June 16, 2017

NO REPRESENTATION WITHOUT TAXATION:

THE SOVEREIGN MYTH (JACOB T. LEVY, 6/16/17, Niskanen Center)

One of the defining organizational facts about the state as we know it -- the modern Weberian state that crystallized in Europe over the course of early modernity -- is that it is symbiotic with transnational finance. In part, but it's an important part, the modern state is a creation of the bond market, and so is the modern democratic state. Medieval mercantile cities had long been able to borrow money at better interest rates than other political units. In early modernity, states that were relatively representative and relatively commercial learned that they could do the same. First Holland, then England, gained crucial advantages in international competition from their ability to borrow cheaply; the credit market trusted representative governments that incorporated important parts of the commercial classes much more than they trusted absolute monarchs. And Britain's ability to out-borrow France eventually contributed to the bankruptcy of the latter state and the onset of the Revolution.

NO STATE IS AN ISLAND ENTIRE OF ITSELF

This is uncontroversial but, from many ideological perspectives, uncomfortable. It means that the growth, stability, and expansion of powerful states governed by representative democracy was in part a creation of the credit market, bondholders, and international finance. That's not a world in which democratic decision makers ever had unconstrained sovereign decision-making authority over public finance, even in the powerful core states of the international system. It also means that the representative state emerged out of a kind of market competition for creditworthy providers of government. The representation of those who would have to be taxed in the future to repay the debt was taken as much more credible than a king's prediction that his son would probably find the money somewhere. Moreover, the innovative financial instruments that characterize modern financial markets were often created by, or around, public or quasi-public entities like the Bank of England and the Dutch East India Company. And once these processes got underway, the validity of transnational debt in the nineteenth and twentieth centuries was often enforced at gunboat-point by powerful states.

Thus, imagined histories of democratic sovereignty over the economy cannot survive contact with the actual history of the emergence of democratic states. Neither can imagined histories of an immaculately conceived market innocent of the world of coercive states. Modern liberal markets and modern democratic states evolved together, and each contributed to the development of the other in their familiar forms. I think that this history is somewhat more compatible with the kind of theory Andy Sabl recently developed in this space, one that takes seriously the connections and affinities among the fundamental institutions of liberal society: the free commercial market, the constitutional democratic state, civil society governed by associational freedom, and the rule of impersonal law. It's the attempt to split these apart, whether to celebrate the democratic state alone or the market alone, that runs into trouble.

My point is not only the familiar one (no less crucial and true for being familiar!) that broad economic forces are always outside of any one state's control. Every local economy is always affected by global economic forces, once markets have been integrated; and this is true regardless of how the local economy is organized. The Soviet Union spared no effort to subject its economy to deliberate planning and control, but it was still at the mercy of global swings in the price of oil. No state can legislate away the existence of changes in relative prices. Neither can a state just decide to have technological innovations or productivity increases, to say nothing of whether there are such innovations elsewhere that have positive spillover effects, or that hurt a local sector by competition. I think all of this is generally recognized -- although one might sometimes wonder, given the popularity of claims about nation-states and democratic electorates controlling their economic destinies.

SOVEREIGNTY'S FUNDAMENTAL ATTRIBUTION ERROR

But I mean to also emphasize that even the things that states do govern about their economies, they have never sovereignly controlled. The public budget, the tax system, public debt, monetary and exchange policy: these have always been constrained by international actors. Indeed, the finance provided by the international actors has often been a precondition for the states' ability to decide these matters at all.

And modern sovereignty just holds that it is the electorate and its representatives who get to decide at all, not that they will be able to control everthing.

Posted by at June 16, 2017 3:23 PM

  

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