The End of the Free Market
Ch. 1: The Rise of a New System
Ch. 2: A Brief History of Capitalism
President and founder of Eurasia Group, the leading global political risk research and consulting firm
Credited with bringing the craft of political risk to financial markets—he created Wall Street’s first global political risk index(GPRI)—and for establishing political risk as an academic discipline.
Teaches at Columbia University, and held faculty positions at the EastWest Institute, Hoover Institute (Stanford) and the World Policy Institute.
Published in International Affairs, The National Interest, World Policy Journal, The New Republic, The New Statesman, The Los Angeles Times, The Wall Street Journal, The New York Times, Washington Post, Foreign Affairs, Harvard Business Review, Foreign Affairs, and Newsweek
Chapter 1: Rise of a New System Primary Theses
THESIS I: Communism is dead
Solidarity-led government takes power in Poland
Latvia, Lithuania, Estonia declare themselves to be sovereign
Gorbachev announces that each country can take its own path to socialism
Berlin Wall opened
Czechoslovakian Communist government resigns” “Velvet Revolution”
Croatia and Slovenia declare independence from Yugoslavia
Ukraine votes for independence, and USSR ceases to exist
Remaining Communist states:
Democratic People’s Republic of Korea: North Korea
Kim Il-sung (1948 – 1994)
his son Kim Jong-il (1994 – 2011)
grandson Kim Jong-un (2011 to present)
GDP: $17 billion
Fidel Castro (1959 – 2016)
Raul Castro (2016 – present)
GDP: $87 billion
THESIS II: Most countries in the world are not representative democracies
Source: Economist Intelligence Unit
THESIS III: Globalization has not led to the end of the nation state
Thesis: While globalization has led to the rise of blocs…
ASEAN – Association of Southeast Asian Nations (1967)
Brunei Darussalam,Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,Thailand, and Vietnam.
European Union (1951)
Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark,Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, The Netherlands, and the (?) United Kingdom.
NAFTA – North American Free Trade Association (1994)
Canada, United States, Mexico
World Trade Organization (1986)
GATT – General Agreement on Tariffs and Trade (1948)
APEC – Asia Pacific Economic Cooperation (1989)
G20 – (1999) Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala,India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines,South Africa, Thailand, Tanzania, Uruguay, Venezuela, Zimbabwe
Eurasian Customs Union – (2000)
Russia, Belarus, Kazakhstan, Armenia;
(candidates: Syria, Tajikistan, Mongolia)
While globalization has led to the rise of blocs…and to the emergence of corporations that are larger than nation states The world’s top 100 economies: 31 countries; 69 corporations (World Bank 2016)
State Grid – China
Sinopec – China
Thesis: While globalization has led to the rise of blocs… …the state and national sovereignty has not withered away
1980’s 2000: Market reforms and failures
2000 : Rise of State Capitalism
Manufacturing Companies owned or closely aligned with their home governments
Cemex – Mexico – $13 billion (cement)
Petrobras – Brazil – $97 billion
China National Petroleum Corporation – $300 billion
Petro China – $348 billion
Sinopec –China $294 billion (energy and chemicals)
Rosneft – Russia – $81 billion (oil refining)
Gazprom – Russia – $99 billion
World’s Largest Financial Institutions – 2016
“On both sides of the Atlantic, political officials say they’re tried to rescue drowning banks and economically vital private-sector companies to breathe new life into them—before releasing them again to swim on their own. They insist they will claim victory only when all those they’ve saved no longer need them.
But this is not how political decision makers in China, Russia, and many other emerging markets see their roles in the future of their domestic economies.
Their words and actions reveal that they believe that PUBLIC wealth, PUBLIC investment and PUBLIC enterprise offer the surest path toward politically sustainable economic development. These governments will continue to micromanage entire sectors of their economies to promote national interests and to protect their domestic political standing.”
(Bremmer, pps. 22-23)
Ch. 2 – A Brief History of Capitalism
1. Capitalism emerges out of the breakdown of feudalism
Feudal Mode of Production – 1100 – 1600 AD
Based on an exchange of loyalty and service for protection and use of land
One’s place in society was determined on the basis of one’s ties to the land
Slaves – bought and sold, but their number declined after early Middle Ages
Could neither leave the manor nor be forced to go – made up majority of peasant farmers
Does not fully enjoy rights of a free person. Serf is the tenant at the will of the lord
May not join Catholic clergy; may not make a will; may not serve on juries
Individual tenants who rent the land
Tied to this land – ay not leave the land and travel
Own their own tools and animals
Lord – was a noble who owned the land
Vassal – one who provides military service and protection to lord and his property
How system was financed: Feudal rents and extractions
1. Labor rent –
agricultural work on lord’s land (3 days/week)
Compelled service to lord (road crew, household service, construction
Fixed amount of agricultural goods to be delivered at specified times
Money rent –
Fixed amount negotiated in advance
3. Monopoly rent – for use of grain mills, ovens, baths, use of roads, interest on loans, cutting wood for fuel, fish in stream
Labor & money
Transition from feudalism to capitalism
Black Death (1315 – 1380)
Peasant uprisings because of starvation and lord’s attempts to increase rents – peasants leaving lord’s estate and living as vagabonds
Enclosures (1400 – 1590’s)
Opportunity for lord to sell wool to merchants meant fencing off common lands to raise sheep and reclaiming peasant plots
Aerial view of enclosures
4. Rise of merchant class
With exclusive monopoly to sell products long distance
Operating outside of the jurisdiction of the guild system in towns
Able to accumulate profit from buying raw wool and trading it on international market
CAPITALISM SLOWLY EMERGES FROM TWO FORCES THAT TOOK 350 years:
AVAILABLE SUPPLY OF UNEMPLOYED FORMER PEASANTS (SUPPLY OF LABOR)
MERCHANT CLASS WHO USE ACCUMULATED PROFIT TO SET UP FACTORIES TO SPIN WOOL INTO CLOTH TO SELL ON DOMESTIC AND FOREIGN MARKET (DEMAND FOR LABOR AND SUPPLY OF CAPITAL)
Henry VIII ( 1491 – 1547) brakes with Roman Catholicism
End rents leaving England for Vatican
Dissolution of Catholic monasteries
End Catholic Church charity to vagabond peasants
Elizabeth I (1533-1603 grants monopoly rights to encourage inventions and to establish new industries
Special privileges and patronage to monopolists
A nation’s wealth = gold, silver and other treasure it controls
Total volume of wealth (gold, silver) was fixed—so my gain is your loss
Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
Accumulation of foreign currency reserves, plus gold and silver reserves.
Granting of state monopolies to particular firms especially those associated with trade and shipping.
Subsidies of export industries to give competitive advantage in global markets.
Government investment in research and development to maximize efficiency and capacity of the domestic industry.
Allowing copyright/intellectual theft from foreign companies.
Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class.
Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.
Criticisms of Mercantilism
Adam Smith’s “The Wealth of Nations” (1776) – argued for benefits of free trade and criticized the inefficiency of monopoly.
Theory of comparative advantage (David Ricardo)
Mercantilism is a philosophy of a zero-sum game– where people benefit at the expense of others. Trying to impoverish other countries can harm home country’s own growth and prosperity.
Mercantilism which stresses government regulation and monopoly tends to lead to inefficiency and corruption.
Mercantilism justified Empire building and the poverty of colonies to enrich the Empire country.
Mercantilism leads to tit for tat policies – high tariffs on imports leads to retaliation.
Mercantilism and State Capitalism
Tariffs in response to domestic subsidies.
“Since China’s steel is effectively subsidized leading to a glut in supply, it is necessary and fair to impose tariffs on imports of Chinese steel to protect domestic producers from unfair competition.”
US tariffs on imports of steel from China 266%. In Europe, tariffs are 13%.
Protection against dumping.
“If some countries have an excess supply of goods, they can sell at a very low price to get rid of the surplus. But, this can make domestic firms unprofitable. Protectionism can be justified to protect against this dumping.”
Examples, include European Union dumping excess agricultural production on world agricultural markets and China’s dumping of steel.
Infant industry argument.
“In Namibia, infant industries cannot compete with the mature and century-old Chinese, French or English companies.”
A nation should first industrialize its economy and is then gradually integrate economically with nations at the same level of development
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