved from ‘the cautious representation’ of a company’s income, assets and liabilities to the ‘fair and true representation’.

This seemingly subtle change of semantics is actually a revolution. It means that the emphasis of accounting standards is shifting from the prudent prevention of the debtor’s bankruptcy to the riskier interests of financial investors operating in securities markets, as ‘fair representation’ tends to produce higher profits than ‘cautious principles’.

But rather than paraphrasing  the authors, I let you read the chapter below.

The non expert readers will enjoy the first 3 pages and the conclusion, while accountants might want the full read.

{ leLaissezFaire }

> link to the full screen version: http://www.scribd.com/full/42306379?access_key=key-2nrcnbrtor82ka422axd

> Embedded version:

Accounting for Financial Capital – Sablowski