Monday, March 19, 2012

Niall Ferguson's The Cash Nexus

In his 2001 book, The Cash Nexus: Money and Power in the Modern World, 1700-2000, Niall Ferguson argues that warfare has led to the development of contemporary governmental and financial structures by creating a need for efficient forms of taxation. Theories of the relationship between economic and politics involve some form of economic determinism. In one common version of economic determinism, associated with the work of Karl Marx and Friedrich Engels, governments simply reflect the power relations created by types of economic production. In a capitalist country, in which power is concentrated in the hands of owners of competitive business enterprises, political institutions express the interests of the owning classes. A major problem with this view of the relation between economics and politics, though, is that there are a great many variations among the political systems of capitalist countries.

In an opposing version of economic determinism popular with American policy-makers, healthy competitive markets create truly democratic institutions, rather than concentrations of power in the hands of a single class or group of people.  In dealing with post-Communist Russia, Eastern Europe, China, and the developing nations of the world,  diplomats and scholars have often maintained that liberalizing the economies of these nations will create more open societies. This, in turn, will gradually result in the emergence of democratic, participatory political structures.

Oxford historian and prolific author Niall Ferguson calls both versions of economic determinism into question. Ferguson begins by attempting to show that until recently the growth of the state and its fiscal institutions have been primarily consequences of warfare. War is an expensive business, he points out, although he contradicts common wisdom by offering evidence that it has grown cheaper over the course of the modern period. The royal and imperial governments of the world needed to find ways to fund their costly battles, and this meant the creation of new and efficient forms of taxation. Ferguson therefore turns to the history of taxation, tracing the development of indirect and direct taxation and other revenue-raising devices that enabled governments to pay for military expenses.  As direct taxation, such as income taxes, came to supply an ever larger portion of the funds, both bureaucracies and representative political bodies came into existence to varying degrees in different political contexts. Taxation, in other words, led to representation as a means of getting subjects or citizens to raise money from themselves.  However, as representative government became more entrenched and the vote spread to ever larger portions of the population, welfare began to replace warfare as the chief object of government spending.

Taxation is not the only way in which governments can raise money. They can also borrow it. For this reason, Ferguson moves from considering how political decisions about warfare stimulated taxation, political institutions, and governmental bureaucracies to a discussion of the evolution of the public debt. The section devoted to national debt contains some of the most technical information in the book, dealing with inflation, interest rates, and bond yields.  As the author points out in the introduction to his book, he considers the national debt to be part of a square of four governmental institutions.  The need to raise funds, for war and then other activities, gave rise to a professional tax-gathering bureaucracy, the first of the four institutions. Taxation led to representative bodies such as parliaments, the second. The third institution, national debt, involved the borrowing of money to spread war and other political expenditures over time. Central banks, the fourth institution, made it possible to manage national debts. Although Ferguson maintains that warfare stimulated the growth of these institutions, politics and economics are connected by the continual interaction of all four.

Having sketched the origins and nature of the institutions of political economy, Ferguson looks at the internal workings of modern national societies. He casts doubt on the Marxist division of societies into landowners, capitalists, and workers. Instead, he suggests that there are other lines of possible conflict. State employees, bond holders, welfare-recipients, and tax-payers have different and frequently opposing interests.  He also speculates that generations can provide a basis for interest groups, since young people entering the work force and old people who are retired or facing retirement benefit from different policies. In an intriguing chapter that Ferguson co-authored with Glen O’Hara, he questions the assumption generally made by politicians that success in managing economic cycles is critical to getting into office and staying there. Instead, he argues that success in getting into office is largely a matter of getting the funding to sway the voters and that this has brought new forms of corruption to contemporary democracies. Efforts to constrain political spending by providing public funds to candidates simply make the corruption worse, he maintains. Therefore, he recommends that the political market become a free market, with minimal public subsidies, no restraints on private donations, and competitive market wages for holders of political offices.

In the final five chapters, Ferguson moves from national to global issues, and he returns to the military themes that open the book. The historian Paul Kennedy is one of his particular targets in this last section. Kennedy argued in The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (1987) that when nations flourish economically they tend to over-extend themselves militarily in order to protect their markets and that military over-extension in turn leads to economic decline. On the issue of the possible extension of democratic government around the world, Ferguson argues that the relationship between economic growth and the spread of democracy is often more tentative than the free market economic determinists assume. The connection of economy and politics involves the interaction of all four of the institutions he has identified and the kinds of political institutions that emerge depend on how all four of these affect each other. He also sees dangers in political democratization. As societies with deep ethnic divisions move toward representative institutions, ethnic majorities often turn their new powers against ethnic minorities, who may take up arms in self-defense. Because international institutions, such as the United Nations, are usually ineffective in intervening to protect the endangered minorities, only stable democracies with strong militaries can do so. Stable democracies, then, need powerful militaries in project their political will and maintain international order.

The need for military capacity on the part of nations such as the United States is undermined by the logic of domestic democracy, Ferguson believes.  Citizens who control their own national resources are generally more interested in using these resources for their own welfare than in using them for military spending.  However, only active, militarily powerful nations can control international tendencies toward civil war and maintain the international order needed for global markets. The danger facing contemporary world powers, then, is not “overstretch,” as Paul Kennedy has argued, but “understretch.” By devoting too many resources to domestic well-being and too few to the strength to act on the international stage, the United States, as today’s global superpower, puts at risk the markets that make its well-being possible.

This is an intriguing book, but it does require some dedication to follow the reasoning from beginning to end. Ferguson’s argument often sags under the weight of his erudition. At times, he seems to be trying to explain everything related to economic history by citing every book he has read, and he is extremely well read. The breathless narration of facts and quotations is impressive, but it can leave the reader dizzy and uncertain just how some of the passages connect to the central argument. 

The discussion of the role of warfare in promoting the emergence of modern economies and political systems is intriguing, but it may overlook other vital historical forces. For example, Ferguson devotes relatively little attention to the contribution of technological change to the expansion of both productivity and government.  Advances in machinery and techniques can increase quantities of goods available. Advances in transportation expand the geographic scale of economic activity, create national and international markets, and encourage regional specialization.  Larger markets with more goods mean a larger surplus for governments, to wage war and set up welfare programs.  The markets made possible by advanced technologies also create demands for governmental involvement in economies to ensure stable monetary systems, cushion economic cycles, and help maintain relatively contented workers.

Ferguson’s “understretch” argument may put too much confidence in the ability of the United States to influence contemporary world events. This book was published before our long and frustrating experience in Iraq and Afghanistan. Further, if the well-being of citizens is a measure of the success of a nation, it may be wise to avoid placing too much emphasis on international power.  Finally, Ferguson does not seem to recognize that directing funds away from military spending can have great economic benefits for a nation. Much of Japan’s post-war economic rise, for example, was apparently due to the fact that the military umbrella of the United States enabled it to concentrate its national resources on trade and industry, rather than on defense spending

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