By: Joseph Halevi and Yanis Varoufakis

1. Two seemingly unrelated questions
It is now common in Europe and Japan to consider the USA as the economic
model in need of emulation. With their economies continuing along the road of
prolonged stagnation, European and Japanese (mainstream) commentators
are busily seeking out the causes of their economies’ malaise by comparing
their micro-structures with that of the US economy. Even the recent savage
downturn in the US seems incapable of stemming this trend. In Europe, just
as in Japan, prestigious commentators incessantly highlight America’s
comparative advantages viz. the flexibility of its labour market and the
atomistic (as opposed to corporatist) entrepreneurial culture (which is, we are
told, deeply entrenched in the collective US mind). Such narratives have
become the foundation of mainstream explanations of the USA’s relative
dynamism, in contrast to the unwieldy non-angloceltic miracle economies of
yesteryear.
No one, however, seems to be remotely interested in explaining why Japan
and Europe have been led to such dire straits by the very features (a
regulated labour market and corporatism) which used to be hailed as the
hallmarks of their immense economic success in the 60s, 70s and 80s. It is as
if no one recalls how the Japanese or German success stories were being
scrutinised in US business schools for decades, seeking clues on what went
wrong in America. The best analysis we get on this score are a series of
mutterings about the paradigmatic shift caused by new technologies and on
how the ‘new economy’ has condemned the Euro-Japanese corporate model
of development to the scrapheap of economic history.
1 Joseph Halevi (j.halevi@econ.usyd.edu.au) teaches Political Economy at the
Universities of Sydney and Grenoble. Yanis Varoufakis (yanisv@econ.uoa.gr)
teaches Political Economy at the University of Athens. We would like to thank Niko
Papandreou for some very helpful comments.
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So, this is our first question: What happened to turn Germany and Japan from
success stories to, putting it impolitely, ‘basket cases’? How did the US
economy recover from its sluggish performance to regain its competitive
edge? Our second question seems utterly unrelated: Why has Germany, and
of course France, embraced the Peace Movement before and during the
latest Gulf War?
In what follows we begin with the premise that neither of these questions can
be understood in terms of mainstream narratives on economics and politics;
that the causes of the present situation are to be found neither in the
microeconomy of the world’s three leading economic zones (US-Europe-
Japan) nor in the sphere of political ethics and diplomacy. We suggest,
instead, that (in the spirit of Magdoff, 1978) useful insights on these important
issues can only obtain when we adopt the broader political economy
perspective which takes seriously the form of globalisation guiding the
international economy ever since the US gained the upper hand and emerged
as the dominant force within Western capitalism.
2. The first phase of the post-WW2 era: A Grand Global Design
The United States came out of WW2 as the major and, in fact, if one excludes
Switzerland, the only creditor nation. For the first time since the rise of
capitalism, all of the world’s trade relied on a single currency and financed
from a single epicentre. Recognising this remarkable opportunity at achieving
unhindered dominance (and, of course, taking on the USSR; a non-capitalist
economic entity which, at the time, the best western economists thought of as
a miracle-in-the-making), the United States took upon themselves the role of
reconstructing the capitalist world. The grandiose project soon acquired two
strands:
First, American policy makers were keen to end the dollar’s monopoly as the
world’s single convertible currency. This monopoly was undesirable because
a world trade system relying on a single currency (supported by a single real
economy which is only a subset of the global economy) is inherently unstable
and prone to major upheavals during the unsavoury parts of the business
cycle. Initially, they toyed with the idea of propping the pound-sterling up and
using it as a potential shock-absorber for the dollar-zone. However, with
sterling’s collapse in 1947, US officials gave up on this idea.
Instead, they favoured, propped up and cajoled the rise of two important
supporting pillars for the dollar: one in Europe (the Deutschmark) and one in
Japan (the Yen). According to Schaller (1985), the architects of post-war US
globalism were three men: James Forrestral (then Secretary of the Navy),
Secretary of State Byrnes, and George Kennan. In their eyes, extending credit
to Europe and Japan was to become a crucial component of US policy as it
would enable these two zones to buy technology and energy products,
fundamentally oil,1 as well as to attract and utilise (often) migrant labour.2
The choice of Germany and Japan seemed entirely logical. Both countries
had been rendered dependable (thanks to the overwhelming presence of the
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US military), both featured solid industrial bases (including oodles of human
capital), and both offered considerable geo-strategic benefits vis-à-vis the
USSR. Britain had to experience the Suez Canal trauma (and the
undermining of its colonial rule in Cyprus by the CIA) before realising this turn
in US thinking. It was at that point that successive British governments began
clutching at straws; namely, the ‘Special Relationship’, which turned the UK
into a minor executor of US policy in exchange for privileged access to the US
market for British multinationals and the City of London.
Secondly, the creation of the two non-dollar currency zones was to be
underpinned by political measures to ensure the parallel creation of free-trade
areas within these zones so as to carve out crucial vital space for the real
economies ’growing around’ the new currencies. This strand of the project
developed quickly into what eventually became the EU in Europe. In Japan,
Mao’s victory curtailed its application. Although the yen and the Japanese
economy were bolstered inordinately by successive US administrations,3 the
vital space that the yen required in mainland China was effectively denied it –
until it was too late (see Schaller, 1985, Forsberg, 2000). Instead, the wars in
Korea and Vietnam surreptitiously engendered an imperfect, yet still
significant, zone within which Japanese trade found space to grow for at least
forty years (see Rotter, 1987).
The post-war reconstruction of the capitalist world, once these two vital zones
(Europe and Japan) were set up, was based on the ability of the United States
to extend credit and finance, partly through American multinationals,
particularly to Europe and to Japan (Britain was an exception for reasons
alluded to above). The main function of this generous credit policy was to
allow Europe and Japan to overcome what was then called the ‘dollar
shortage’; a problem that was not eliminated until the mid-1950s (see Halevi,
2001). At that point, the US realised that it was not enough to have ‘stabilised’
Europe (with the persecution of the Greek civil war, the appeasement of
Franco and the Portuguese regime, the safeguarding of the iron curtain’s
impenetrability) and Japan (through a long and comprehensive occupation).
Having financed these two zones sufficiently for them to be able to pay for
their inputs (through the Marshall plan in Europe and war-financing during the
Korean conflict in the case of Japan, see Hart-Landsberg, 1998), the US felt
the need to mobilise in order to guarantee low prices and a constant flow of
such (energy and raw material) inputs to these two zones. The loss of China,
the trials and tribulations of Latin America, the liberation movements in SE
Asia (against the French), the stirrings in Africa – all these developments
enticed the US into developing an aggressive stance against liberation
movements in the Third World (identified with the threat of rising input prices).
In short, the US took it upon itself to relegate the periphery, and the Third
World in totto, into the role of supplier of raw materials to Japan and Western
Europe. In the process, American multi-nationals in energy and other mining
activities were doing good business. As for the US domestic economy, there
were crucial, beneficial after-effects. During the 1960s domestic crises were
largely averted through three large public expenditure programs, two of which
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were closely related to US global strategy: The ICBM program and the
Vietnam War.4 Both strengthened US corporations belonging to the military-
industrial program and each contributed heftily to the development of the
Aeronautic-Computer-Electronics complex (ACE); an economic powerhouse
largely divorced from the rest of the US economy (see Markusen and Yudken,
1992; Melman, 1997).
Nevertheless, we shall dare speculate that, in the US officials’ minds, these
were merely hugely desirable by-products of their main policy [namely, of
guaranteeing energy and input supplies (at favourable prices) for the
reconstruction and development of Europe and Japan]. As Forsberg (2000)
shows, the United States did not hesitate to introduce harsh regulations that
ultimately discriminated against American multinationals. Their top priority
was not to benefit them directly. The wars in Korea and Vietnam had as their
major task the continual supply of cheap raw materials to Europe and Japan.
The fact that American multinationals benefited too was a pleasant side-
effect.
Interestingly, there was another by-product, possibly one that the US had not
intended at the time (an issue that future historians must elucidate): The
creation, through war financing, of the vital economic space that Japan was
so far lacking: the SE Asian countries and their, so-called, Tiger economies
(see Rotter, 1987). At this point it is worth recalling that, without these wars,
countries like Korea, Thailand, Malaysia and Singapore would have remained
utterly underdeveloped and the USA would be Japan’s only market (taking
into account her partial exclusion, agreed upon between Europe and the US,
from European markets).
3. The second phase of the post-WW2 era: Unintended
Consequences bear a New Design
The above thoughts lead to a re-assessment of post-war US dominance from
the perspective of the USA’s balance of payments in relation to the rest of the
world. The starting point was a large scale, and impressively ambitious, effort
to overcome and to supplant the multiple, conflicting imperialisms that
characterised the world political economy until WW2. The all-encompassing
destruction that the latter brought to Eurasia and Japan enticed the US to
attempt that which had not been attempted before: Global domination of
capitalist markets.
As argued in the previous section, while seemingly in competition with the US,
the economies of Germany and Japan were aided and propped up for at least
35 years, sometimes through painful US sacrifices. Was this a form of
internationalist altruism at work? The more one considers the long-term
interests of American accumulation the less credible the altruistic explanation
seems. At the heart of US thinking was an intense anxiety regarding the
inherent instability of a single-currency, single-zone global system. Indeed,
nothing concentrated the minds of 1950s US policy makers like the memory of
1929 and the ensuing crisis. These same minds saw an interdependent
network comprising three industrial-monetary zones, in which the dollar-zone
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would be predominant (reflecting the centrality of American finance, and its
military defence of the realm in the sphere of securing inputs from the Third
World), as the optimal mechanism design for the rest of the 20th century and
beyond.
In this sense, and if our analysis is correct, the notion that European
integration sprang out of a European urge to create some bulwark against
American dominance appears to be nothing more than the European Union’s
‘creation myth’. Equally, the idea that the Japanese economy grew inexorably
against the interests of the US needs serious re-examination. Economic
historians agree (regardless of ideological perspective), that the US played a
central role in supporting the process of European integration and of
Japanese export-oriented industrialisation (despite the latter’s detrimental
effects on the US balance of trade).
Of course, this does not mean that American policy makers were either
omniscient or omnipotent. Their best-laid plans often led to disaster. But even
when they did fail dismally, these failures proved rather ‘creative’, in the sense
that they brought about developments neither wholly undesirable nor
historically insignificant. We have already, for example, argued that the
persecution of the Vietnam War did not go according to plan. However, the
silver lining, from the US policy makers’ perspective, is visible to anyone who
has ever visited SE Asia. Thailand, Malaysia and Singapore grew fast and in
a manner that frustrated the pessimism of neo-Marxist critics of the under-
development school (who had predicted that no genuine development of Third
World countries in possible under US-led monopoly capitalism). However,
there is little doubt that these industrial miracles were instigated by US war
spending as a consequence of the lengthy, tragic conflict in Indochina. Just as
Japan’s economy grew on the back of US military spending during the Korean
war, the tigers of SE Asia were the offspring of enormous investment, paid for
from the US military budget, during the Vietnam war (see Hart-Landsberg,
1998).
Similarly with the oil crisis of the 1970s where things did not go, as we shall
argue below, the way the US had planned. However, while developments did
get out of hand, US policy makers managed, nevertheless, to snatch an
important array of victories from the jaws of catastrophe. To tell this story
properly, we need to start, again, at the Vietnam War. The military spending
that was responsible for the development of SE Asia into a type of later-day
Japanese vital zone was also the reason for America’s gigantic balance of
payments deficit; a deficit that, besides its local effects in SE Asia, provided
much of the Keynesian boost that brought us the prolonged post-war boost
(starting with the Korean war onwards).
As we all know, this balance of payments deficit grew beyond any sustainable
level reflecting the extent to which the Vietnam War was confounding the US
military’s best efforts. With the dollar under inordinate pressure, President
Nixon was forced to give up on the stable parity of the dollar to gold, as had
been determined in the Bretton Woods agreement. Although US policy
makers always felt that the US could afford, as long as it retained its political
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dominance within the ‘Free World’, a sizeable balance of payments deficit, the
war in Vietnam had taken it too far beyond the pale and into the deep red. The
unexpected successes of Ho Chi Minh might have, supra-intentionally been
the cause of the industrialisation of SE Asia (courtesy of US war-financing).
However, the alarms were ringing furiously in Washington; especially in the
Finance department and the Fed. From the late sixties onwards, the brightest
and the best US policy makers sought ways and means to address America’s
balance of payments problem,
As the financial position of the US was deteriorating, the continuing growth of
the two main non-US capitalist centres (Europe and Japan), while part of the
USA’s post-WW2 Grand Design, began to lose its appeal in Washington. The
American quagmire in Indochina was giving rise to two antagonistic effects.
On the one hand it was generating the quantitative conditions for global
growth but, on the other hand, it was creating acute rivalries between the US
and its two major protégés (Europe and Japan) in the context of the former’s
balance of payments deficit and the ensuing pressure on the dollar.
In his 1982 memoirs Henry Kissinger said quite categorically that the push to
increase oil prices came from the US. It is now well accepted (see
Oppenheim, 1976/7) that Kissinger’s memoirs impart quite accurately the
manner in which US decision makers seized upon the OPEC-imposed
embargo to push for a sharp increase in oil prices, well beyond OPEC’s
planned price rises. The aim was to redress the balance of payments situation
between the three major zones: the US, Europe and Japan. The basic
assumption here was that, in the estimation of the US authorities, both Japan
and Western Europe would find it much harder than the US to deal with a
significant increase in oil prices.
As it turned out, this policy backfired. In the same way that Washington had
underestimated in the 60s the resolve of the Viet Cong, in the 70s they
underestimated the chain reaction that their meddling in oil prices would
cause within the fledgling OPEC and against the background of the tensions
that the Israel-Palestinian conflict had only recently brought to the region. Yet
again, however, the US managed to extract advantages out of a major self-
made crisis. To be precise, the US succeeded in reducing its balance of
payments deficit. Indeed, by the end of the 70s, it had been eliminated almost
fully. How did the immense hike in oil prices do this?
Note that during the 1970s, and while the US balance of payments was
improving, the balance of trade remained deeply in the red. However, the
situation with the balance of payments was being reversed as a result of a
massive strengthening of the USA’s international financial position. In short,
the US managed to attract capital from the rest of the world as the latter was
sinking inexorably into stagflation. As international capital was seeking refuge
into the US, the latter could afford not only to continue with a balance of trade
in deficit but, in fact, to allow its trade balance to deteriorate further.
A second silver lining, for the US, following the uncontrollable rise in oil prices
in the 1970s, was the massive rise in interest rates spearheaded by spiralling
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inflation. As central banks struggled to keep the lid on prices, interest rates
went through the roof. Setting aside, for the moment, the world-wide,
overwhelming recessionary effects of this development, the rise of interest
rates world wide were more effective in destroying the enemies of US foreign
policy around the globe than any military operation the US could ever
imagine. Arguably, the chain of events that led to the implosion of communism
in Poland and Yugoslavia began in the 70s with the sharp rise in interest rates
soon after these countries had accepted offers of substantial loans from
Western financial institutions. Similarly with Third World countries in which
national liberation movements had grabbed power against the better efforts of
the US, borrowing on the international market for the purpose of underwriting
much needed new infrastructure: their economies were to be plunged in a
crippling debt crisis following the rise of interest rates from 3% to 30% in a
few, short years. In fact, they never quite recovered ever since.
As with the rising oil prices, similarly with the bourgeoning interest rates: the
US economy (although hit hard itself by the recession brought on by the rises
in the prices of oil and money) improved its relative financial position viz. not
only Europe and Japan but also the Third World and its Communist foes. By
the early 1980s, under the Reagan administration (including the Chairman of
the Fed), US policy fully endorsed this new reality and a consensus emerged
that the balance of payments ought not be the focus of attention any more;
that what mattered was the strength of US finance, founded upon the strength
of its multi-nationals, particularly in the energy sector, and on the ability to
make the dollar accepted internationally (without any form of concrete
payment behind it).
In simpler, albeit more emotive, terms, the new era that began in the early
1980s is marked by the transformation of the world economy into a periphery
from which the United States imports huge quantities of goods with little
concern for its balance of payments. Of course, this periphery is no
homogeneous magma. It is, rather, a well-structured realm, complete with two
powerful currency zones (Euro-land and Japan-SE-Asia), which US policy
makers alternately bolster or undercut, in response to their assessment of the
situation ‘on the ground’ and, naturally, their evolving overarching objectives.
Basically, the United States pays for its deficit (to the rest of the world) by
issuing bonds and treasury bills or by attracting capital through its stock
exchanges. This is the way in which the traditional concern (of what to do with
the deficit) was dealt with. Low US inflation is pivotal to this strategy. For
unless it is kept at close to 1 or 2%, the capacity of the US economy to attract
capital would be undermined. (This is because, if there is relatively high
inflation, the asset values and financial assets purchased by incoming capital
will decline in value.) So, from the early 1980s onwards, the main game in
Washington was how to underpin the strengthening of US financial capital
through the creation of a highly deflationary international environment.
By extension, the rest of the world supplies the US with commodities at non-
inflationary prices and, meanwhile, the US does not have (unlike every other
country, including Europe and Japan) to deal with its deficit. This is very
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similar to the situation that Britain established in relation to India. From the
end of the 19th century until the Great War, Britain ran a huge balance of
payments deficit. The way it managed to maintain it was by having India
export to the rest of the world and by taxing away, in one way or another, the
surplus that India generated through its exports. These capital flows and taxes
made it back to the City of London thus clearing the deficit. This is the model
that the US have been emulating in the last twenty years. Instead, however, of
using this policy viz. a single country (as Britain had done), they applied it to
the rest of the world (especially so after the collapse of the USSR and its
satellites).
A brief perusal of the Fed’s research papers over the past ten years
convinces the reader that the US authorities see the greenback as a strategic
asset. The drive to dollarise whole foreign economies, especially in Latin
America, is to be understood as part of the same mindset. Dollarisation
means that the US dollar becomes the country’s de facto local currency. The
main effect, from the US perspective, of this move is that the demand for
dollars all of a sudden depends not only on the international transactions of
other countries but on the domestic transactions of the dollarised economies
as well. This gives the US added political leverage and reduces further the
pre-occupation with external debt. The reason is simple: As dollars are now
being increasingly demanded by foreigners also for their own domestic
purposes, the USA’s balance of payments plays a decreasing role in shaping
the dollar’s value in the international money markets. (See Halevi, 2002.)
To recap, the Vietnam War put a great deal of strain on the model of world
dominance that the US had been utilising since 1947. As the cost of waging
carnage in Indochina was exceeding its planned levels by a huge margin, the
capacity (and willingness) of the US to finance, while controlling, its two
creations (the Yen and the Deutschmark zones) began to slip. The balance of
payments problem intrinsic to this model demanded a new solution; one that
involved a redistribution of finance capital away from the Yen and the
Deutschmark zones and back towards the Angloceltic nexus. Of course, the
shift could not be too sudden since the greenback’s two pillars (the Japanese
and the European economies) remained, and still are, essential to the US for
their shock-absorbing and effective demand enhancing qualities.
Continuing with our recap, US officials understood well that the only way in
which the USA could avoid deflating in order to adjust its external balance
was by compelling the rest of the world to keep financing the US deficit. Such
redistribution of finance capital resembled London’s strategy for maintaining in
perpetuity a large balance of trade deficit with India. The simple implication of
this is that the US imposed on the rest of the world the role that India played
vis-à-vis the British Empire. Tragically, there was a snag: Unlike India, which
could export to the rest of the world, and thus generate the balance of trade
surplus which the British would subsequently plunder, the rest of the world
cannot export to the rest of the world!
It is in this sense, we claim, that Washington has been pursuing a policy of
global deflation. For in the absence of inter-galactic trade, the only way that
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the US can make the rest of the world accept a perpetual redistribution of
finance capital is by enforcing, and by recapitulating, its international role in
crucial areas. Two crucial areas in which the US placed much emphasis are,
of course, the energy and the environment sectors. In the meantime, much
effort was put into maintaining the divide and rule policy (e.g. the project of
keeping Europe politically divided while monetarily united) that would ensure
US continuing control over the areas that might politically impinge on its
domination of world finance, energy and environment. In all these areas, US
policy has been ruthlessly to promote American ‘comparative advantage’,
which is shorthand for American supremacy.
4. The New Design’s Geo-Politics
The capacity of the US to pursue its post-Vietnam Global Design depends on
its capacity to maintain a steady flow of capital from the rest of the world to
the USA. This capacity in turn hinges crucially on its political dominance over
the rest of the world. Ferguson and Rogers (1986) foreshadowed this when
they wrote that: “…even as military assistance and arms sales rocketed
upward in the 1970s, many American business figures pressed for an
enhanced American capacity for direct intervention abroad” (p.97).
Anyone who read Richard Perle’s (a long-time US ambassador, including to
the UN, and currently advisor to the Bush administration) 1997 report to
Israel’s then Prime Minister-elect B. Netanyahu [entitled “A Clean Break: A
new strategy for securing the Realm”, see www.isrealeconomy.org/strat1.htm]
will immediately recognise the author’s emphasis on the nexus between geo-
strategical concerns and the imperative to secure privileged access to oil.
Even if the US did not need a monopoly over middle-eastern and central
Asian oil for itself, it would wish to control it in order to guarantee its finance
centres a steady flow of petrodollars.
In an ironic sense, the latest war in Iraq might not about the oil per se. It is
about ensuring that, whoever controls it, buys and sells it in US dollars
through the New York commodities exchange.5 For it is this flow of finance,
and to a much lesser extent the ownership of oil, which enables the US to
continue its policy of world dominance through an unbounded balance of
payments. (Of course the fact that the oil will be taken over in the post-
Saddam era by Bush and his Texan friends does not reduce the US
administration’s enthusiasm.)
In November 200 Richard Hass, the current director of Policy Planning in the
State Department, strengthened our argument by writing an essay advocating
that the US adopt an “imperial” foreign policy. He defined the latter as “…a
foreign policy that attempts to organise the world along certain principles
affecting relations between states and conditions within them.” This would not
be achieved through colonies but through what he termed “informal control”
which would require military might (if necessary). Global mechanisms such
as international financial markets, the WTO, the IMF etc. were earmarked as
essential devices for ensuring the dominance of US interests, with the military
iron fist backing up the invisible hand of the market.
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To give an additional example of the nexus between military dominance and
the USA’s economic comparative advantage, it is useful to recount the
testimony given to a Congressional hearing on Afghanistan in 1998 by John
Maresca, Vice President of oil giant UNOCAL (see Maresca, 1998). In a
cheerful prophesy of the 2001 war in Afghanistan, Maresca outlined a
rationale for a US invasion of Afghanistan and a future take over Central
Asia’s natural resources. His argument turned on Chinese economic
development which has to be, in his view, both abetted and controlled (just
like Europe’s and Japan’s economic development was after WW2, we might
add).
Maresca implied that, unlike Japan and Europe, China will not willingly
liberalise its capital account and, therefore, that the flow of capital from China
to the USA will be impeded. In simpler words, profits by Chinese, Japanese
European and, of course, US companies operating in China will not be readily
transferable to the US, Maresca lamented. Even though Maresca did not spell
it out, he was hinting strongly that China’s refusal to allow for free capital
movements to the US was certain to impede the process of financing the US
deficit from the emerging giant. The best way to overcome China’s
recalcitrance, Maresca explained, would be to monopolise the supply of
energy in its vicinity. It does not take much genius to see that if China’s
energy supplies are indeed successfully circumscribed, and placed under the
control of US companies, it would be easier for the US, via the WTO, IMF etc.
to force China’s hand and earn concessions on the freedom of China-
generated capital to flee to New York.
Moving, for a moment, beyond wars and oil, President Bush’s first salvo
against an earlier global consensus concerned the Kyoto protocol. The
connection between US policies on energy and the environment is evident but
it would be a mistake to think that it is merely a matter of pursuing the
interests of US financial and energy corporations. The anti-green streak of the
current administration runs deeper and is related to broader US objectives.6 In
recent years, after stubborn resistance to the idea that the Greenhouse Effect
is real, the US administration finally accepted the evident truth: the climate is
changing as a result of the greenhouse effect. However, Instead of rejoicing,
environmentalists were incensed. Why?
The reason is that the said acknowledgment was not accompanied by a
sense of urgency regarding the need to reverse the effect of global warming.
Indeed, the opposite eventuated. Circles in Washington have been
canvassing for the last year or so the view that global warming might be bad
for most parts of the world but not necessarily bad for the US. There is,
indeed, speculation that US agri-business will benefit from an increase in
global temperatures because, according to estimates based on large scale
computerised simulations, the productivity of American agriculture will rise as
long as genetically modified seeds are utilised extensively. Meanwhile, with a
declining world food production, US ‘comparative advantage’ is predicted to
strengthen. Once more, the US appears to the rest of the world as completely
obsessed with the project of remaining unimpeded by its balance of trade
deficit; even at the planet’s expense.
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In summary, the New Design seems to revolve around the axis of control over
energy sources, as well as environmental change, with an explicit view to
enhancing the USA’s capacity to draw capital flows from the rest of the world
and thus avoid domestic crises due to the growing indebtedness of US
families and businesses. If this requires global military campaigns and the
alienation of world opinion on matters of global importance (e.g. the
environment, world peace), this is deemed a small price to pay for a huge and
steady windfall.
5. The New Design’s Political Repercussions
Many of us wondered why George W. Bush’s infantile State of the Nation
speech (2003) sparked off a standing ovation even by Democrats opposed to
him; e.g. Hilary Clinton. The conventional wisdom is that this is the done thing
and American patriotism is a funny creature that allows a Democrat like
Clinton to look George W. Bush’s and see, not an inane opponent, but rather
the President of the United States. Be that as it may, this cultural idiosyncrasy
cannot extend to the manner in which foes of the Texan oil brigade have kept
such an eerie silence. Although the majority of US senators have no direct
financial interest in the Great Iraqi Oil Robbery, they all feel quite strongly
about preserving the flow of foreign capital through the centres of American
finance. Perhaps, from their perspective, the Butcher of Baghdad’s worst
crime was to nominate, back in 1998, the Euro as the currency in which Iraqi
oil is to be traded!
Of course, the fact that the US political establishment seems to fall into line
behind the New Design does not mean that the benefits from the latter are
distributed evenly among the American people. Indeed, if we look closely, the
US economy is highly segregated between a sector connected to the
aeronautic-computer-electronics (ACE) military-industrial complex and the
rest of the US economy; a division which is apparently increasing fast (see
Markusen and Yudken, 1992). Interestingly, although the comparative
productivity and competitiveness of the ACE-linked sector vis-à-vis European
and Japanese economies is rising, the rest of the US economy is falling
behind (relatively, again, to Europe and Japan). Moreover, the former is
severing its links with the latter, thus enhancing the inequality between jobs,
incomes and opportunities between the two Americas: the one connected to
ACE, thus prospering, and the one that is not.
Put simply, the US latest economic miracle has nothing to do with the
flexibility of its labour markets and the entrepreneurship of the average
American; it is simply a direct product of industries that grew out of its global
geo-strategic hegemony. Who are the pillars and, at the same time, the
beneficiaries of this strategy? One thing we know for sure is that the
beneficiaries are not the average Americans. In fact, never before have so
few Americans had so much while the many had to survive on so little (see
Galbraith, 1998, and Varoufakis, 2002). No, the beneficiaries are three
sectors of the US economy: energy multinationals (mostly oil companies), the
financial institutions handling the capital flows from the rest of the world, and
the ACE industries hooked into the US military. As for the rest of the US
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domestic economy, and the rest of the world, they are in a state of permanent
crisis.
The question is: How have US policy makers managed to maintain political
control over this global design? Starting with Japan, we must not forget that
the US recreated, on the ashes of Imperial Japan, a nation with a political
apparatus which was entirely new to the country. The loose two-party state
imposed by the US administration, and effectively written into its constitution,
had been designed to prevent any significant influence of politicians on policy.
The Japanese bureaucracy is powerful, largely efficient and autonomous.
Thus the people of Japan have become the last Japanese colony, ruled over
by a class of governmental entrepreneurs whose political ambitions are non-
existent. While this model provides stability, conformity and is conducive to
speedy economic development at times when demand from the US is high, it
is utterly incapable of instigating change, of giving voice to the political
aspirations of the Japanese masses, and even of mapping out an
autonomous Japanese trade or finance policy.
To give two examples, the US had ensured that, following the rise of SE Asian
‘tigers’, Japan would be selling Korea, Malaysia and Thailand technological or
capital goods (usually through the transfer of superseded production lines).
Interestingly, most regional trade was bilateral (as opposed to tri-lateral): SE
Asia was trading directly with the US and so was Japan. By contrast, the flow
of final goods between SE Asia and Japan was minuscule. In other words, the
US (either willingly or unwillingly) prevented Japan from establishing an
economic zone around it similar to that enjoyed by Germany in Euro-land.
When, following the 1997 crises, Japanese officials realised the lost benefits
due to their failure properly to integrate SE Asia into the Japanese economy,
they tried to make amends. Alas, the US denied Japan the instruments as
well as the opportunities to alter the situation substantially.7 The world
economy (excluding the US) being in permanent deflation, Japanese factories
have no means of making use of their huge capacity and thus the Japanese
economy finds it impossible to transcend a state of perpetual recession.
This makes Japan even more dependent on exporting to the USA. US officials
allow Japanese firms access to American consumers but at a hefty price:
Japan must forego any plans at becoming a foreign capital importer (in
competition with the US). In practical terms, it is forbidden from developing its
own international financial policy or from establishing new international bodies
for the minimisation of financial volatility – especially in South East Asia. It is
therefore wholly unsurprising that Japanese politicians dare not speak out
against US policy at any significant level.
Of the two zones created by American fiat in 1947-1955, Europe (that is,
mainly the Franco-German axis) had a great deal more integrity than Japan,
since its industrial capital base was integrated early on (via the Common
Agricultural Policy and other EEC, now EU, funding mechanisms) with non-
industrial sectors which, though low in productivity, could (and did) become
sources of demand for European industrial goods. Over the period 1947 to
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1995, the US made (what seemed as) significant economic sacrifices in order
to promote initially the deutschmark and later economic and monetary union.
Whenever the German currency showed signs of weakness (as for example
in the 50s and 60s), the US bought deutschmarks in solidarity with the
Bundesbank. And when the deutschmark appreciated too much, they helped
bring it down in solidarity with German industry, even if doing so harmed
American companies.
On the political front, the EEC’s expansionist agenda (e.g. to engulf Greece,
Spain and Portugal in the early eighties) was aided and abetted by the US via
NATO. So, a reasonable observer would surmise that the US had been more
than friendly toward the ‘European Project’. Cynics might add, not without
justification, that European unity was indeed an American project; that
America thought of European unity, and worked diligently towards it, long
before the Europeans themselves took it to heart. In this viewpoint, the idea
that the EU was set up in competition against the US appears absurd and is
best explained as the Europeans’ ex post rationalisation.
Regardless of our degree of cynicism, however, it would take much naiveté to
imagine that US ambitions for Europe involved political union of the type that
might spawn an autonomous political program; one that suited Europe
independently of global plans for the maintenance of American sovereignty
over the world finance capital. General De Gaulle understood this well, as he
understood that the very constitution of the EEC was not automatically going
to engender a European political force. Having also grasped the role of Britain
in all this (an economy that the Americans never intended to bond to the
Deutschmark-zone, or Euroland, but one which they attached directly to the
their own dollar-zone through the City of London), De Gaulle both exited
NATO’s military wing and tried, unsuccessfully, to block the UK’s entry into
the then EEC.
More recently, US conduct in Yugoslavia, Chechnya and now Iraq
demonstrates the method by which US policy makers have mixed their
support for a European economic sphere of unified trade and capital mobility
with a weak political infrastructure in its support. Remarkably, the US plan,
circa 1947, of carving out a European trade zone with a single currency, but
no political union, is alive and well. The current US push for extending the
EU’s borders to the Urals and Northern Iraq is highly consistent with a
remarkably long-sighted plan.
6. Conclusion
European policy makers in Brussels, and their Japanese counterparts in
Tokyo, waste countless trees writing and distributing research papers on
Entrepreneurship and Competitiveness, desperately seeking ways of playing
‘catch up’ with the US. The most recent such literature from Brussels (see the
European Commission’s recent Green paper on Entrepreneurship) seems to
trade on the assumption that the reasons why the US economy is more
energetic than those of Europe and Japan has to do with the superiority of the
Protestant Ethic, the debilitating effects on incentives caused by over-
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generous safety nets, and overly regulated labour markets. The problem with
this assumption is that it is at odds with any logically coherent analysis of the
global political economy. Europe and Japan always regulated the supply of
labour (either institutionally or conventionally) more stringently than the US.
And yet for thirty years the European and Japanese economies (especially
Germany) were outstripping that of the US. Why have things changed?
Conventional wisdom has it that the New Economy caused what ‘people in
the know’ refer to as a ‘paradigmatic shift’; namely, that capitalism has moved
up a gear and Europe’s (and Japan’s) old ways (with job security, worker’s
rights etc.) cannot survive in our brave new order. As is so often the case,
conventional wisdom’s track record at explaining historical shifts is poor.
Suppose for a moment that the US is indeed steaming ahead on the strength
of information and computer technologies (ICT), fuelled by the spirit of
American free enterprise and unencumbered by worker-friendly labour laws. If
this were so, it should be the case that the American economy is more
dynamic, inventive and innovative across all sectors involving ICT (vis-à-vis
their Japanese and European equivalents). But they are not!
The only sectors in which the Americans have overtaken the Euro-Japanese
are those which are intimately linked to the US defence budget – a whopping
powerhouse that makes European alleged Statism seem like a children’s
fancy dress party. And yet, Eurocrats and Japanese officials alike make the
profound mistake of relying on small picture comparisons which miss out the
big picture. They observe, for instance, that more small firms in the US
(relatively to Europe and Japan) have a greater propensity to grow into
medium sized ones. And from this observation they conclude (without further
explanation) that there must be something about American small business
that boosts their growth rate. Then they look closer but do not find the missing
ingredient.
Exhausted, they conclude that the reason must be in the heads of American
entrepreneurs; that it must have something to do with the greater fear of
remaining uninsured in a rich country were millions have access to no proper
medical care. And, regrettably, they recommend that perhaps what the
Europeans and the Japanese need is a little tough medicine; fewer workers’
rights, less social benefits, fewer vacations and, generally, a life more brutal,
nasty and short (in the hope that desperation will stir up waves of
entrepreneurship).
What they fail to see, even though it keeps staring them in the face, is that the
US is not only the land of many small businesses but also the land of the
world’s largest and most numerous multi-national conglomerates. That US
growth in the 1990s was financed by borrowing; so much borrowing from
overseas that, in the last few years, if all Americans were to sell everything
they own, they could still not repay their loans. The question of course is: How
come foreigners continue to lend them, at relatively low interest rates, and
without the dollar suffering massive falls? The Panglossian storyline is that
foreigners continue to pump money in the US economy because it is so
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productive. Unfortunately, this is a tautological answer and as such adds
nothing to the debate.
Meanwhile, we have been claiming in this article, the real reasons for the
renewed US dominance lie elsewhere and have nothing to do with the micro-
picture. In short, excepting the US, the rest of the world has been placed
strategically (by US policy makers) in a state of permanent deflation.
Permanent deflation means high unemployment for the rest of the world
independently of how flexible or inflexible labour markets might be or how
entrepreneurial the various peoples are. Europe and Japan have been caught
up in the wake of the flow of capital to the US and are struggling for effective
demand. Thus the statistical evidence of relatively un-dynamic small business
sectors across Europe are the effects, rather than the causes, of the relative
dominance of the US economy.
There is, we have argued, a great point of difference between the type of
dominance that the US exercised before and after the 1970s so-called oil
crises. In the first phase (1947-1979), US efforts to dominate centred upon
building up Japan and Europe and fighting regional wars in order to maintain
the supply of cheap inputs to itself and, perhaps more importantly, to these
two zones. The resulting balance of payments deficit of the US boosted these
economies further and this, to a large extent, explains why there was no
political power in either zone that ever contested American authority (even
though some had good cause to quarrel with US administrations either for
ideological reasons, e.g. the SPD in Germany under Willy Brandt, or for
historical ones, e.g. the ultra-nationalists in the Japanese LDP).
However, in its second phase the US adopted a change of design. This New
Design required that the rest of the world be in a persistently deflationary
state, continually validating US IOUs and, in so doing, protecting the US
financial system from a crisis of domestic debt brought about by the
unprecedented levels of household and corporate net debt. Which brings us
to our the second query with which we opened this paper:
Why have the Germans and the French taken to the high moral ground viz.
the war on Iraq? Surely it is not because war is wrong or that the UN must be
consulted. These reasons made neither Paris nor Berlin hesitant when it
came to bombing Yugoslavia in 1999. Or from consenting to US invasions in
Panama, Grenada or the brutal terrorism exercised against Nicaragua. The
reader will allow us to conclude with an admittedly speculative answer:
Suppose our analysis so far is right in that the US latest economic miracle is
financed through capital flows from Europe (and the rest of the world).
Suppose that it is true that the reason Europe has been stagnating for two
decades is the USA’s capacity to impose upon Europeans, by geopolitical
means, this type of economic misery. Lastly, suppose that, unlike EU
bureaucrats, French and German leaders understand the causes of Europe’s
malaise. Now, if all this is true, how should we expect them to interpret
President Bush following two announcements? First, that he will go to war
against an already impoverished people which, it is common knowledge, will
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result in US companies’ exclusive access to the world’s second largest oil
fields. Secondly, that he intends to grant gigantic tax cuts to the richest of his
fellow Americans while at the same time boosting government spending
(primarily through the defence budget).
Under the premises above, there is only one possible conclusion that the
leaders of ‘old’ Europe must come to: The rest of the world (of which
continental Europe bears the highest burden) must speed up the rate at which
it finances the US deficit. This is tantamount to an acceleration of Europe’s
deflationary spiral. When these thoughts are combined with the observation
that the Bush administration seems uninterested in forging a broad
understanding with America’s European allies on a wide range of issues
(ranging from the Kyoto protocol to steel tariffs, genetically modified crops and
the International Court of Human Right etc.) it is not difficult to see why some
European leaders may have objected. To kill strangers in pursuit of a common
objective is one thing; but to consent to such brutality as part of a Grand
Design from which one will only lose, is quite another.
We believe that the current quarrels between the Bush administration and the
Franco-German axis might be a precursor of things to come along these lines
of analysis. Unless the US administration finds some modus vivendi with
continental Europe’s elites (one which allows the latter to maintain a capacity
to reproduce themselves at a sustainable rate), then not only will the US
military find itself without allies in the battlefield (except perhaps some
remnants of the British Empire) but, also, the whole edifice of American global
hegemony will titter precariously on the edge of a terrible abyss. We say this
because a US active interest in preventing crises of accumulation in Europe
and Japan has always underpinned the capacity of these economic zones to
keep financing the US deficit. In short, the Bush administration’s unilateralism
may prove a long-term disaster for US capitalism.
It is now of great historical importance whether US officials will show signs of
understanding once again the importance of supporting, like they once did,
capital accumulation in Europe and Asia. Since the Reagan era, no such
appreciation has been demonstrated. The real driving force behind US policy
has been the voracious appetite of the US economy for foreign capital; a latter
day Minotaur single-mindedly concerned with its nourishment. ‘Old’ Europe
accepted the role of feeder in the 80s while the Soviet threat was imminent or,
in the 90s, while Clinton was making pleasant noises about inclusive global
governance. They now feel that not only is there nothing in it for them but that,
in addition, the New Minotaur is too greedy for its own good.
To end on a light hearted note, one hopes that EU leaders have realised by
now how much merriness they must have caused in America’s corridors of
power when they pronounced, three years ago in their Lisbon EU summit, that
they intended to turn the EU into the world’s “most competitive economy by
the year 2010”. Against the panoply of America’s economic, political and
military Global Design, EU leaders were proposing to pit microeconomic
reform! US officials must have been shaking in their boots!
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Notes
1 See Rotter, (1987).
2 There is ample evidence that US policy makers were well aware of the importance of
generating high foreign effective demand for US output by political means since at least the
last decade of the 19th century. See US State Department memorandum circa 1895, quoted in
Zinn (1998), p.5.
3 For example, when Japan applied to join the Organization for Economic Co-operation and
Development in 1964, Washington signed a dozen trilateral treaties allowing European
countries greater access to U.S. markets—provided they waived the right to use GATT’s
clause thirty-five against Japan.
4 The third was Johnson’s Great Society project.
5 Perhaps Saddam Houssein understood this well when some years ago he performed the
cardinal sin of determining that Iraqi oil is denominated in Euros, rather than US dollars.
6 The US oil industry in association with US auto-makers are, indeed, investigating clean-
technologies. Cynics would say that the research is carried out with a view to delaying the
introduction of hydrogen cars and hybrids as much as possible. Nonetheless, the fact that the
research is carried out is good news. The burning question is: How will the new technologies,
once patented, be disseminated across the globe. We are, for instance, sceptical about the
prospect that they will be licensed cheaply were they are most needed; namely, in parts of the
world were car ownership is rising in leaps and bounds (e.g. China).
7 Halevi and Lucarelly (2002) write: “No systematic synergies exist any longer between Japan
and its area of influence. In this respect Japan and East Asia constitute the most vulnerable
point of the international political economy of U.S. imperialism. On one hand, this area is fully
tied to the American economy; on the other hand, it contains two countries of world
importance: Japan, as a productive core, and the People’s Republic of China. The external
surpluses of these two countries and of Taiwan represent a major part of the U.S. deficit.
Thus the surpluses must be channeled to the financing of the international position of the
United States. By the same token the two trillion dollar savings in Japan’s deposits must be
opened up to the hedge funds and other institutions mainly operating from, or in conjunction
with, Wall Street.”

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