The United States in Decline 9781783508303, 9781783508297

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THE UNITED STATES IN DECLINE

POLITICAL POWER AND SOCIAL THEORY Series Editor: Julian Go Recent Volumes: Volume 5:

1985

Volume 6:

1987

Volume 7:

1989

Volume 8:

1994

Volume 9:

1995

Volume 10: 1996 Volume 11: 1997 Volume 12: 1998 Volume 13: 1999 Volume 14: 2000 Volume 15: 2002 Volume 16: 2004 Volume 17: 2005 Volume 18: 2006 Volume 19: 2008 Volume 20: 2009 Volume 21: 2010 Volume 22: Rethinking Obama: 2011 Volume 23: 2012 Volume 24: Postcolonial Sociology: 2013 Volume 25: Decentering Social Theory: 2013

POLITICAL POWER AND SOCIAL THEORY VOLUME 26

THE UNITED STATES IN DECLINE EDITED BY

RICHARD LACHMANN University at Albany SUNY, Albany New York, NY, USA

United Kingdom North America India Malaysia China

Japan

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2014 Copyright r 2014 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78350-829-7 ISSN: 0198-8719 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

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SENIOR EDITORIAL BOARD

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STUDENT EDITORIAL BOARD

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EDITORIAL STATEMENT

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SERIES EDITOR’S INTRODUCTION

INTRODUCTION: THE UNITED STATES IN DECLINE? Richard Lachmann

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CAN THE U.S. SUSTAIN ITS GLOBAL POSITION? DYNAMISM AND STAGNATION IN THE U.S. INSTITUTIONAL MODEL Fred Block and Matthew R. Keller

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COLD WAR AND CHINA IN THE (UN)MAKING OF THE GLOBAL DOLLAR STANDARD Ho-fung Hung

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CAPITAL ACCUMULATION AND THE RISE OF FINANCE Marcel Knudsen

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THE FLAILING HEGEMON: MANAGING U.S. MILITARY DECLINE Ian Roxborough and Zoe Levy

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CONTENTS

ELITE FRAGMENTATION AND THE DECLINE OF THE UNITED STATES Mark S. Mizruchi and Mikell Hyman

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FROM CONSENSUS TO PARALYSIS IN THE UNITED STATES, 1960 2010 Richard Lachmann

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CONVERGENCE-2, OR THE FATE OF OTHER SUPERPOWER Georgi Derluguian

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LIST OF CONTRIBUTORS Fred Block

Department of Sociology, University of California, Davis, USA

Georgi Derluguian

Social Research and Public Policy, New York University Abu Dhabi, United Arab Emirates

Ho-fung Hung

Department of Sociology, Johns Hopkins University, Baltimore, USA

Mikell Hyman

Department of Sociology, University of Michigan, Ann Arbor, USA

Matthew R. Keller

Department of Sociology, Southern Methodist University, Dallas, USA

Marcel Knudsen

Department of Sociology, Northwestern University, Evanston, USA

Richard Lachmann

Department of Sociology, University at Albany, State University of New York, Albany, USA

Zoe Levy

School of Public Policy, Stony Brook University

Mark S. Mizruchi

Department of Sociology, University of Michigan, Ann Arbor, USA

Ian Roxborough

Department of Sociology, Stony Brook University, Stony Brook, USA

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SENIOR EDITORIAL BOARD Ronald Aminzade University of Minnesota

Howard Kimeldorf University of Michigan-Ann Arbor

Eduardo Bonilla-Silva Duke University

Florencia Mallon University of Wisconsin-Madison

Michael Burawoy University of California-Berkeley

Jill Quadagno Florida State University

Nitsan Chorev Brown University

Ian Roxborough Stony Brook University

John Coatsworth Columbia University

Michael Schwartz Stony Brook University

Diane E. Davis Harvard University

George Steinmetz University of Michigan

Susan Eckstein Boston University

John D. Stephens University of North CarolinaChapel Hill

Peter Evans University of California-Berkeley

Maurice Zeitlin University of California-Los Angeles

Nora Hamilton University of Southern California

Sharon Zukin City University of New York

Eiko Ikegami New School University Graduate Faculty

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STUDENT EDITORIAL BOARD Cara Bowman Zophia Edwards Kiri Gurd David Levy Megan O’Leary

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EDITORIAL STATEMENT Political Power and Social Theory is a peer-reviewed annual journal committed to advancing the interdisciplinary understanding of the linkages between political power, social relations, and historical development. The journal welcomes both empirical and theoretical work and is willing to consider papers of substantial length. Publication decisions are made by the editor in consultation with members of the editorial board and anonymous reviewers. For information on submissions, please see the journal web site at www.bu.edu/sociology/ppst.

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SERIES EDITOR’S INTRODUCTION Talk of the “United States in Decline” began decades ago in the 1980s. Debates raged over whether the United States was losing its economic, political, and cultural supremacy in the world. This “declinist” thesis subsided in the 1990s, as the Soviet Union fell apart and as the U.S. economy experienced new staggering rates of growth and prosperity. But too many frightful indicators of American decline have resurfaced for the idea to go away completely. This volume takes up the matter with astute and penetrating scholarly observations. Unlike the declinist talk that one finds on CNN or the internet, these essays make lasting social scientific contributions: rigorous, theoretically informed, and empirically grounded. I am thankful to Richard Lachmann for choosing PPST as the venue for his important volume and to the contributors for their insightful essays. Thanks, too, to Thomas Dark and the rest of the team at Emerald for putting it all together. Julian Go October 2013 Boston, MA

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INTRODUCTION: THE UNITED STATES IN DECLINE? Richard Lachmann ABSTRACT Is the United States in decline? If so, what are the causes and dimensions of that decline and is it irreversible? Will American decline be accompanied by the rise of a new hegemon? To what extent are that rise and decline merely concurrent processes, determined by forces internal to each polity, or are American decline and the rise of its competitors both manifestations of a single global dynamic? This introduction defines decline and presents the answers to those questions offered by the authors of the chapters in this volume. I conclude by analyzing the effects of internal US decline upon the global economy and geopolitics and offer an agenda for future research on politics and nationalism in a post-hegemonic world. Keywords: Decline; hegemony; economy; politics

Is the United States in decline? If so, what are the causes and dimensions of that decline and is it irreversible? Will American decline be accompanied by the rise of a new hegemon? To what extent are that rise and decline merely

The United States in Decline Political Power and Social Theory, Volume 26, 1 17 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0198-8719/doi:10.1108/S0198-8719(2014)0000026001

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concurrent processes, determined by forces internal to each polity, or are American decline and the rise of its competitors both manifestations of a single global dynamic? The chapters in this special issue offer varying answers to those questions. Yet, before we can address those questions, we need to determine: what is decline? For the United States, decline need not be an absolute diminution of the nation’s geopolitical or economic position or a drop in living standards. As Marcel Knudson points out in his contribution to this volume, Britain and the Netherlands maintained their high standards of living even as they surrendered the benefits and costs of being the hegemon. Thus for the United States, as the current global hegemon, decline could be the loss of dominance in one or more realms even as the size of its economy, level of personal consumption, and technological edge of its military continue to grow. Such loss of dominance could be due to or followed by the rise of a new hegemon, or US capacities could merely degrade, creating a world in which various powers carve out spheres of influence or in which none is able to assert dominance, leaving the world in chaos, as Arrighi and Silver (1999) already posited more than a decade ago. The contributors to this volume differ on the causes and dimensions, and indeed on the certainty, of US decline. They also vary in the extent to which they connect US decline to global forces. Yet, taken together these chapters offer a comprehensive view of the principal forces that have undermined US hegemony in recent decades and highlight the structural impediments to developing effective strategies to preserve or revive US economic or geopolitical dominance. My goal is not to summarize the chapters in this volume. Indeed, the richness and nuance of their arguments can be appreciated only by reading the chapters themselves. Rather, I seek to identify the ways in which the authors’ analyses can be linked to show the ways in which US decline was driven by forces internal to the United States and how the slim possibilities for slowing if not reversing that decline depend upon a transformation of US political dynamics. Similarly, the future of the world in the aftermath of US decline will be determined by contingent interactions among prospective successors (most notably China) whose bids for hegemony will be shaped primarily by their internal political dynamics, and secondarily by the ways in which the would-be hegemons interact with the United States. The authors in this volume examine different facets of the United States and therefore vary in their attention to the interactions of the United States with other powers. Ho-fung Hung examines a cornerstone of US

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hegemony: the dollar’s status as the world reserve currency. As a result, his chapter is the most attuned to America’s economic and geopolitical challengers and to the dynamics of the world system. Hung argues that the “dollar standard” allows the US government to borrow almost unlimited funds on world bond markets, thereby using deficit financing to sustain its unprecedented edge over rivals in military spending, even as its share of the world economy declines. Furthermore, American economic decline has been limited by the US government’s ability to manipulate currency exchange rates (and, Hung could have added, international trade agreements) to sustain US economic power in various sectors. Hung argues that dollar supremacy no longer is sustained by US economic strength. Rather it is based on an implicit deal between the United States and other countries (above all the nations of the EU, Japan, and Middle Eastern oil countries) that still depend on the United States for military defense even as they compete economically with America. Those countries tolerate high US trade deficits, go along with US manipulation of the dollar’s value to improve America’s financial and trade positions, and park much of their surpluses in the United States, especially by buying government bonds. The United States is not formally an imperial power, but by threatening to withdraw US troops stationed in other countries they have been able to compel those nations to accede to US fiscal demands. The end of the Cold War reduced the value of the US defense umbrella (except in the Middle East). However, Hung finds that in this century the dollar has received new support from China. China, to maintain its own export-oriented economic strategy, has invested much of its surplus in US government bonds, thereby preventing the dollar from plummeting in relation to the RMB and keeping interest rates within the United States low. It is unclear whether dollar supremacy can be maintained in the future. Hung lays out two possible scenarios. In one, the United States is able to use its military power and alliances with East Asian countries to pressure China to revalue its currency and thereby reduce US trade deficits, preserving dollar supremacy and increasing America’s share of global manufacture and trade. In the other, China is able to assemble its own set of allies to protect it from US military or trade pressures when it refuses to revalue the RMB. This would ensure huge US trade deficits into the foreseeable future, undermine confidence in the dollar, and lead either to the rise of a new hegemonic currency (more likely the RMB than the Euro) or to global chaos in currency markets. The realization of either scenario depends, not on the current or future balance of economic strength between the United States and China, but on

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their geopolitical power, a topic beyond the scope of Hung’s analysis and the subject of Roxborough and Levy’s chapter. Roxborough and Levy trace the US military’s strategic doctrine since the end of the Cold War, and finds that while America still enjoys an overwhelming edge in technology and spending, its advantage is undermined by inconsistency and incoherence in its strategic orientation, and by China’s growing ability to shield itself from the threat of US attack. China potentially is a more powerful, and certainly a far more costly, adversary to counter than any of the other dangers postulated by the Pentagon or by foreign policy intellectuals and journalists since 1989: Russia, terrorists, failed states. Just as the future of dollar supremacy depends as much on China’s policy choices and capacities as it does on US decisions, so too does the future of US military hegemony rests in part upon China’s decisions about how much to spend on its military and on how aggressively it seeks to dominate East Asia. Yet, Roxborough and Levy are much more pessimistic about America’s future military dominance than Hung is that dollar hegemony will endure. Roxborough and Levy find increasing incoherence in US strategic doctrine and argues that shifting strategic priorities and concepts are the result of a hegemon’s declining capacity to dominate military rivals and to suppress challenges from lesser states and non-state actors. In other words, changes in intellectual orientations and worldviews among foreign policy officials follow rather than cause the loss of geopolitical dominance. If Roxborough and Levy are correct, then even if China decides not to accelerate its military spending and refrains from asserting itself in the Pacific, the United States will flail about in setting military priorities. America will find it ever harder to mobilize the resources, or to convince rivals that it is willing to make the sacrifices in money and casualties, to dominate the world. As a result, challengers will assert themselves in a range of ways and places, and US strategic doctrine will shift rapidly to respond to the dangers of the moment. The rapid downgrading of the Chinese threat in the aftermath of 9/11 and the creation of a new strategy to fit a “long war” against global terror exemplified such inconsistency. Roxborough and Levy’s analysis complements Michael Mann (2003) who sees the United States as an “incoherent empire” because of inconsistencies between its political, military, economic, and ideological power. For Roxborough and Levy, the inconsistency is within the military realm. Thus, US hegemony could be ended by military weakness even if American economic power endures. Even as the United States loses the capacity to threaten its strongest rivals militarily, it retains dollar supremacy, which the US government continues to employ to give competitive advantage to varying sectors of

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the economy. Hung, like Robert Brenner (2003), notes that America’s dollar strategy has shifted back and forth (during the 1980s and 1990s within the space of a few years) between favoring a high dollar that benefits financial firms and a cheap dollar that advantages manufacturing firms. Hung and Brenner are correct that those manipulations have slowed the decline of American manufacturing, at least in certain key sectors. Yet, the long-term trajectory has been for manufacturing to constitute a declining share of the US economy as one industry after another and the jobs that go with them have moved abroad, above all to China. Chinese governmental policies have accelerated this shift in two ways: First, by keeping the RMB low, China has advantaged its manufacturers at the expense of competitors in the United States and Europe, albeit at the cost of reducing Chinese consumers’ standard of living. Second, an array of Chinese policies (which come under the umbrella of state capitalism) has ensured that much of the manufacture that has moved out of the United States was concentrated in China rather than elsewhere in the Global South. China’s policies in themselves haven’t directly weakened US manufacture. However, by concentrating world manufacture in China, it has created synergies and economies of scale that have further shifted manufacture of increasingly sophisticated products to China that might have remained in the United States had basic manufacturing instead been scattered across the Global South. And of course, the concentration of manufacture in China, combined with a depressed currency, produced the huge trade imbalance and the dollar reserves in Chinese hands that so far have sustained dollar supremacy while creating the future danger of collapsing dollar values and instability in the Chinese economy. Knudson traces changes in productivity, profit, and reinvestment in US industry from 1960 to 2007. He finds that, except for the 1995 2000 period, productivity declined inexorably from the early 1970s on. At first, US firms ignored falling productivity and increased their inputs of labor and capital in an effort to expand production and market share, which drove down profits. Knudson sees the early 1980s as the moment of fundamental change: firms adopted the ideology of “shareholder value” and sought to increase productivity and profits by reducing investment in the United States, shifting production abroad, and moving away from manufacture toward strategies of financialization. Knudson’s careful attention to timing shows that the decline in productivity preceded the move of industry abroad and financialization. Those strategies were rational responses to real economic conditions, by managers faithful to their own and their shareholders’ interests.

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Knudson’s analysis thus supports Arrighi’s (2007) view that hegemonic decline is inevitable and inexorable. Yet, Knudson departs from Arrighi in his analysis of the Clinton boom of 1995 2000. Where Arrighi sees that “belle e´poque” as largely the product of financialization typical of declining hegemons (Arrighi finds similar moments in late nineteenth century Britain and the Netherlands in the 1770s), Knudson sees a real albeit short-lived boom. Prompted by what turned out to be vastly exaggerated hopes for productivity gains from the computer revolution, corporate managers made real investments in the 1990s that created strong growth in US manufacturing. However, that overinvestment then led to a more severe decline in the 2000s, just as underinvestment in the 1970s led to an uptick of growth in the 1980s. If, as Knudson shows, the shift of production abroad, disinvestment, and financialization are rational responses by managers to declining productivity, then technological innovation could spark new investment within the United States. Where capitalists decide to invest is not preordained. Just as China adopted policies that made it, rather than other poor countries, the main site of capital investment, so it is possible that China’s future policies will prevent it from achieving economic dominance, while new US policies could make US manufacturing attractive to global capital. Block and Keller find opportunities for such pro-manufacturing policies in America because they argue that the United States is not a liberal market economy in which the state plays little role in the economy. Rather, the Federal government has adopted a series of policies that aid both large, oligopolistic firms and small innovative start-ups. The former are well known: most notably, government subsidies and lengthy patents for pharmaceutical firms and regulatory favors and bailouts for large banks. However, innovative small firms also have been aided throughout the Cold War and since by the Pentagon, which remains the largest sponsor of technological research in the world, and has been joined in recent decades by universities and government labs that are encouraged to monetize their inventions in collaboration with large and small firms. To some extent the two sides of American capitalism operate at cross-purposes. Large banks have been reducing small firms’ access to credit, while large firms take advantage of start-ups’ vulnerability to buy them out at lower prices than those firms could realize if they had the capital to sustain themselves until they are able to market their innovations. The balance between large and small firms, between oligopoly and innovation, Block and Keller convincingly contend, will be determined in the political realm rather than by market forces. The most important political

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force is the sustained opposition to tax increases on the wealthy, which has created a decades-long fiscal crisis that reduces government funding at all levels for education, which in turn reduces the supply of educated workers who can create or produce high-tech goods and services. The state at all levels also has less to spend on government and university labs. At the same time, big banks and large firms use their now-unlimited campaign contributions to wring ever more subsidies and privileges from the Federal government. Block and Keller offer alternate scenarios for America’s future. The most likely is continued political gridlock under which economic and political inequality continues to increase and public investment declines, further weakening the remaining institutions of the American developmental state while fortifying oligopolistic large firms. Another possibility, made less likely by the 2012 election, is Republican triumph and an accelerated decline as investment in education and research are rapidly gutted and the remaining regulation of large banks and oligopolistic firms are ended. The final possibility is strengthened Democratic dominance, pushed in a progressive direction by popular pressure. Such a Democratic majority in Congress could enact significantly increased taxes on the wealthy to pay for improved education, greater social benefits, and renewed state investment in research and innovation. Block and Keller see the Obama Administration’s energy policies as a harbinger of that direction. The 2009 stimulus bill provided funding for green energy start-ups, fostering innovation and challenging the dominance of large oil firms. That possibility was undermined when the Republicans captured the House in 2010 and moved to eliminate further funding for green energy. Despite continued Republican control of the House, President Obama holds extensive regulatory powers. If the popular insurgency Block and Keller describe were to emerge, Obama could be encouraged/pressured to use the Environmental Protection Administration’s existing authority to limit CO2 emissions, which would force a conversion to green energy and undermine the big oil companies. Such a policy would foster massive innovation and an economic revival in the United States, an argument made by mainstream journalists like Thomas Friedman as well as by Block and Keller. Yet, in the likely absence of an insurgency, limits on CO2 or any of a myriad of feasible policies to revive US innovation and growth will not be realized, and American economic decline will continue. Insurgencies, or even upsurges in electoral participation, are difficult to predict. However, even when masses become politicized they are acting upon states and elites that almost always retain choices of what concessions

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to offer protesters. In other words, the state gets to decide which elites’ oxen get gored, and therefore, at the same time as popular forces make demands on the state, elites seek to ensure that other elites assume the cost of pacifying protesters. Thus, it remains necessary to study elite politics and see which elites have tightened their control over the state in recent decades and how such shifts in political power will shape US economic and geopolitical policies in coming years. Mark Mizruchi, Mikell Hyman, and I undertake that task in our contributions to this volume. Mizruchi and Hyman find that the managers of large corporations adopted relatively moderate positions during World War II and continued to acquiesce to the role of labor unions in their firms and to the continuation of New Deal social programs. Organized into the Committee for Economic Development, founded in 1942, business executives also supported many of the Great Society programs instituted in the 1960s, expressed support for environmental regulations, and collaborated with President Nixon in formulating a national health plan that was more comprehensive than the ones enacted under President Obama or proposed by President Clinton. Why were business leaders so accommodating or, as I phrase it in my chapter, part of a postwar consensus? Mizruchi and Hyman identify three factors: the strength and legitimacy of the state, the strength of labor unions, and the coordinating role of banks. Mizruchi and Hyman highlight two aspects of the state: one is the legitimacy the state gained from ending the Depression and then sustaining rapid economic growth through the 1960s (to which they could have added, the legitimacy that flows to any state that wins a major war). The other is similar to Block and Keller’s image of the state, as the font of subsidies and regulations helpful to favored firms. However, where Block and Keller see the benefits the state bestowed on big business as stifling the real sources of innovation and growth in smaller businesses and universities, Mizruchi and Hyman take a more neutral stance toward regulations that advantaged big firms, noting that during the same postwar decades when those firms waxed fat under government protection, the economy overall grew and the benefits of that growth were shared fairly equally across strata. The wide distribution of economic gains in the decades from the New Deal through the 1960s was due in large part to high rates of unionization as well as the national political power unions amassed through their members. Just as big firms accommodated themselves to the reality of the post-New Deal state, so they recognized unions as a permanent presence in their industries. Mizruchi, Hyman, and I agree that the Taft-Hartley Act of

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1947 was designed mainly to prevent an expansion of union power (unionization rates kept increasing after 1947, albeit more slowly, into the 1970s), even though it had effects unanticipated by its authors and backers, which significantly weakened unions over the long term. The third constraint on corporate behavior was director interlocks among firms and with banks. Mizruchi and Hyman find that firms with high numbers of interlocks were more moderate politically than isolated corporations. Bank boards exposed executives to diverse opinions, and banks by withholding loans were able to penalize extreme corporate behavior. I agree, in my chapter, that high levels of unionization, a national state with strong capacities, and interlocks among national firms were sources of elite restraint. I point to an additional factor not discussed by Mizruchi and Hyman: America’s dual elite structure. I note that national firms co-existed with state and locally based firms, which were protected from competition by Federal legislation and regulation. Local elites, through their sway over members of Congress, who after all are elected from states and local districts, and through their influence over state and local government, limited national elites’ ability to appropriate state resources and powers. What broke apart the postwar consensus and allowed elites to breach previous limits on their rapaciousness? Mizruchi and Hyman argue that elites were spurred to become more aggressive by the rise of foreign competitors, inflation, the loss of government legitimacy due to Vietnam and Watergate, and what business saw as especially intrusive and burdensome environmental and occupational safety regulations enacted in the 1970s. (Block, 2007 also makes this argument). These changes prompted business elites to move aggressively to oppose unions and to challenge government regulation. Mizruchi and Hyman trace the decline of moderate business groups and the rise of more ideologically combative business leaders. Business executives gained further room for maneuver when they found ways to bypass banks by raising capital directly from investors in the United States and abroad. Banks in response shifted from their traditional businesses of loaning money to firms and focused instead on investment banking and speculation for their own accounts. During the 1980s, firms came under pressure from a new source: instead of worrying about access to banks, business executives feared hostile takeovers. To preserve their, and their firms’, independence, managers focused on short-term expedients to pump up profits and their share price. Stock options provided a powerful incentive to pursue those strategies. One way, of course, to increase profits is to break unions and reduce wages or to send production to low-wage

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states and countries. Another way is to eliminate costly regulations. Yet a third is to reduce corporate taxes. Thus, Mizruchi and Hyman argue that corporate executives’ interests in retaining autonomy and profiting from stock incentives and bonuses spurred their antigovernment, inegalitarian ideology and actions. I focus less on corporate elites’ interests and desires and more on their capacities. I ask why elites were able to move against unions and the state beginning in the late 1970s when they had been unable to do so earlier. I agree with Mizruchi and Hyman that it was a cumulative process: once unions and the state began to be weakened, it became easier to push for further givebacks from workers and to win additional tax cuts and regulatory “reforms.” However, the question remains, what started the process in the 1970s. I give even less emphasis to the macroeconomic and global forces emphasized by Brenner and Arrighi (declining US competitiveness, inflation) than do Mizruchi and Hyman. My focus is on political dynamics internal to the United States. Since I argue that dual elite structure was, along with unions and the state, the main restraint on national elites’ long-standing desires to attack unions and rollback state power, then the liberal consensus ended only when one of those three legs was weakened. I find that the first of the three to be undermined was the dual elite structure. The Federal government essentially stopped enforcing antitrust laws under Nixon. This created a ratcheting effect: as independent state and locally based firms were merged into national firms or, as was the case with many banks, merged with each other to form new national entities, the political resistance to further mergers and deregulation was undermined. Local banks for decades had opposed allowing national banks to encroach on their businesses. As national banks were allowed to buy local banks, and local banks allowed to merge across state lines, that resistance evaporated. As local banks lost political power, the Federal Reserve became more aggressive in allowing national banks to enter new lines of business and Congress passed legislation that weakened and then finally, at the end of the Clinton Administration, abolished the separation of investment and commercial banking, unleashing the wave of speculation that culminated in the 2008 collapse. The interaction between mergers and deregulation operated in most sectors of the economy. As firms consolidated, they gained in their ability to capture regulatory agencies and to procure contracts and subsidies from the Federal government. State capacity was lost, less because of prominent military or ethical failures, and more because those capacities were

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appropriated by elites. Increasingly the Federal budget is devoted to such subsidies; that as much as tax cuts created the unending fiscal crisis that leaves the national government unable to maintain its social welfare and military commitments or to undertake the sorts of investments in research, new technologies and education that Block and Keller rightly see as essential to continued US economic hegemony. The unevenness with which the structure of elite relations has been transformed in each sector of the US economy explains the incomplete nature of US decline. The rapidity of banking and securities deregulation has helped sustain the dollar’s position as the world currency, while ensuring that American financiers would continue to be the main beneficiaries of that global advantage. Yet financial deregulation also sapped smaller firms’ access to investment capital, as Block and Keller explain, and undermined the coordination of corporate elites and their capacity to exert countervailing pressure against more reactionary business interests, as Mizruchi and Hyman demonstrate. At the same time, large US banks and financial firms took advantage of deregulation to encroach on the international banking activities that had been centered in London in the 1980s and 1990s following their deregulation and dominate the opportunities and risks of global speculation. The large size of those banks ensured that when the crash came in 2008 the Federal Reserve and Treasury would have to bail out and subsidize those firms. The measures taken to preserve those banks as private entities, combined with the policies the Chinese government adopted to sustain its export sector, ensure (at least for now) the dollar supremacy described by Hung. The political move to the right and the disorganization of moderate business networks combine to block reforms that could preserve US economic competitiveness. US health care is notoriously far more expensive and delivers lower life expectancy than in other OECD countries. For decades, efforts to create a national system that would restrain costs and provide universal access were blocked. As I point out, the finally successful Obama legislation made it through Congress only by preserving all the existing advantages enjoyed by physicians and insurance, pharmaceutical, hospital, and medical equipment companies, while offering new subsidies to the already privileged insurance companies. While the legislation provides the basis for regulatory measures that could limit health care costs, any efforts by the Obama or future Administrations to make use of those new powers would face opposition from the medical and insurance industries. Similar obstacles to reform exist in other sectors.

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The elite autarky that I describe combines with what Mizruchi and Hyman identify as elites’ inability to reach consensus on reforms that would benefit the national economy and hence elites collectively even as particular elite actors would be forced to concede privileges and income. Autarky and stasis combine to lock the United States into a trajectory of fiscal crisis, disinvestment, and challenges to its hegemony in some though not all realms. The Soviet Union underwent its own process of elite decentralization and autarky. Georgi Derluguian identifies the turning point during the Second World War, when Stalin was forced by military setbacks to devolve power upon his generals and industrial managers, granting them the decision-making power that allowed them to mobilize the human and material resources Stalin had commanded from the center to collectivize agriculture and industrialize the USSR. During the war, autonomy allowed officials to produce the weapons needed, and let generals develop the military strategy that defeated Hitler and saved Stalin’s regime. After the war, destalinization accelerated and institutionalized higherlevel officials’ autonomy from the central state. The upper-level nomenklatura were able to hoard resources and wield power that prevented either the reassertion of authoritarian power at the center or the reformist plans of Khrushchev and Gorbachev. Indeed, Derluguian and Padgett (2012) show that Gorbachev’s attempted reforms accelerated rather than reversed elite autarky. Most fatally for the Soviet Union, elite autonomy extended to the leadership of the national republics, which asserted independence in 1991. Nomenklatura autonomy was reinforced by workers’ growing ability (as the pool of peasant labor shrank and the birth rate fell) to demand higher wages and benefits and to shirk production quotas and by the intelligentsia’s growing disaffection. The ruling elite’s need to prevent worker politicization alone or in alliance with the intelligentsia blocked measures that might have raised productivity or reformed institutions but risked provoking popular opposition. These factors combined, in Derluguian’s analysis, to account for Soviet stagnation. After growing faster than the United States under Stalin, the Soviet economy stalled out, unable to create the innovations that would have allowed it to compete economically or geopolitically with the United States. Ironically, in Derluguian’s view, the Cold War provided the geopolitical stability that gave self-serving officials the freedom to protect their own interests at the expense of social and economic dynamism. The United States, unlike Hitler, did not pose a mortal threat to the Soviet regime. In this, Derluguian parallels Arrighi’s view of the relationship between

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the United States and China. Arrighi sees China as essentially peaceful in its intentions, having never adopted the five-hundred-year-old Western imperialist approach to the rest of the world. Therefore, the United States has no need to respond militarily to China’s rise. If it does so, it will be as a result of political dynamics internal to the United States. Derluguian finds that the post-Stalin Soviet Union did not generate such militaristic dynamics, and Roxborough and Levy argue that the US military and foreign policy establishment is not capable of adopting and pursing a consistent aggressive stance toward China. I would add that US elite autarky extends into the military in alliance with military contractors, ensuring that much of the budget continues to be spent on Cold War weapons systems that are as unsuited for countering China as they have proven to be for fighting counterinsurgency wars in Iraq and Afghanistan. Derluguian views external forces as decisive for both sustaining and upsetting elite autonomy in the Soviet Union. Hitler’s threat forced Stalin to grant elites autonomy, and the mildness and predictability of the US Cold War challenge sustained that autonomy. At the same time, the growing economic success of the United States and its allies, as opposed to the stagnation of the Soviet Union and the backwardness of its communist allies, ensured that the USSR never could really challenge the United States, and locked Soviet elites into their safe status as autarkic rulers of a declining great power. Derluguian sees parallels in the American Vietnam War and the Soviet war in Afghanistan: both exposed weaknesses in each superpower’s military strength and fostered internal dissention. Yet, he also notes that Vietnam was followed by a US revival while Afghanistan ended in Soviet collapse. Derluguian explains the contrasting outcomes as the consequence of the interaction of each power’s internal dynamics with their position in the world system. The United States was at the center of an alliance of wealthy countries, while the USSR lost rather than profited from its ties to Eastern Europe and its poor Third World allies. Timing also mattered: the United States was defeated in Vietnam fifteen years before the Soviets withdrew from Afghanistan. In any case, while the Soviet Union was a superpower, it never was a hegemon and therefore could not reap the benefits from dominance of its sphere of influence that the United States did from the entire world. All the chapters in this volume focus on the internal dynamics of the United States (or the Soviet Union) and lead us to the conclusion that elite control over or insulation from state policies determine the trajectory and speed of decline. Global forces geopolitics and the dynamics of the world

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capitalist system matter by offering opportunities to or imposing constraints on particular elites. The United States’ global position, thus, affects various elites differently, most notably by strengthening financiers at the expense of almost everyone else, although American financiers won power to shape US domestic and foreign policies mainly by winning at domestic US politics. The fate of the US military elite is more typical of elites in this declining hegemon: it has been able to preserve its autarkic control over the military budget and over US global military strategy even as its policies have served to weaken America’s geopolitical position in the world. Rising autarky at home that combines with and contributes to declining dominance in the world also characterizes an array of firms and their managers in an increasing number of nonfinancial industries. Such autarky weakens the state’s power to develop strategies and make investments that could reverse decline. Are there any signs of developments that could reverse US decline? Dollar supremacy serves the financial sector but has not in recent decades spurred growth in any other industry. US military dominance no longer yields military victories and in recent decades has been leveraged to sustain dollar supremacy rather than to advantage other sectors. While Block and Keller trace a path to revive US industrial vitality, the investments made in Obama’s stimulus legislation are not being sustained, and US financial and military power are much more likely to stunt rather than spur future investments in infrastructure, education or research. The current dismal trajectory, which leads to further US decline, could be changed by mass political mobilization that demands new policies. While mass movements often are unpredictable, we can say with certainty that the current political stasis produced by elite fragmentation and autarky also has poisoned political discourse and undermined bases for popular groups to mobilize and affect politics. We cannot construct a plausible story of US revival based on the analyses of US financial and military power, governmental policy, and elite and mass politics presented by the chapters in this volume. Scenarios of revival depend on the deus ex machina of a mass movement arising out of currently demobilized and unorganized social groups or the eruption of a social conscience among rich elites who currently are able to insulate themselves from the mass of their fellow citizens. How will the world be transformed by US global decline? Although the causes of US decline are largely internal, the consequences will be felt and set by the actions of states and classes outside as well as within the United States. Hung offers a model of how to analyze the future. He begins by identifying the dynamics internal to the United States and China and then

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shows how the policies adopted in each of those countries then affect the subsequent opportunities and calculations of governments, financiers, and industrialists in the other nation. The interaction between the United States and China will likely determine whether the dollar or RMB is the global currency of the future, especially now that the Euro appears unlikely to vie for supremacy. As Hung makes clear, there is a distinct possibility that if the dollar loses hegemony, the RMB will not be able to replace it, nor will any other currency. Global financial anarchy could well ensue. Similarly, as Roxborough and Levy show, the decline of US military hegemony may well not be succeeded by dominance on the part of China or any other polity. If American hegemony is replaced by a world of multiple power centers, we need to examine if non-hegemonic power will be centered within national states or if instead more diffuse containers of elite, class, or mass power will vie for global or local dominance. Immanuel Wallerstein, who has written extensively on what he sees as the final breakdown of the capitalist world system and coming global anarchy (see 2003; 2009 for examples), predicts the demise of nation states and leaves open what will replace them. I have argued elsewhere (Lachmann, 2010, pp. 191 207; 2011) that environmental crises brought on by global warming and resource shortages are likely to strengthen nationalism and the power of those states with the capacities to appropriate resources abroad and to exclude refugees fleeing famines, economic collapse, and wars. Territories with weaker states are likely to fall into anarchy, but I don’t think that will be the fate of the entire globe. All of Wallerstein’s and my predictions about the global economy and geopolitics are built upon assumptions about the capacities and interests of nation states, elites, and other actors in a world in which the United States no longer is hegemonic and in which environmental crisis and competition for diminishing resources become ever more salient. While our modes for analyzing political action and capacity differ, we both mainly describe the relevant actors in terms of their national-state locations and interests. That is why the decline of the dominant nation state, the United States, will be so consequential for the entire world. Elite and class actors within the United States, and indeed in much of the rest of the world, articulate their interests in relation to the American state. In a posthegemonic world, those elites and classes will prosper or suffer in tandem with the capacities and geopolitical leverage of the other states within which they are able to anchor themselves. The chapters in this volume do not address the consequences and dynamics of the global anarchy or revived nationalism that would emerge

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if after US decline there were no hegemon for the first time since the advent of the capitalist world system. However, the chapters point to the necessity of studying each country’s internal politics to understand both the interests that will be reflected in their policy choices and their capacity to carry out those policies. The choices and capacities of hegemons, would-be hegemons, lesser powers, and territories with weak or non-existent states combine to create a global capitalist and geopolitical dynamic. Those dynamics can be changed by political developments and changes in capacities within key countries. As Hung shows, the global financial system can be transformed as the power of the financial elite changes in the United States or as the export manufacturing elite in China gains or loses sway over the state. Geopolitics, as Roxborough and Levy explain, will be affected fundamentally by struggles among military and other elites within the United States (and Arrighi would add in China and the EU as well) to determine foreign policy. The United States’ global position could be revived if American politics fortifies the set of policies Block and Keller trace. Whether Mizruchi and Hyman’s more optimistic or my more pessimistic analyses of US politics are correct could determine if Obama’s plans and Block and Heller’s hopes are realized. A world historical event, such as the demise of the Soviet Union as a superpower/empire/state, was produced by a sequence of contingent, but ultimately self-reinforcing, domestic political events, which Derluguian traces and analyzes. The United States’ decline is a world historical event too. Much will be written, as much already has been written, about the implications of that decline for the world. Yet, we will find it hard to advance such global analyses until we can better understand the internal dynamics of US decline (and also the forces that react to US decline within polities elsewhere in the world). The chapters in this volume work toward that goal. In so doing, they advance our theoretical understanding of the causes and courses of hegemonic and imperial decline. They also provide bases for understanding how decline affects those who live through it, and for analyzing how and the extent to which Americans’ various responses to decline will affect life in a post-hegemonic US and the role that the United States will play in the world.

REFERENCES Arrighi, G. (2007). Adam Smith in Beijing: Lineages of the twenty-first century. London: Verso. Arrighi, G., & Silver, B. J. (1999). Chaos and governance in the modern world system. Minneapolis, MN: University of Minnesota Press.

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Block, F. (2007). Understanding the diverging trajectories of the United States and Western Europe: A neo-polanyian analysis. Politics & Society, 35, 3 33. Brenner, R. (2003). The boom and the bubble: The US in the world economy. London: Verso. Lachmann, R. (2010). States and power. Cambridge: Polity Press. Lachmann, R. (2011). Nationalism in a post-hegemonic world. Review: A Journal of the Fernand Braudel Center, XXXIV(3), 259 283. Mann, M. (2003). Incoherent empire. London: Verso. Padgett, J. (2012). The politics of communist economic reform: Soviet Union and China. In J. F. Padgett & W. W. Powell (Eds.), The emergence of organizations and markets (pp. 271 315). Princeton, NJ: Princeton University Press. Wallerstein, I. (2003). The decline of American power: The U.S. in a chaotic world. New York, NY: New Press. Wallerstein, I. (2009). Alternatives: The United States confronts the world. Boulder, CO: Paradigm.

CAN THE U.S. SUSTAIN ITS GLOBAL POSITION? DYNAMISM AND STAGNATION IN THE U.S. INSTITUTIONAL MODEL Fred Block and Matthew R. Keller ABSTRACT In this chapter, we argue for an essential dualism in the U.S. economy; there are simultaneously institutional sources of dynamism and institutional patterns that portend a process of decay and decline. This dualism corresponds to a growing divide between innovative small- and medium-sized enterprises and big corporations both financial and nonfinancial that are increasingly predatory in their business strategies. Surprisingly, firms on both sides of the divide are increasingly dependent on government. The small- and medium-sized firms rely heavily on government science and technology programs to help them innovate. The large firms need government to protect their position. Whether dynamism or decay will prove to be stronger, we think, is contingent on political choices that will be made over the next ten years. This contingency, in turn, makes it easier to understand the highly polarized nature of partisan politics in the United States today.

The United States in Decline Political Power and Social Theory, Volume 26, 19 51 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0198-8719/doi:10.1108/S0198-8719(2014)0000026002

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Keywords: Economic sociology; political economy; U.S. economic decline; U.S. economic renewal; dualism; corporate power

INTRODUCTION Henry Luce first proclaimed the arrival of the American Century in 1941, but doubts about its duration were heard in just twenty-five years. Discussion of U.S. decline began in the second half of the 1960s when the United States faced stalemate in the jungles of Vietnam and intense pressure on the dollar in global markets. Initial doubters insisted that a united and rebuilt Europe would displace the United States as the world’s hegemonic power. In the 1970s and 1980s, Japan became the most popular choice as successor, but it is now China that is most frequently referenced as the soon-to-be ascendant nation. The problem is that declinist arguments have consistently underestimated the political, economic, and military resilience of the United States; their predictions have proven consistently premature. But declinists are bound to be correct at some point; there are no historical examples of a global hegemon whose rule lasts indefinitely. Sooner or later, some of the institutional configurations that contributed to the nation’s global power will turn into fetters that block reform and renewal. The challenge in assessing the U.S. pathway is to recognize both the elements of resilience and the elements of decay or stagnation in its institutions and social and political dynamics. We seek to do this by developing an argument about the central sources of dynamism and atrophy in the U.S. economy (See also Block & Somers, 2014; Polanyi, 2001[1944]). Our argument is that prevailing accounts of the United States as a Liberal Market Economy (LME) are deeply misleading, making it very difficult to grasp key trends in the U.S. institutional trajectory. Although market mechanisms are important in many respects, government has played a far more central role in U.S. innovation and economic growth than most analysts suggest. However, this role is a double-edged sword. While government has played a critical role in catalyzing dynamism through investments and by guiding processes of technological innovation, there is a danger that entrenched corporate interests, under the guise of laissez-faire ideology, will deepen their use of governmental powers to monopolize rents and undermine the central sources of vitality in U.S. society and the U.S. economy.

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The argument proceeds as follows. We argue that characterizing the United States as an LME is misleading, drawing on examples from key industries to show the centrality of government in the economy. But the roles of government are neither uniform nor uni-directional. We therefore suggest that over the last several decades, government policies have fostered the emergence of a “dual” U.S. economy. Large incumbent firms have increasingly been able to entrench their positions by winning government patronage and support. At the same time, decentralized U.S. developmental policies and government agencies have also effectively nurtured the rise of a dynamic and innovative technology sector driven primarily by small- and medium-sized challengers. Though government is strongly implicated in each of these dynamics, and though there are critical resource exchanges between parties involved in this dual system, there are nevertheless significant tensions within it. In the next two sections, we turn our attention to what we regard as the central challenges to these polyvalent institutional dynamics primarily, powerful recent trends likely to tip the balance strongly in favor of entrenched firms, and thus to generate increasing stagnation rather than ongoing dynamism. Finally, while acknowledging that assessing future trends is a hazardous endeavor, we discuss the interwoven nature of these obstacles to U.S. dynamism, as well as potential opportunities for institutional renewal.

How Should the U.S. Model Be Characterized? Scholars in the “varieties of capitalism” approach have generally described the United States as the paradigmatic case of an LME, which they contrast to Coordinated Market Economies (CME) on the European Continent and in Japan (Hall & Soskice, 2001). In LME’s, firms operate with a high degree of autonomy from the public sector, organized labor, and other firms, and society relies on the market as the key coordinator of economic activity. LME’s are seen as more likely to generate “radical” innovations because private firms are relatively insulated from government, and therefore have greater freedom to maneuver and experiment. CMEs, by contrast, are characterized by a more directive role of the state, greater reliance on corporatist bargaining, and greater horizontal coordination across firms. They, in turn, are thought to be more likely to excel at generating “incremental” innovations due to these stronger, more rationally deliberative ties between government and industry.

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Aspects of this characterization make sense. There is no doubt that the United States, as Esping-Andersen (1990) argued long ago, is far less generous in its welfare provisions than other nations, and employees have far fewer protections than in comparable nations. But the LME versus CME framework is nevertheless deeply misleading. The central problem is that it replicates the ideological claim that the United States relies largely on the market to coordinate most economic activity. We think it is more accurate to understand the U.S. economic model as one in which a relatively small group of very large corporations have been granted governance authority which they wield with extensive support from the public sector. These large corporations both financial and nonfinancial are considerably less constrained by labor and government regulation than large firms in many other developed nations. But it is inaccurate to suggest that they are simply creatures of the market (Crouch, 2011; Fligstein, 1996), or that they operate at arm’s length from government. Many of these firms grew to an enormous size precisely to attempt to insulate themselves from the vagaries and unpredictability of market competition. Usually, mergers and acquisitions were employed to eliminate competitors and create a position in which firms are able to exert considerable market power. When one looks closely at the entrenched positions of these firms, it is almost always the case that governmental powers are used to maintain their dominant positions. A particularly telling example involves the giant pharmaceutical companies that provide consumers in the United States and the rest of the world with many of the prescription medications designed to treat both acute and chronic illnesses. The top U.S. firms in this industry grew large through a long series of mergers and acquisitions, and they often insist that size is necessary to fund productive research and development activities to discover new medications. The reality, however, is that in recent years the laboratories of these firms have had substantial difficulties in developing effective new medications (e.g., Drews & Ryser, 1996; Fox, 2006; Moore, 2003). The majority of recent “blockbuster” drugs have in fact emerged from smaller biotechnology firms, public-sector laboratories, or a combination of the two (Vallas, Kleinman, & Biscotti, 2011).1 Even though the large firms’ internal R&D operations have been less than ideally productive over the last 15 20 years, a key bulwark of the industry’s profits has been the patent protection provided by the U.S. government, which has been built into the global trade regime through the Treaty Regarding Trade-Related Aspects of Intellectual Property Rights. Instead of head-to-head market competition, the system provides firms

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with a twenty year monopoly to market newly patented discoveries.2 Yet these firms have also successfully lobbied in the United States against government interference with their ability to set prices. While there is no justification in economic theory for giving monopolists unlimited pricing power, this combination undergirds the industry’s profits. Moreover, pharmaceutical firms have used these profits to further consolidate their entrenched positions by creating an elaborate marketing system that includes thousands of “drug detailers” who regularly visit physicians to “educate” them about the advantages of prescribing the firm’s medications. This system works so well that some health care providers will continue to prescribe high-cost prescription drugs to their patients even when there are equally effective alternatives available at lower prices. These efforts are supplemented by well-funded direct-to-consumer advertising campaigns (Angell, 2005). Clinical trials are the last pillar of the firms’ entrenched positions; expensive and prolonged trials are required to gain Food and Drug Administration approval of new prescription drugs. Since incumbent firms have years of experience in negotiating this process and the deep pockets required to fund the trials, they frequently license technologies and/or acquire smaller firms that have promising new drugs under development. Even smaller competitors who want to maintain their independence often end up negotiating with established firms to help them navigate clinical trials and the ultimate marketing of the drug. Through these mechanisms, large incumbent firms have been able to assert their centrality to the collaborative networks that dominate drug discovery and development processes (Roijakkers & Hagedorn, 2006), and they are able to gain a significant share of the profits of new medications developed initially by small firms which often work with public laboratories and ongoing support from the National Institutes of Health. In short, the large pharmaceutical companies should be reliably profitable for years to come even if their internal R&D operations fail to rapidly generate innovative new medications or treatments.3 The story of the large commercial banks in the United States parallels the pharmaceutical case. Through much of U.S. history, there was considerable popular opposition to the centralization of banking services, such that as late as the 1970s, the U.S. banking industry was highly heterogeneous with a large share of customer deposits held by small, local, or regional banks or savings and loan institutions. There was, however, an elite consensus that this status quo was inefficient and particularly in the 1980s, government policies shifted toward support for bank consolidation through

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the dismantling of various regulations that had blocked the growth of giant financial corporations (Davis, 2009; Dymski, 2011; Suarez & Kolodny, 2011). To be sure, not every step in this drama was the consequence of a coordinated plan; some developments were more serendipitous. For example, Congressional measures designed to “deregulate” the Savings & Loan industry in the 1980s led to a crisis when many of these institutions expanded too quickly or took highly speculative positions in commercial real estate markets. When the real estate market turned down, the sector went into a crisis and a major government bailout was needed. The consequence of the crisis and bailout was a substantial shift in consumer deposits away from S&L’s and toward commercial banks. In 1984, the Reagan Administration’s Comptroller of the Currency a key bank regulator in testimony before Congress announced that there were already 11 large commercial banks that were “too big to fail” (Dymski, 2011). He meant that their failure would create too great a risk of a severe economic crisis and that government would have to take action to rescue them in such a crisis. The effect of this Too Big to Fail (TBTF) status whether intended or unintended was to grant these banks substantial advantages relative to their competitors. The assurance of a government rescue allowed large banks to shift portions of their investment portfolios toward assets that were riskier in the aggregate than what their competitors were holding. Since riskier assets generally provide higher rates of return, the TBTF designation enabled greater profits. At the same time, those providing capital to the bank had less to fear since a government rescue would assure they would get their money back. In short, the TBTF banks would have a lower cost of capital than their rivals. Cheaper capital, combined with higher potential returns, enabled higher rates of profit. With this support in place, the TBTF banks led an enormous wave of consolidation in which a series of large regional banks were gobbled up (Dymski, 2011; Organization for Economic Cooperation and Development, 2000), and even the ranks of the initial 11 were reduced by the mid-2000s to four or five large commercial banks that controlled a high percentage of consumer deposits. This remarkable process of bank consolidation played a critical role in the unfolding of the Global Financial Crisis, because most of these remaining giant banks derived a substantial share of their profits from trading in mortgage-backed securities and other complex derivatives (Stiglitz, 2010).

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But while the position of the giant commercial banks is unassailable, they have neglected one of the core missions of financial intermediaries loans to firms that produce things. To be sure, large corporations in the United States are able to raise short-term loans in the commercial paper market, and have been decreasingly dependent on bank credit lines for some time. But one significant casualty of bank consolidation has been a relative decline in small business lending, which is a labor intensive business. When bank loan officers make loans to small business firms, they usually spend considerable time getting to know more about prospective firms’ practices and prospects. The problem is that in a competitive banking environment, this labor intensive work is too costly to justify. When measured, for example, against profits earned from trading in currency or derivative markets, there is no contest. The banking industry has adopted several strategies to deal with this problem. One approach is to offer small business customers substantial credit lines through credit cards as a mechanism to help them cover certain expenses that occur in advance of revenue flows. The second is to use computerized approval systems for small business loans. But both strategies generally fail to provide small businesses with sufficient credit, particularly when they face risky circumstances. The algorithms for both business credit cards and computerized lending involve fairly standardized predictors of repayment, so that firms that are doing something new or different are likely to score poorly on these measures and be denied the credit that they need (Cortese, 2011; Morgan Stanley, 2010). Certainly, Big Pharma and the largest commercial banks represent extreme examples of dubious business strategies that have been undergirded by systematic government support. But when one looks through the list of the 500 largest business corporations in the United States, there are many other examples of entrenched firms that are heavily dependent on support from the government.4 Firms such as Boeing, Lockheed Martin, General Dynamics, Northrop Grumman, and Raytheon derive a large share of their revenues from ongoing defense contracts. There are the giant firms that derive their profits from selling oil and coal that have relied heavily on government subsidies, and in the case of coal, weak efforts to offset the massive externalities of mining and coal burning. In the entertainment and communications industry, giant firms have achieved entrenched positions by government licenses to use the airwaves and by a system of strong government protection of intellectual property. The Disney Corporation, for example, has famously lobbied Congress on several occasions to make

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sure that cartoon characters created in the 1920s and 1930s continue to be the firm’s exclusive property.

THE OTHER SIDE OF THE DUAL ECONOMY: GOVERNMENT POLICY AND INNOVATION FROM BELOW If reinforcing the institutional power of large firms was the sole component of the U.S. system, there would be little resilience, and little innovation within the system. But a parallel trend also strongly influenced by government policies has been the emergence of a dynamic innovation economy led by ever-changing cadres of innovative small- and medium-sized firms. Remarkably, much of this system operates outside and in parallel to the 500 largest corporations (Block & Keller, 2011), and it co-exists uneasily with the consolidation of power by the largest firms. Through a long process that began in the 1950s, this system has effectively altered the locus of innovation in the U.S. economy. Much of this system was a direct result of the Cold War with the Soviet Union that lasted from the end of World War II to the fall of the Soviet Union in 1991. U.S. policymakers recognized that U.S. superiority in scientific research was a major geo-political resource, and they made major investments to strengthen the nation’s scientific and technological capacities. One important element was continuing funding for a network of scientific laboratories that were originally established to develop the atomic bomb during the war. Another was the creation of the National Science Foundation in 1950 to put the federal government directly in charge of supporting and advancing university-based scientific research. A third foundational piece was the creation of the Defense Advanced Research Projects Agency (DARPA or ARPA) in 1958 in response to the Soviet launch of Sputnik. DARPA’s mission was to recruit leading scientists and engineers to fund the development of “over the horizon” technological capabilities that might have military applications in fifteen or twenty years (Block, 2008, 2011a; Roland & Shiman, 2002). In the decades immediately after World War II, military demand and research funded through Stanford University also nurtured the development of Silicon Valley as a new center for technology-based firms (Leslie, 2000; Saxenian, 1994). And it was in Silicon Valley that an important organizational innovation took form the rise of spin-off firms. When scientists and

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engineers working at a larger firm came up with promising new ideas, they would quit their jobs and start a new firm to develop this technology. Over time, the Valley developed a rich set of institutions, including venture capital firms, to help these start-ups grow and prosper. Even more importantly, program officers at DARPA quickly came to see that supporting some of these start-ups could be an effective way to accelerate technological development. In short, through the joining of a business logic with a governmental logic, a powerful new engine for technological development was born. This new system became publicly visible in the mid-1970s when Apple Computer, Microsoft, and Genentech the first of the biotechnology firms founded by a major research scientist were launched. While Apple and Microsoft did not receive direct governmental support in their early years, we know that the visits that Steve Jobs and Bill Gates made to the Xerox PARC Laboratory in Menlo Park had a profound impact on their business strategies (Fong, 2001). At Xerox PARC, Jobs and Gates saw the fruits of years of DARPA support for research on human computer interfaces. The Ethernet, the mouse, and the graphical user interface were already being used on Xerox PARC computers, and a significant part of what Apple and Microsoft were to do in their first ten years was to commercialize those technologies. Around this time, policymakers in Washington recognized that this emergent innovation system, which had proven effective for national security purposes, could be further leveraged to bolster the U.S. position in global trade competition. Starting in the Carter Administration and accelerating under Ronald Reagan, Congress passed a series of initiatives designed to improve the government’s ability to nurture new commercial technologies (Block, 2008). In effect, they were trying to build on DARPA’s successes by establishing similar capabilities in many different corners of the federal government. One important initiative of this period was the Bayh-Dole Act that gave universities the right to patent and commercialize technologies developed by researchers supported by federal funding. At the same time, a series of measures created incentives for the federal laboratories, including the nuclear laboratories, to support the spin-off of their research capabilities either by generating start-up firms or by collaborating with existing firms. Another important step was the 1983 creation of the Small Business Innovation Research Program (SBIR) that provided funds to small technology firms to explore the viability of a potential innovation. This funding source meant that if university or federal laboratory researchers wanted to create a new firm to explore the commercial potential of a newly developed

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product, they might be able to win SBIR support for the first several years of research (Keller & Block, 2013). Over the last thirty years, these and other initiatives have matured into a highly effective system for generating sophisticated new products, enabling a large share of innovation to occur outside of large corporations. In fact, during this same period, many of the large corporations eliminated or significantly cut back their laboratory operations and increased their commitment to “open innovation” (Chesbrough, 2006). This means, essentially, that rather than relying upon internal laboratories to develop innovative new products, they would collaborate with external partners and/or purchase technologies on the market via acquisitions or by licensing the rights from existing firms, universities, or public research laboratories. This dramatic shift in the locus of innovation is demonstrated in our study of the R&D 100 Awards (Block & Keller, 2009). Each year, R&D Magazine recognizes 100 commercially available innovations regarded as significant breakthroughs, as determined by juries of experts and the magazine’s editors. While Fortune 500 companies acting alone routinely won 40 or more of the annual awards in the 1970s, by the 2000s they averaged only about 10 awards per year and most of these were in collaborative projects with start-ups, universities, or government laboratories. By contrast, over the last three decades small- and medium-sized firms, often working in collaboration with publicly funded institutions, dramatically increased their share of awards. Equally important evidence is provided by shifts in the employment of scientists and technologists working for the private sector. A generation ago, the vast majority of Ph.D. scientists worked at the largest firms those with 10,000 or more employees. But this has changed over a generation: now the majority of Ph.D. scientists and engineers who work for industry are employed at firms with fewer than 500 employees (Keller & Block, 2013). These shifts have sharply increased the U.S. economy’s ability to generate novel products based on new technologies. When the innovation process was dominated by large firms, each firm would pick the most promising ideas from its laboratories and try to bring a handful of new products to the marketplace each year. Perhaps there were several hundred big firms which dominated the innovation process; if each focused on a moderate number of ideas (only some of which would succeed), one would expect the innovations to count in the hundreds or low-thousands. Today, by contrast, there are tens of thousands of firms pushing new ideas. Even if many of those firms ultimately fail, they provide a vast repository of knowledge about both

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promising leads and technological dead-ends that can be drawn upon by others. Moreover, whereas the primary actors in the older firm environment were concentrated and stable, the more recent firm environment is characterized by decentralization and the continuous churning of both firms and ideas. The result has been an acceleration of the innovation process. It is this system of new firms, operating with the support of government, that has provided the steady stream of new products that has sustained U.S. global economic leadership. Key products include the personal computer, consumer software, biotechnology drugs, solar photovoltaics, and new materials that are often engineered with the use of nanotechnologies. And even when successful products such as Apple’s iPhone and iPad have been developed by an established firm, many of the capabilities of these electronic devices have been produced by smaller firms. For example, the Siri personal assistant that is available with the iPhone was developed by a small firm working with support from the Defense Department that was ultimately purchased by Apple. But a central problem with this “bottom up” innovation system remains. Small- and medium-sized firms in the United States often find themselves unable to raise the capital required to bring new ideas to fruition. There is little tradition in the United States of banks financing longer-term investments by small businesses that are pursuing risky new technologies. Moreover, as the banking industry has faced extraordinary consolidation over the last three decades, this type of lending has become ever more scarce. These small firms are also unable to raise capital in the equity markets; with only rare exceptions, firms must have a marketable product before they are allowed to make an initial public offering of shares. And despite the celebration of the venture capital industry, the reality is that only a modest share of their investments goes to early-stage technology companies (Branscomb & Auerswald, 2002; Keller & Block, 2013). Investments are rather focused on firms with technologies close to marketreadiness, or on the relatively small number of firms viewed as having the potential to imitate the spectacular successes of Microsoft or Google. Government programs have filled some of this financing gap. The Small Business Administration provides government guarantees for a certain volume of bank loans to small firms. SBIR and similar programs provide transitional funds to some firms.5 But the reality is that both the scale and duration of the government efforts are insufficient relative to the number of firms that require financing help which is often needed for five or six years.6 Some firms fail for want of financing, and others pursue the second best option of selling their technology to a large firm.

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In fact, the chronic problem of financing these smaller firms has made it easier for incumbent firms to adopt the strategy of open innovation. Many of the large firms treat the development of new products as something that can be outsourced in the same way that they might outsource legal services or their payroll systems many, for instance, have launched their own corporate venture capital operations to seek out promising technologies developed externally (National Institute of Standards and Technology [NIST], 2008).7 For the innovative firms, selling their company or licensing a technology is typically a second best alternative to taking the innovation to market themselves since earlier sales of technology ideas generally receive less generous terms than do technologies close to market-readiness (Gompers & Lerner, 2010). Yet this is often precisely what happens because of the difficulties of raising capital sufficient to continue independent development (Keller & Block, 2013). In sum, rather than an LME characterized primarily by the use of markets as coordinating mechanisms, the United States employs distinctive policies and relationships that inexorably link private industry with different elements of a highly decentralized state apparatus. These institutional relationships retain a dual character that has fostered, on the one hand, strong political influence from the largest corporations. On the other hand, government policies also helped to generate the rise and expansion of the smaller firms that have allowed the larger corporations to pursue open innovation. Though these embedded relations provide spaces and even potential levers for the reinvigoration of the economy, they also generate distinctive weaknesses and potentials for atrophy.

POTENTIAL SOURCES OF STAGNATION WITHIN THE U.S. SYSTEM We can condense a number of critical challenges to the future of the U.S. innovation system under four distinct headings.

Predation by Large Incumbent Firms It is well known that campaign donations play a large role in U.S. politics, and recent Supreme Court cases have opened the floodgates of unlimited independent spending by corporations and the very wealthy. The largest

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corporations make substantial political donations and they maintain armies of lobbyists in Washington to influence both legislative and executive branch decisions (Crouch, 2011, Mettler, 2011). The lax regulation that allowed the big Wall Street firms to make dangerous bets in the financial markets was directly linked to the Street’s huge contributions to both major political parties (Fligstein & Goldstein, 2010). This pattern creates a danger that established corporate giants will use their political clout to close off opportunities for smaller, challenging firms. One paradigmatic case pits traditional energy giants, which derive their core revenues from coal and oil, against an emergent green energy sector which at this stage mainly consists of small- and medium-sized firms committed to solar energy, wind energy, advanced batteries, biofuels, and energy-efficient building technologies. The Obama Administration used resources from the 2009 stimulus bill (the American Recovery and Reinvestment Act) to drive this sector forward and the Department of Defense is also using a measure of its procurement power to do the same. But established energy firms successfully used their clout on Capitol Hill to defeat a comprehensive energy bill that might have tilted the playing field away from carbon-based fuels. And since the Republican victory in the 2010 mid-term elections, the House of Representatives has blocked many green energy initiatives including the extension of various tax credits. The combination of a determined Republican opposition and historically low natural gas prices could lead to premature death for many of these green energy firms. Another type of predation is the use of patent portfolios by large firms to stymie innovations by newcomers. The starting point is that existing patenting procedures have made patents increasingly narrow; one new machine, for example, might involve 200 different patents that cover how particular parts are made or how they interact with other parts. In response to this complexity, many established technology firms have accumulated huge portfolios of patents that they primarily use for strategic purposes (Bessen, 2003). If they are sued by a competitor for patent infringement, they hold so many distinct narrow patents that they are often able to find some in their collection that the other firm has infringed. Once they countersue or threaten to do so, the likelihood is increased that the two sides will negotiate some relatively modest settlement that will allow each party to continue marketing their new products. But incumbent firms also have the option to use their portfolios against newcomers who lack the resources to fight lengthy legal battles that may occur in multiple jurisdictions. In short, the combination of an irrational patent regime and aggressive legal strategies by big firms could effectively stifle small-firm innovation.8

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These specific instances are simply examples of the potential ability of incumbent firms to use their political leverage and their deep pockets to stifle new rounds of innovation. For example, in the 1990s, there were widespread fears in the technology industry that Microsoft was using its near monopoly on computer operating systems to gain a similar monopoly over web browsers, which it could then use to channel future web development in manners consistent with its corporate goals (Bank, 2001). When the Clinton Administration was in power, it filed an antitrust case to avert this possibility, but a different administration might well have decided against intervention.9 To be sure, there are modest counter-weights within the current institutional arrangements that could help to discourage aggressive strategies by larger firms. Practices of open innovation depend upon the existence of external technical expertise and a repository of technology ideas developed by smaller competitors and/or university and government researchers. But there is no clear reason why such resources would have to be concentrated in a particular national or spatial location over the long term; as we discuss below, there is evidence that R&D operations in some fields have already begun to relocate to non-U.S. locations. In sum, the dynamism of the U.S. model has come from new ideas and new products bubbling up from below, often through the efforts of small start-up firms. But there is a distinct danger that the political and financial power of incumbent firms will increasingly tip the playing field in their own favor. If obstacles to new firm creation become increasingly severe, this would discourage potential entrepreneurs and lead to a downward spiral in U.S. innovative dynamism.

Fiscal Crisis The United States has been struggling with fiscal crisis at the federal, state, and local levels for a generation (Block, 2007, 2009, 2011b). Despite demands for government services rising at every level of government, there have not been correlative increases in revenues because of a politically potent antitax sentiment held by a significant sector of the electorate. Both Ronald Reagan and George W. Bush were elected to office with promises to make cuts in Federal income taxes that would primarily benefit the wealthiest households. As they implemented these cuts, fiscal pressures trickled down to other levels of government since transfers from the federal government were reduced. Since state and local governments also faced strong

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opposition to increased taxation, a common pattern has been to cut back services or charge much higher fees for those that are still being provided. The largest corporations and financial institutions bear significant responsibility for this ongoing fiscal crisis. They have typically been politically allied with grassroots antitax activists and with the conservative politicians who have encouraged the demonization of taxation. In doing so, they have pursued their own self-interest by reducing corporate taxes and diminishing the tax burden on the highest income households (Block, 2007). Federal spending for research and development and commercialization of new technologies had a brief upward turn with the stimulus bill in 2009, but federal R&D as a percentage as GDP has since resumed an incrementally downward trajectory that began in 2004.10 Without increases in federal revenues or, with further cuts made due to budgetary pressures or calls for austerity this spending will likely continue to decline over the next decade. This means that fewer university-based researchers will have their grants funded, the federal laboratories will be forced to cut outlays for staff and equipment, and programs such as SBIR will have fewer resources to invest in small innovative firms. Given the key role of these programs in supporting new technology developments, there is the distinct possibility of a contraction in the populations of high-tech start-ups.

The Misallocation of Capital In an earlier era, concerns over scarcity of capital were a critical factor in governmental policy actions (Krippner, 2011). Today, the U.S. economy has ample supplies of capital available for investment, but the existing financial structure is unable to direct these funds where they are most needed. The largest corporations have adopted very high hurdle rates that have to be satisfied before making new investments, so many of them are sitting on large cash hordes. Moreover, following the brief interruption for the 2007 2009 recession, many of these firms return hundreds of billions of dollars per year to shareholders in the form of stock repurchases that have the added benefit of assuring that the stock options provided as a key part of executive compensation packages will be “in the money” (Lazonick, 2010). At the same time, we have already seen that the largest financial institutions are reluctant to devote resources to small business lending while they continue to lend generously to other firms in the financial sector. Data from the Federal Reserve Flow of Funds show that gross investment by nonfinancial, noncorporate businesses had peaked at close to

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$300 billion per year before the recession started in 2007.11 To be sure, the Federal Reserve category does not coincide precisely with the universe of small- and medium-sized firms, but it gives a rough indication of activities in that sector.12 But only slightly more than $100 billion of these outlays were financed by borrowing, indicating that even at the peak of the boom, these firms had to rely on internally generated funds to finance most of their expansion. The recession produced a sharp drop in both their rate of investment and their borrowing; even as late as 2011, their total annual borrowing was close to zero. This suggests that the scarcity of capital available for small- and medium-sized enterprises has been severe. To be sure, some commentators have pointed to venture capital as an institutional source of dynamism in the U.S. economy (Shapin, 2009) and a unique support for small, high-technology firms. But the reality is that venture capital firms devote only a small share of their investment in early-stage technology development, and even this funding has been extremely volatile (Keller & Block, 2013). Furthermore, most small- and medium-sized firms cannot possibly claim that they will generate the kind of spectacular future growth that attracts the interests of venture capitalists. Concerns about funding small- and medium-sized firms have become so acute that the deeply divided U.S. Congress actually passed a piece of legislation to address this problem. Provisions in the JOBS (Jumpstart Our Business Startups) Act of 2012 make it easier for small firms to raise capital by selling shares and permitting firms to engage in “crowdfunding” using the internet to raise limited amounts of capital. The bill was controversial because some see it as opening the door to an expansion of the kind of investor fraud that already occurs in various unregulated penny stock markets. But the main problem is that the legislation does not address the main sources of the capital crunch, and is unlikely to make a major difference for most capital-starved small businesses. Those firms particularly technology-intensive firms typically need longer-term investments and patient, knowledgeable investors. The institutional infrastructure for this kind of investment does not currently exist.

Fragmentation of Production and the Erosion of Skills Since the 1960s, large U.S. corporations have increasingly been “financialized” managed as bundles of assets to be allocated in manners that boost short-term profits (Boyer, 2005; Fligstein, 1990; Lazonick, 2009). Though the sources of change are complex, one of the outcomes fostered

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by this trend is the evaluation of patterns of internal corporate expenditures in terms of whether or not they will generate greater short-run profits in comparison to outsourcing similar functions to external parties. R&D operations are particularly vulnerable to such cost-benefit analyses when they are based in short-run calculations; after all, innovation is by definition unpredictable. So-called “blue sky” R&D programs aimed at longer-term outcomes or disruptive innovations are particularly vulnerable, as suggested by the dismantling or downsizing of many of the major research laboratories like Bell Labs and Xerox Parc that played a key role in earlier waves of innovation. While the trend toward outsourcing R&D functions is not necessarily problematic in itself as noted, the decentralization of industrial organization has arguably accelerated technological dynamism in the aggregate trends toward outsourcing high-tech manufacturing to firms outside the United States are potentially more troubling, as over the long-run, they could undermine U.S. advantages in two key respects. First, when manufacturing capacity is shifted to lower-cost locations in global competitors, it risks a “separation of production from R&D” (Florida & Kenney, 1992) that disrupts innovative dynamism. While trends toward outsourcing manufacturing initially emerged in lower-skilled fields such as garments and athletic shoes, over the last several decades foreign competitors through both low wages and deliberate government policies have also eroded the U.S. manufacturing base in high-tech fields ranging from computer hardware and flat panel displays to advanced batteries and photovoltaics (e.g., Office of Technology Assessment, 1995). In each of these fields, key scientific breakthroughs, and often product design functions, have occurred in the United States, but manufacturing has been relocated to settings with lower wages and, often, fewer protections for workers. Although these shifts lower the costs of production, the key point is that scholars have repeatedly shown that technology-intensive innovation tends to be fostered through collaborative exchanges between communities of specialists who combine distinctive bodies of knowledge (Hage, 2012; Hargadon, 2003; Lester & Piore, 2004) including ties between product designers, users, and the manufacturers who turn innovative ideas into actual products. If manufacturing continues to shift abroad, it is likely that corporate R&D operations will eventually follow as firms take advantage of the manufacturing skills and the practical know-how developed in production facilities. Indeed, part of the narrowing gap between R&D expenditures in the United States. and competitors like China is due to the (re-)location of R&D functions overseas, where they are both cheaper and typically in closer proximity to the factory floor (National Science Board [NSF], 2012;

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Table 1.

R&D Employment of U.S.-Based Multinational Corporations in 1994, 1999, 2004, and 2009 (Thousands).

Year

Employment in United States

Employment Abroad

Percent Abroad

1994 1999 2004 2009

624.8 646.8 716.4 738.7

102.0 123.5 137.8 267.4

14.0 16.0 16.1 26.6

Data Source: National Science Foundation, National Center for Science and Engineering Statistics, special tabulations (2011) of Bureau of Economic Analysis, International Economic Accounts, U.S. Direct Investment Abroad (2009 and previous years). NSF 2009 data is preliminary. Reproduced from NSF Science and Engineering Indicators 2012.

see Table 1). Moreover, the ability to relocate is not evenly distributed. Larger firms typically have greater capacity to shift R&D operations overseas than do domestically based small firms a trend that can be seen in recent NSF data which suggest that 30% of R&D workers at U.S.-owned firms with 1000 or more employees are located abroad, compared to only 11% among small firms.13 In addition, as the U.S. manufacturing base has eroded, there has been a correlative trend toward the disappearance of practical, “learning-bydoing” training programs that have historically been associated with building the skill capacities critical to innovation (Alic, 2011). While this trend has been in motion for some time, it seems unlikely that such skills will be strongly revived if manufacturing jobs continue to decline. While these trends are potentials that are not inherent to the U.S. institutional system, the decline of such skills parallels a broader trend toward the erosion and/or hollowing out of educational opportunities a battle that has been fiercely waged in the political and social spheres in recent years.

SOCIAL BARRIERS TO THE FUTURE OF THE U.S. MODEL Economic difficulties hardly exhaust the problems that the U.S. model faces. Growing inequalities in U.S. society are a direct threat to its ability to retain its global leadership in innovation. These deepening inequalities result from public policies that have encouraged the financialization of

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the U.S. economy and facilitated dramatic shifts in income toward the top 1% of the income distribution (Hacker & Pierson, 2010; Krippner, 2011). But the truly devastating dynamic has occurred as this upward redistribution of income is combined with the worsening fiscal crisis that impacts all levels of government. The vicious cycle in which the United States has been trapped for some time is that the tax burden on high income households and large corporations has been repeatedly lowered as a way to encourage job creation. These measures, however, have often had the effect of encouraging speculation and the kind of short-term financial calculations that run counter to productive or patient investments. In the meantime, cuts in federal revenue have forced a continuing series of civilian budget cutbacks including, particularly, reductions in the support that the federal government provides to state and local governments.14 These bodies, however, have faced rising infrastructure costs as well as mounting costs for health care and the maintenance of the prison system. Faced with intensifying fiscal crises that cross-cut levels of government, programs and outlays that were intended to protect citizens in the bottom half of the income distribution from the growing instability of household income have been significantly reduced (Hacker, 2006). Starting in the 1980s, for example, spending designed to provide subsidized housing for the poor has been dramatically reduced and the total number of public housing units has fallen as projects built in the 1950s and 1960s are demolished without being replaced. One result has been an intensified concentration of extreme poverty in certain residential pockets characterized by few services and much criminal violence. In order to escape from those neighborhoods, many of the other urban and suburban poor and near poor end up paying a high proportion of their income for rent (Dreier, Swanstrom, & Mollenkopf, 2005). These difficulties were intensified by the 1996 Personal Responsibility and Work Opportunities Act, popularly known as welfare reform (Block, Korteweg, & Woodward, 2006). This legislation ended the federal entitlement to welfare assistance for families with children and replaced it with Temporary Aid to Needy Families a program administered at the state level. The far tighter eligibility rules of the new program have meant that even during the 2007 2009 recession, there were states that refused to assist any additional families through the program (DeParle, 2012). There seems little doubt at this point that the Census Bureau’s findings of an increasing number of children living in extreme poverty less than half of the federal poverty level is connected to the decline in the percentage of

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poor children receiving federal assistance which, in turn, can be directly traced to this 1996 legislation. These resource shifts interact with an array of budget cuts, carried out at different levels of government, to adversely affect the opportunities and life chances of people in the bottom half of the income distribution. But one perhaps sees the most dramatic consequences in the area of education. The United States has long had a system of public schools with significant quality differences between affluent and less-affluent districts because public schools are usually supported by local property taxes. In the 1960s and 1970s, there were systematic efforts to narrow these differentials through public policies including federal spending in support of schools in poor neighborhoods. However, fiscal crisis has helped to undercut such efforts over the last three decades. The result has been a pervasive decline in quality that has not been reversed by the focus on testing pushed by reforms during the Administration of George W. Bush.15 The shifts have been most dramatic in higher education. Here, the state of California provides an important object lesson. California made large investments in education in the 1960s and 1970s, which involved a strong commitment to K-12 schools, and major investments in the University of California system of Ph.D. granting institutions, the state college system, and community colleges. The combination of investments in these educational tiers gave California the best educated labor force in the nation (Newfield, 2008). It was not coincidental that the computer industry, the biotechnology industry, and the entertainment industry grew rapidly in the state over subsequent decades: these industries were able to find ample supplies of skilled workers, including highly trained scientists and technicians. However, as California faced increasing fiscal crisis from the 1980s onward, the state has progressively retreated from these commitments. By 2008, California ranked 43rd among all states in spending per student in the public education system, and results in terms of student achievement were comparable. To make matters worse, while student fees and tuition for higher education were kept at low levels in the earlier decades in order to assure opportunity to young people from lower income households, these costs have risen rapidly over the last two decades. But rising tuition and fees have not been sufficient to offset declining state support, so schools have had to make repeated budget cuts that generate larger classsizes, fewer support services, and reduced financial aid. The consequence is that higher education is increasingly out of reach for growing sectors of the population, and future industries are unlikely to find the ample, spatiallyconcentrated, well-educated workforce that once helped firms to prosper.

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California’s experience parallels recent data that show that the historic advantage held by the United States in generating patterns of upward social mobility has now disappeared (Organization for Economic Cooperation and Development, 2010; Smeeding, Erikson, & Jantti, 2011). In the past, the United States was a highly open society where the children of impoverished immigrants were able to climb the ladder of opportunity if they had sufficient skills and drive. This was a contrast with the more classbound patterns in Europe, where access to educational opportunity was more limited for children from lower income households. This difference was an important pillar of the dynamism of the U.S. economy; it meant that creative entrepreneurs and technologists could more easily emerge from any corner of society. But the shift of income toward the wealthy and decades of prolonged fiscal crisis have eroded this advantage, as the United States is now among the least mobile of developed nations (Organization for Economic Cooperation and Development [OECD], 2010). In sum, growing social exclusion and the decline of upward mobility options for people in the bottom half of the income distribution threaten the dynamism of the U.S. economy in four distinct ways. First, the United States will have increasing difficulty providing the technically skilled labor force required for high-tech industries. Second, an innovation economy requires an expanding population of entrepreneurs with advanced technical skills who are willing to take risks. But obstacles to upward mobility mean that many of those potential entrepreneurs will not get the education that they need. Even when they do, students’ increasing levels of indebtedness are likely to reduce entrepreneurial risk-taking particularly among small firms, which have relatively high rates of failure.16 To be sure, the United States has long enjoyed the advantage of being a destination for entrepreneurial migrants scientists, engineers, professionals, and business leaders from around the world. But the economic downturn, the fiscal crisis, and rising social tensions in the United States in recent years have created a new wave of anti-immigrant fervor. Research on the Tea Party mobilization on the right wing of the Republican Party has emphasized that in all regions of the country, activists are particularly disturbed by the growth of immigration (Skocpol & Williamson, 2012). Though most of the anti-immigrant sentiment centers on undocumented immigrants from Mexico and Central America, there may be spillovers that impact legal immigrants and those from other regions. Third, an innovation society needs consumers with a certain level of skill and sophistication (Alic, 2011). As innovation becomes ubiquitous, users of new technologies help to improve and modify products and to become

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a part of the needed infrastructure for new rounds of innovation. For example, strides in developing internet commerce require many households to be connected to the internet with high speed connections. But active public policies in some countries and lower levels of inequality have allowed them to vault ahead of the United States in the percentage of the population connected to the internet at high speeds.17 The combination of a passive government role and deepening social inequality has created a deep digital divide in the United States that makes it more likely that future internet applications will be pioneered elsewhere. And the problem is not just a digital divide but a literacy divide. The OECD’s (2000) assessment of information-age literacy among adults found that only 53% of adults in the United States scored at level 3 or better on the test, while the comparable rate in the Nordic countries was 68% (Pontusson, 2011). This suggests that nearly half of U.S. adults have limited capacity to contribute to an information technology-based innovation economy as consumers, employees, or entrepreneurs. Fourth, an innovation society requires an effectively functioning democracy in which citizens have the capacity to steer new courses when they are necessary or appropriate. However, current trends in U.S. politics are moving away from this kind of inclusive and effective democracy. Recent Supreme Court decisions have led to an acceleration of flows of money from extremely wealthy individuals into the political process. In the most recent Republican Presidential primary, several candidates were able to continue in the race because of multimillion dollar donations from particular individuals. Moreover, corporations are also now able to spend unlimited amounts of money in independent efforts to support or oppose particular candidates without disclosing their involvement until after the election is completed. At the same time, legislatures in a number of states have recently passed measures to create new obstacles to participation in elections. At least 11 states have passed laws requiring that voters have valid, state-issued photo identification cards at the time that they cast ballots. While a driver’s license fulfills this requirement, a significant percentage of minority and young voters do not drive and might not have the resources or time to secure an appropriate card before going to the polls. These measures have been advanced as protections against voting fraud, but cases of fraudulent voting are rare. Since some of these legislatures have also reversed earlier measures that allowed early voting or made voter registration easier, it is clear that these are efforts to further reduce the United States’ already low rates of electoral participation in minority communities (Piven, Minnite, & Groarke, 2009).

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This type of democracy with unlimited donations by corporations and the rich and institutionalized measures to suppress voting by the poor is likely to weaken any political challenges to income and wealth inequalities and to undercut efforts to reduce the role of money in political campaigns. This increasingly oligarchic form of democracy (Winters, 2011) will make it more difficult for citizens to challenge the entrenched power of existing corporations and financial institutions.

DISCUSSION: WHY (MIS)UNDERSTANDING THE MODEL MATTERS One of the great ironies of recent history has been that the consolidation of power among giant corporations and large financial institutions in the United States has been facilitated by the rhetoric of free market economics. Beginning with Ronald Reagan and Margaret Thatcher, political leaders have pursued an agenda sometimes labeled as neoliberal, market fundamentalist, or the Washington Consensus that emphasizes rolling back the government’s role in the economy, cutting taxes, reducing public spending on social services and transfer payments, privatizing state-owned enterprises, lowering tariff and nontariff barriers to trade, and freeing business from government regulation. As we have argued, this ideology has provided cover for entrenched firms to use government to protect them from true market competition. But this free market rhetoric has become an ever greater threat to the future vitality of the U.S. economic system. For example, the hostility to taxation reduces government capacity and legitimacy. One consequence is that the largest banks face weak and underfunded regulatory bodies, leaving them free to pursue riskier strategies that could again destabilize the global economy. Similarly, declining investments in public education erode the skills and the wider-distribution of capacities necessary to advance domestic innovation. There is substantial danger for the negative feedback effects that scholars describe as “locking in” an institutional trajectory that would assure accelerated U.S. global decline. But there is a further irony. The successes of the United States in technology leadership, especially around the computer and the internet, have led other countries to emulate institutions that were thought to have contributed to these successes. Unfortunately, many such attempts have been based on a misdiagnosis of the key factors in U.S. technological dynamism.18

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The misleading history typically attributes the U.S. successes to three specific factors. The first is the existence of a venture capital industry that looks for and invests in early-stage technology firms in the expectation of huge payoffs when the new firm is able to sell its shares to the public in an initial public offering. This, in turn, supports the idea of relying on a stock market rather than bank financing as the key mechanism for long-term business financing. And finally, the claim is that the U.S. “winner take all” system in which investors and top corporate executives earn a disproportionate share of income is critical to incentivizing entrepreneurialism and economic growth (Hacker & Pierson, 2010; Lazonick, 2009). For nations such as Germany and Japan, emulating these aspects of the U.S. model has involved wrenching changes to different and wellestablished institutional arrangements (Streeck, 2009; Yamamura & Streeck, 2003). In both nations, banks played a key role in financing business and the stock market was historically less important as a financing mechanism. At the same time, introducing a higher level of income inequality has been jarring since there was an established consensus that there should not be a yawning gap between the top executives of a firm and average employees. But the reality is that the painful adjustments based on these factors are unnecessary, and likely to be counterproductive. There are four key errors in these mistaken model(s) that have often bled into both U.S. and domestic policy debates which stem from the over-emphasis on markets as coordinating mechanisms in analyses of the U.S. system: 1. The centrality of public sector investments in research and development are downplayed, as is the critical role played by state actors and state institutions in supporting the development of new technologies (Block & Keller, 2011). 2. By writing the government role out of the story, venture capital firms are promoted from important but supportive institutions to the central players in the drama. The role of venture capital in the innovation system is certainly critical. But private venture capital does not by itself provide sufficient resources to foster the recurrent Schumpeterian churning of small innovative firms (Keller & Block, 2013). 3. The stock market system of financing in the United States has in many respects been a negative factor in the growth of the small-firm-based innovation economy. To be sure, there are success stories like Amazon and Google that have had successful initial public offerings and grown into powerful corporations. But these stories obscure the more common

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experience of innovators who have great difficulty raising sufficient capital. A system of long-term investments by banks, similar to the way that firms that are a part of Germany’s Mittelstand have been financed (Deeg, 1999), would be more consistent with the continued and continuous growth of small- and medium-sized enterprises in the United States. 4. Finally, there is little evidence that the enormous income differentials in the United States are necessary for the success of its innovation system. Many of the scientists and engineers who become entrepreneurs have the same motivation they had when they were doing research they want to solve problems. While the possibility of making money in the process is certainly attractive, this is hardly justification for corporate CEO’s making $100 million per year or hedge fund managers making more than $1 billion per year (Lazonick, 2009).

THE DIALECTIC OF DUALISM IN THE U.S. MODEL Our argument is that over the last generation from the 1980s onward the U.S. economy has been moving simultaneously in two conflicting directions. There has been a developmental direction based on the accelerated appropriation of science and technology, the incorporation of computer and information-based technologies throughout social life, and the widespread diffusion of new skills and capacities. The main embodiment of this tendency has been the emergence of a substantial sector of small, hightechnology firms making key breakthroughs, usually with support and guidance from decentralized initiatives sponsored by the federal government. Yet at the same time, giant corporations and financial firms also with the support of the federal government have become more skillful in extracting resources from society and concentrating wealth in the hands of a relatively small elite. This process of extraction has accelerated the movement of jobs, particularly in manufacturing, to overseas locations, and it has effectively hollowed out communities across the nation, leaving them without sufficient employment opportunities or access to the credit required to build new economic pathways. And with a deepening fiscal crisis, there has been a widespread decay of public services, especially education. The fact that government policies are at the center of both sides of this dualistic economy means that there is no way to avoid analyzing politics in the United States if we are to understand where the economy is heading. Here we immediately come up against the unprecedented polarization

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between the political parties that has accelerated steadily over thirty years. Through much of the nation’s history, both of the major parties were ideologically diverse making it possible to pass major new initiatives with bipartisan support. The key legislative structural reform passed in the 20th century such as the Federal Reserve Act in 1913, the Social Security Act in 1935, the Civil Rights Act in 1964, and the Medicare Act in 1965 all received bipartisan support in both houses of Congress. In contrast, Barack Obama’s health care reform plan passed in 2010 without a single Republican vote in either house. As indicated by the ongoing battles over taxation and levels of government spending, this degree of polarization leads to gridlock. Occasionally, one party can prevail in a particular battle, but then the momentum is likely to shift to the other side that is then able to block additional steps. The consequence is that even though the two parties offer radically different paths forward, neither of them is able to make definitive progress down their preferred path. While the Democrats would like to raise more government revenue in order to increase spending for innovation, infrastructure, and social programs, they have been effectively stalemated. But at the same time, the Republican efforts to radically restrain spending on the biggest items in nondefense spending Social Security, Medicare, and Medicaid have also been defeated. The gridlock generates three different plausible scenarios for the future. The first is continued gridlock. The second is that the Republicans win a large enough electoral victory and can sustain it over several cycles so that the Democrats are forced to accept their path into the future. The third is that the Democrats win overwhelmingly in several consecutive elections and force the Republicans to return to bipartisan cooperation. At this point, continuing gridlock appears far and away the most probable outcome. Even after Obama’s reelection victory in 2012, the Republicans have been able to block any new legislative initiatives. While the Republicans could sweep the Presidency and control of Congress in 2016, their commitment to slashing popular programs such as Medicare is likely to generate a political backlash that would empower the Democratic opposition and move things back toward gridlock. But a continuation of political gridlock is likely to tip the scales toward accelerating economic decline. Without a significant increase in tax revenues, continuing fiscal crisis will weaken the innovation economy. Moreover, gridlock generally benefits entrenched corporate and financial interests because the existing rules and regulations support their established positions. For example, gridlock encourages resistance by the big financial

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institutions to any improvement in the capacity and strictness of the agencies that regulate finance. The expected consequence is continued misallocation of capital that further weakens the dynamic sectors of the economy. It seems, therefore, that the only possible short- to medium-term scenario that would definitively tilt the United States onto the path of renewal is the circumstance in which Democrats control the White House and at least one house of Congress, alongside the emergence of a strong and widespread progressive grassroots insurgency. This could effectively shift the balance of political power such that even some Republicans would participate in the passage of critical reform legislation. This was, after all, precisely what happened during the two great reform Congresses of the 20th century the one that sat in 1935 1936 and the one in 1965 1966. In the first period, it was widespread labor insurgency that pushed the political system toward reform; in the second, it was the Civil Rights movement and its supporters. In the Fall of 2011, the Occupy Movement initially in Zucotti Park near Wall Street and then in dozens of locations across the country briefly suggested the possibility of grassroots pressures generating a new reform era. To be sure, unlike the labor movement and the Civil Rights Movement, Occupy activists refused to put forward a concrete set of demands. But Congressional Republicans did not budge from their obstructionism and police repression was ultimately able to disrupt the movement’s major weapon its ability to hold strategic and highly visible urban spaces. Nevertheless, it is striking how deep an impact this short-lived insurgency has had on national political debates. For the first time in thirty years, the Occupy Movement successfully made a major issue of the dramatic shift of wealth in favor of the top 1%. These questions continued to resonate as controversies over Mitt Romney’s personal taxes and the Republican support for even more tax relief for the wealthy were central issues of the 2012 election cycle. Let us imagine, however, that the Occupy moment was simply a dress rehearsal for a broader insurgency pressing the demands of those whose social and economic position has been damaged by the disappearance of jobs paying a middle-class wage, the retreat of the public sector, and the huge economic gains made by the 1%. Under those circumstances, a new reform epoch that could strengthen the dynamic sectors of the U.S. economy and weaken the position of entrenched extractive elites would be possible. This is certainly not the likeliest scenario, but it is probably the most compelling alternative that would avert a precipitous national decline.

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NOTES 1. To be sure, the large pharmaceutical companies have successfully gained approval for many variations on existing drugs sometimes combining two approved medications in a single pill. Though these marketing innovations generally make little contribution to public health, they have often made it possible for firms to extend patent protections of products that might otherwise go “off patent.” More generally, scholars have shown that public sector research has become increasingly important to industry developments (e.g., Cockburn & Henderson, 2001). 2. The WTO’s brief explanation of the pharmaceutical patent regime can be found at: http://www.wto.org/english/tratop_e/trips_e/pharma_ato186_e.htm 3. Indeed, these trends have led some executives within the industry to argue for even greater outsourcing and less internal expenditure on R&D (e.g., Herper, 2011). 4. Additional examples from fields including health care, tax policy, and student aid are detailed in Mettler (2011). 5. A recent study prepared for the NIST on small and medium manufacturers suggests that “103 federal government programs administered across at least 17 departments and independent agencies offer funds for small businesses or small-tolarge size manufacturers in a variety of areas.” Nevertheless, many are small and/or inaccessible to most firms, and the study’s central finding was that “a lack of available capital has restricted the ability of many small manufacturers to grow and compete in the current business environment” (NIST, 2011, pp. 1 2). 6. In the case of biotechnology or pharmaceutical developments, the horizon is typically longer (Pisano, 2006). 7. Corporate venture capital (CVC) operations date to the 1960s; they expanded as trends toward financialization and de-verticalization were accelerating in the 1970s and 1980s (Gompers & Lerner, 2000, p. 21). CVCs do not solve the earlystage financing problem; they actually invest less in early-stage technologies than traditional venture capitalists. A recent analysis (NIST, 2008, p. 4) notes: “From 1998 to 2006, the share of venture capital investment in start-up companies fell from 8 percent to 5 percent, and the share of investment in early-stage companies fell from 26 percent to 15 percent. For CVCs, the share of investment in start-up companies fell from 7 percent to 3 percent, and the share of investment in earlystage companies fell from 23 percent to 10 percent.” 8. The Wall Street Journal quoted a patent law expert as saying: “These days, it would be nearly impossible for a start-up to build and market a new smartphone … The licensing fees and lawsuits would keep it from getting an inch off the ground” (Jones, 2012). 9. A comparable battle has been playing out in recent years around the concept of “net neutrality” the idea that internet service providers should assure equal access to all providers of web content. While the Obama Administration has embraced this idea, powerful industry leaders have argued that they should be allowed to charge different prices to different content providers or deliver content at different speeds. The concern is that such policies could allow a handful of major media companies to establish dominant internet channels that would quickly crowd out other providers. In short, the history of the internet could replicate the history

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of radio in the United States where a multitude of different providers were ultimately winnowed down into a small handful of giant radio networks. 10. This downward trend parallels the United States’ diminishing share of global R&D spending; from 1999 to 2009, the U.S. share fell from 38 percent to 31 percent. While the gross amount of R&D spending in the United States continues to lead the world, as of 2012 the U.S. R&D to GDP ratio ranked it eighth among OECD countries (NSF, 2012, chapter 4). 11. The data are from Table F.103 of the Federal Reserve, Flow of Fund Accounts of the United States available at http://www.federalreserve.gov/releases/ z1/Current/annuals/a2005-2010.pdf. Accessed on May 2, 2012. 12. Some very large firms are organized as S corporations or partnerships because of tax advantages and might be included in nonfinancial noncorporate businesses. 13. NSF, 2012, Chapter 3. Overseas R&D investments are particularly concentrated in particular sectors: “By far, the industry that performed the most R&D outside of the United States was the pharmaceuticals and medicines industry ($10.9 billion) … Other industries … were automobiles, automobile bodies, trailers, and parts manufacturers ($8.4 billion), semiconductor, and other electronic components manufacturers ($7.1 billion), and software publishers ($6.3 billion)” (NSF, 2012, p. 25). 14. The fiscal crisis has, of course, been exacerbated by high levels of U.S. defense and national security spending, including the costs of wars in Afghanistan and Iraq. 15. Research suggests that quality pre-school programs can play an important role in reducing the negative impact of low income on children’s school experience (Nolan et al., 2011), and here again fiscal crisis has eroded spending for child care programs that assist poor children in the United States. 16. Using data from the Census and the Bureau of Labor Statistics, the U.S. Small Business Administration suggests that about half of all new employer firms fail within five years. See http://www.sba.gov/sites/default/files/sbfaq.pdf 17. According to one recent analysis of access to broadband services (Information Technology and Innovation Foundation, 2008), from 2001 to 2007 the U.S. dropped from 4 to 15 among OECD countries. 18. To be sure, these misunderstandings are not accidental; they have been propagated by free market ideologues who have recounted a misleading version of history (e.g., Chang, 2003).

ACKNOWLEDGMENT Fred Block is grateful to support from the Ford Foundation for research that has informed this chapter, and to staff members at the UN Human Development Report for valuable criticisms on an earlier version. Miriam Joffe-Block and Marian Negoita contributed key ideas. John Kincaid

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provided helpful research assistance. Matthew Keller thanks Sean O’Riain and colleagues at the National Institute for Regional and Spatial Analysis (NIRSA) at the National University of Ireland (Maynooth) for conversations and space provided during a research leave.

REFERENCES Alic, J. (2011). Everyone an innovator. In F. Block & M. R. Keller (Eds.), State of innovation (pp. 236 260). Boulder, CO: Paradigm. Angell, M. (2005). The truth about the drug companies. New York, NY: Random House. Bank, D. (2001). Breaking windows. New York, NY: Free Press. Bessen, J. E. (2003). Patent thickets: Strategic patenting of complex technologies. School of Law, Boston University. Available at http://www.researchoninnovation.org/thicket.pdf Block, F. (2007). Understanding the diverging trajectories of the United States and Western Europe: A neo-polanyian analysis. Politics & Society, 35/3, 3 33. Block, F. (2008). Swimming against the current: The rise of a hidden developmental state in the United States. Politics & Society, 36/2, 169 206. Block, F. (2009). Read their lips: Taxation and the right-wing Agenda. In I. W. Martin, A. K. Mehrotra, & M. Prasad (Eds.), The new fiscal sociology (pp. 68 85). Cambridge: Cambridge University Press. Block, F. (2011a). Innovation and the invisible hand of government. In F. Block & M. R. Keller (Eds.), State of innovation (pp. 1 30). Boulder, CO: Paradigm. Block, F. (2011b). Daniel Bell’s prophecy. Breakthrough Journal, 2, 53 61. Block, F., & Keller, M. R. (2009). Where do innovations come from? Transformations in the US economy 1970 2006. Socio-Economic Review, 7/3, 459 483. Block, F., & Keller, M. R. (Eds.). (2011). State of innovation. Boulder, CO: Paradigm. Block, F., Korteweg, A., & Woodward, K. (2006). The compassion gap in American poverty policy. Contexts, 5/2(Spring), 14 20. Boyer, R. (2005). From shareholder value to CEO power: The paradox of the 1990s. Competition & Change, 9/1, 7 47. Branscomb, L. M., & Auerswald, P. E. (2002, November). Between invention and innovation: An analysis of funding for early stage technology development. National Institute for Standards and Technology. NIST GCR 02-841. Chang, H.-J. (2003). Kicking away the ladder: Development strategy in historical perspective. London: Anthem. Chesbrough, H. (2006). Open innovation: The new imperative for creating and profiting from technology. Boston, MA: Harvard Business School Press. Cockburn, I., & Henderson, R. (2001). Publicly funded science and the productivity of the pharmaceutical industry. In L. Jaffe & Stern (Eds.), Innovation policy and the economy (Vol. 1, pp. 1 34). Cambridge, MA: MIT Press. Cortese, A. (2011). Locavesting. Hoboken, NJ: John Wiley. Crouch, C. (2011). The strange non-death of Neoliberalism. Cambridge, UK: Polity. Davis, G. E. (2009). Managed by the markets. New York, NY: Oxford. Deeg, R. (1999). Finance capitalism unveiled. Ann Arbor, MI: University of Michigan Press.

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Leslie, S. W. (2000). The biggest “Angel” of them all: The military and the making of silicon valley. In M. Kenney (Ed.), Understanding silicon valley: The anatomy of an entrepreneurial region. Stanford, CA: Stanford University Press. Lester, R., & Piore, M. (2004). Innovation: The missing dimension. Cambridge, MA: Harvard University Press. Mettler, S. (2011). The submerged state. Chicago, IL: University of Chicago Press. Moore, A. (2003). The big and small of drug discovery. EMBO Reports, 4, 114 117. Morgan Stanley. (2010). B2B Finance: Credit Crunch Creates Opportunities for Large Corporates: Poses Policy Challenges. Morgan Stanley Report (March). National Institute of Standards and Technology (NIST). (2008). Corporate Venture Capital: Seeking Innovation and Strategic Growth. NIST 08-916. National Institute of Standards and Technology (NIST). (2011). Connecting small manufacturers with the capital needed to grow, compete, and succeed: Small manufacturers capital access inventory and needs assessment report. Washington, DC: NIST. (November). National Science Board (NSF). (2012). Science and Engineering Indicators 2012. Arlington, VA: National Science Foundation. (NSB 12-01). Newfield, C. (2008). Unmaking the public university. Cambridge, MA: Harvard University Press. Office of Technology Assessment. (1995). Flat Panel Displays in Perspective. OTA-ITC-631. Organization for Economic Cooperation and Development (OECD). (2000). Literacy in the information age. Paris: OECD Publishing. Organization for Economic Cooperation and Development (OECD). (2010). Economic policy reforms: Going for growth. Paris: OECD Publishing. Pisano, G. (2006). Science business: The promise, the reality, and the future of biotech. Boston, MA: Harvard Business School Press. Piven, F. F., Minnite, L. C., & Groarke, M. (2009). Keeping down the black vote. New York, NY: New Press. Polanyi, K. (2001[1944]). The great transformation. Boston, MA: Beacon Press. Pontusson, J. (2011). Once again a model: Nordic social democracy in a globalized world. In R. Cronin & Shoch (Eds.), What’s left of the left (pp. 89 115). Durham, NC: Duke University Press. Roijakkers, N., & Hagedorn, J. (2006). Inter-firm R&D partnering in pharmaceutical biotechnology since 1975: Trends, patterns, and networks. Research Policy, 35, 431 446. Roland, A., & Shiman, P. (2002). Strategic computing: DARPA and the quest for machine intelligence, 1983 1993. Cambridge, MA: MIT Press. Saxenian, A. (1994). Regional advantage: Culture and competition in silicon valley and route 128. Cambridge, MA: Harvard University Press. Shapin, S. (2009). The scientific life: A moral history of a late modern vocation. Chicago, IL: University of Chicago Press. Skocpol, T., & Williamson, V. (2012). The tea party and the remaking of republican conservatism. New York, NY: Oxford University Press. Smeeding, T., Erikson, R., & Jantti, M. (Eds.). (2011). Persistence, privilege and parenting: The comparative study of intergenerational mobility. New York, NY: Russell Sage. Stiglitz, J. (2010). Freefall. New York, NY: Norton. Streeck, W. (2009). Re-forming capitalism. Oxford: Oxford University Press.

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COLD WAR AND CHINA IN THE (UN)MAKING OF THE GLOBAL DOLLAR STANDARD Ho-fung Hung ABSTRACT Since the 1970s, many global political economists have been seeing the US as a declining hegemon. After four decades into this hegemonic decline, performance of economies having been regarded as candidates for new hegemons such as Germany/Europe and Japan fell far short of these expectations, while US share of the global economy and its military supremacy remained stable. This staying power of the US stems from the “dollar standard,” under which the US dollar is the dominant foreign reserve currency and international transaction medium in the world economy. The dollar standard originated in the Cold War era when all major capitalist powers relied on the US for military protection. It persisted after the end of Cold War, thanks to the continuous mutual reinforcement of the dollar standard and the global domination of the US military. The recent rise of China, which is the first major capitalist power outside the orbit of US military protection, poses a serious dilemma to the US. On the one hand, China’s export-oriented development drives China to purchase US Treasuries on a massive scale, hence

The United States in Decline Political Power and Social Theory, Volume 26, 53 80 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0198-8719/doi:10.1108/S0198-8719(2014)0000026003

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lending support to the short-term viability of the dollar. On the other hand, US’s skyrocketing current account deficit, much attributable to China, precipitates a crisis of confidence over the dollar’s long-term prospects. China is likewise caught in a dilemma between sustaining its export-driven growth and shifting to a domestic-consumption-driven economy. The development of the US China currency conflict, together with the transformation of the Chinese developmental model, will be the most important determinant shaping the future of the dollar standard and US global power in the years to come. Keywords: US Hegemony; China; Global Dollar Standard

INTRODUCTION Among scholars in the tradition of world system analysis, the declining hegemony of the US has been a main theme since the inception of this tradition in the 1970s. For the world systemist, a hegemonic capitalist power derives its political leadership among other capitalist powers from its economic supremacy as reflected in its share of world GDP, together with the profitability and competitiveness of its enterprises. When an old hegemonic power declines (such as eighteenth-century Dutch and early twentiethcentury Britain), multiple new capitalist powers (such as France Britain in the eighteenth century and Germany US in the early twentieth century) would contend for the role of new hegemon. Rivalry and chaos would grow until one of the hegemonic contenders managed to secure its overwhelming economic advantage and harness this advantage to end the chaos, leading other core powers to establish a new global order under the terms it devised. After the new hegemon reaches its zenith of influence, new capitalist powers, taking advantage of the stable environment for capital accumulation provided by the hegemon, emerge and challenge the incumbent hegemon, eroding its economic competitiveness and geopolitical clout. This initiates a new round of rivalry and global chaos, and the cycle repeats. Witnessing the US defeat in Vietnam and its persistent fiscal, economic, and socio-political crises in the 1970s, world systemists reasoned inductively that the United States had entered the phase of hegemonic decline just as United Kingdom did in the early twentieth century (Arrighi, 1994; Arrighi & Silver, 1999; Chase-Dunn et al., 2005; Wallerstein, 1979). Drawing on experiences of past hegemonic transitions, world systemists

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have been enthusiastic to look for potential candidates for a new hegemon, with Germany (or a unifying Europe) and Japan topping the list in the 1970s through the 1990s. After three decades of discussion about US decline, some started to find anomalies of this decline in comparison with earlier hegemonic declines. For example, Giovanni Arrighi (1994) notes that the United States, after losing its economic supremacy that it once enjoyed in the 1950s and 1960s, managed to maintain a military apparatus which is still far beyond challenge by any other capitalist powers. In particular, Europe and Japan, the two economic powers which had posed grave challenges to the United States, have only negligible military capability and depend on the United States for their security needs. Moreover, the sustainability of economic challenge that Japan and Europe posed to the United States has been in doubt. While Japan has been pulled into an economic quagmire since the 1990s, Europe’s integration has encountered huge obstacles when nationalist sentiments against EU rose in the 2000s and the euro crisis erupted after 2008. It is therefore not exaggerating when Arrighi postulated that one possible scenario for a post-American world order is a US-centered global empire grounded on America’s unmatched means of coercion around the world. After all, US share of world GDP has not declined as dramatically as the hegemonic decline thesis suggests. It only dropped from the height of 35 percent in 1960 to 28 percent in 2010 (World Bank). With its productive competitiveness and state capacity continuously deteriorating from the 1970s till today, as illustrated by its worsening current account and fiscal deficits that have gone astronomical, the question is how and why US could still hold on to its economic weight and global military domination. In this chapter, I argue that the status of the US dollar as the most widely used reserve currency and international transaction currency is the missing link that helps explain US staying economic and politico-military power in the last thirty years. The globally dominant status of the dollar, which many refer to as the “dollar standard” (e.g., Bai, 2009), allows the United States to borrow internationally at low-interest rates and print more money to repay its debt as the last resort. The US capability to borrow in its own currency has been allowing United States to solve many of its domestic economic malaises and maintain the most enormous, active war machine in the world through indebtedness, while avoiding the kind of balance of payment emergencies and debt crises that have wreaked havoc many developing economies which had borrowed in creditors’ currency (mostly US dollars). Some refers to this exceptional advantage of the United States that the dollar standard confers on the United States as an

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“exorbitant privilege” (Eichengreen, 2011) or an extreme form of seigniorage, under which all foreign economic institutions relying on the dollar as medium of exchange are effectively contributing tributes to the United States. In what follows, I will first outline the trajectory of the status of the dollar in the global economy over the last forty years, delineating the dynamics that has sustained the “dollar standard” ever since the dollar became a fiat money after Nixon abolished dollar’s gold convertibility in 1971. I will then outline how the rise of China as the world’s manufacturing center and US’s largest foreign creditor over the last decade has been supporting the dollar standard. In the end, I will conclude by contemplating different scenarios of the future development of the dollar standard and US global power. My central argument is that US politico-military supremacy, as a legacy of the Cold War, and the dollar standard have been mutually reinforcing pillars of US global power even after the Cold War ended in the 1990s. The rise of China as an export-oriented economy, which is addicted to the dollar and is the first major capitalist power that is outside the orbit of US security umbrella, renders China the contradictory capacity in supporting and challenging the dollar standard at the same time. The tension of China’s contradictory role heightened in the aftermath of the 2008 global financial crisis. The future of the dollar standard hinges as much on China’s internal political economy as on development of the US economy.

THE STICKY DOLLAR The post-WWII hegemonic role of the dollar in the capitalist world economy was sealed in the Bretton Woods conference of 1944, which established the gold convertibility of the dollar under the promised rate of 35 dollars for one ounce of gold, together with the pegs of major currencies to the dollar in the capitalist world. This arrangement, in addition to the Marshal Plan after the Second World War that vastly increased dollar’s global liquidity, enabled the dollar to complete its replacement of British sterling as the dominant currency in foreign exchange reserves and international trade around the world. The stability of the resulting global monetary order in the 1950s and 1960s had been warranted by America’s sizable gold reserve, current account surpluses, and unparalleled competitiveness in the world economy. It is not only a reflection of American prowess but also a means through which the United States provided leadership to the capitalist world, securing a stable environment for growth. The collapse of this Bretton Woods order in 1971 is well known and need not be discussed in details here. To put it simply, the rising productivity of

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West Germany and Japan following their full recovery from the war curtailed US economy’s competitive edge by the late 1960s. Diminishing competitiveness, in addition to the escalating fiscal and current account deficit incurred by the US’s troubled involvement in Vietnam, induced a run on the dollar and the outflow of gold reserves from the United States. It left Nixon with few choices but to suspend the gold convertibility of the dollar in 1971, forcing other major capitalist economies to undo their currencies’ peg with it. The abolition of gold convertibility allowed the United States to attempt shrinking its current account deficit and revive its economic competitiveness through devaluating the dollar (Arrighi, 1994, pp. 300 324; Brenner, 2003, pp. 7 47). Upon the collapse of the Bretton Woods system, many predicted the end of dollar hegemony and the rise of a multipolar global economic order grounded on more or less even domination of multiple major currencies such as yen and Deutsche mark. Attempts to draw the parallels between sterling’s decline in the early twentieth century and dollar’s decline abounded. However, this predicted multipolar moment never came, and the dollar hegemony has continued for four more decades until today. Even with the formation of the euro as a competitor, the dollar remains the most widely used currency in the world economy. In spite of slight fluctuations, its share of aggregate foreign exchange reserve in the world has been quite stable before and after euro’s launch, and is much larger than the US share of global GDP (Fig. 1). The same can be said regarding the use of dollar in international transaction. The euro did not gain much ground in comparison to the share of Europe’s national currencies combined before its launch (Table 1). While dollar hegemony under the Bretton Woods system was a manifestation of the US’s overwhelming economic might, the lingering global dollar standard after Bretton Woods was the most significant lifeline that the US relied on to slow down its economic decline. The post-Bretton Woods continuation of the dollar standard, as a fiat money ever since 1971, lasted even longer than the dollar hegemony under the Bretton Woods. This is a paradox that begs for serious explanation.

THEORY OF CURRENCY DOMINATION In 1971, amidst the dissolution of the Bretton Woods monetary system, British political scientist Susan Strange published Sterling and British Policy: A Political Study of an International Currency in Decline. She drew

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HO-FUNG HUNG % 90 80 70 60

US dollar Japanese yen

50

Pound sterling Deutsche mark Euro

40

US share of world GDP

30 20 10

Fig. 1.

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

0

Share of Major Currencies in Total Identified Official Holdings of Foreign Exchange, 1973 2011.

Table 1.

US dollar Pounds sterling Deutsche mark French franc Japanese yen Euro

Currency Distribution of Global Foreign Exchange Market Turnover (Percentage, Total = 200). 1998

2001

2004

2007

2010

86.8 11.0 30.5 5.0 21.7

89.9 13.0

88.0 16.5

85.6 14.9

84.9 12.9

23.5 37.9

20.8 37.4

17.2 37.0

19.0 39.1

Source: Bank for International Settlements (BIS) triannual central bank survey.

on the rise and fall of the sterling hegemony in the nineteenth and early twentieth century to devise a theory on world currency. To Strange, a currency could become hegemonic in the global economy by attaining one or more of the statuses: the status as a top currency, the status as a master currency, and the status as a negotiated currency. A top currency is grounded on the economic viability and competitiveness of the issuing

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country, as reflected by a strong currency and healthy current account balance of the issuing country. Other countries adopt the top currency because of the reliability of its value. A master currency refers to currency issued by a colonial power and it was widely and involuntarily adopted in its colonies. Its wide usage in the world economy is politically rather than economically determined, depending on the size of the colonial empire that the issuing country controlled. A negotiated currency is one whose wide usage was grounded on bargaining and consensus between the issuing country and its trading partners. The hegemonic status of a currency usually stems from a combination of the three statuses, and the relative significance of each status could change from time to time. Viewed in this light, the US dollar was a top currency at the height of the Bretton Woods order, as its dominant position was a function of US’s economic strength that allowed it to have a persistent current account surplus and maintain the one ounce of gold to 35 dollar exchange rate. After the collapse of Bretton Woods in 1971 and during US’s recurrent economic troubles in the 1970s, some argue major capitalist powers were free to use other currencies in trade and reserve buildup, and their continued preference of the dollar was no longer grounded on economic reason, but on voluntary agreement among these powers (see also Eichengreen, 2011, pp. 124 49; Helleiner, 2008). The dollar’s negotiated currency status after 1971 is indisputable, as time and again its dominant position was questioned or even challenged (particularly after the launch of euro as a plausible alternative). Its wide usage depended, at least in part, on the good will of governments of major capitalist economies. The trans-Atlantic as well as trans-Pacific alliances that the United States constructed during the Cold War and struggled to maintain after the end of Cold War were key platforms where the United States negotiated with its allies over a wide range of political and economic issues, including the use of dollar. But it is not the whole story. Besides its negotiated currency status, the top currency, and more importantly the master currency status of the dollar, should not be ignored in explaining the staying power of the dollar standard. To ensure that enterprises continued to use dollar in their invoices and governments continued to maintain a substantial portion of foreign exchange reserves in dollar after the abolition of its gold convertibility, Washington still has to guarantee that its currency meets a minimum standard of stability and reliability. Ideally, the US government has to make sure that the value of the dollar remains strong all the time, warranting its short-term attractiveness to investors. In the meantime, the current account

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balance of the United States needs to stay in good shape so as to warrant the stability of the dollar’s value over the long run, ensuring the long-term attractiveness of the dollar. These have been daunting tasks, provided that the US current account balance and prospect of economic growth have been deteriorating ever since the 1970s. Moreover, the goals of maintaining the dollar’s long-term and short-term attractiveness were contradictory. In the heyday of the Bretton Woods system from the late 1940s to the early 1960s, the strength of US dollar, given by its gold convertibility, did not hurt US current account balance, as US productive competitiveness was unmatched in the capitalist world. But since the 1970s, when US manufacturing began to be under increasing threat from European and Asian competitors (Brenner, 2003), the US current account balance has been ever more sensitive to the movement of the dollar. While a strong dollar could hurt US export competitiveness and hence worsen its current account deficit (therefore hurting dollar’s long-term attractiveness), improving the current account balance often requires a depreciation of the dollar (hence hurting the dollar’s short-term attractiveness). What the US policy makers have been doing is to maintain the dollar’s precarious top currency status by alternately defending the long-and short-term attractiveness of the dollar by swinging back and forth between a weak and a strong dollar. The negotiated currency and top currency statuses of the dollar could not be easily maintained without its master currency status. To be sure, the United States has never been a colonial empire as Britain used to be, and the United States could rarely force other countries to privilege the dollar as the British used to force its colonies to use sterling. But the unparalleled political and military muscle of the United States does enable it to prevent the rise of currencies potentially threatening to the dollar, hence keeping the dollar safe from the challenge of viable alternative currencies. It makes the “negotiation” that renders US dollar a negotiated currency status much easier from the vantage point of Washington, as the lack of alternatives induces other capitalist economies to increase their tolerance of US current account deficit and the weakness of dollars. This toleration also gave Washington great freedom of action to manipulate the value of the dollar, at times ignoring its current account deficit for an extended period of time amidst its pursuit of a strong dollar, and at times reviving economic growth from a crisis by depreciating the dollar. This helps the United States maintain its economic viability and therefore the top currency status of the dollar. To understand how exactly Washington employed its geopolitical powers to perpetuate the dollar hegemony, one has to explicate the history and dynamics of the movement of the dollar since 1971.

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GEOPOLITICAL FOUNDATION OF THE DOLLAR HEGEMONY Ever since the beginning of the Cold War in the late 1940s, the United States has been providing military protection to its allies around the world, including not only core capitalist countries in Europe and Japan, but also key oil producers and other developing countries on its side. Economies covered by this military umbrella outsourced their national security against communist threat to the US war machine, and they could survive with a defense budget much smaller than it could have needed if there had been no military protection from the United States. The role of US global war machine in supporting the hegemonic status of the dollar was well illustrated by numerous episodes at the height of Cold War, when governments of America’s European allies, West Germany in particular, had to increase purchase of dollar instruments and US military supplies, paid in dollars, under the explicit threat of reduction of US troops stationed in their countries. Such reduction could have immediately generated a security crisis, forcing those governments to increase military spending to pick up the slack. As Francis J. Gavin points out, with reference to the monetary tension between West Germany and the United States in the Kennedy through Johnson years that the United States eventually resolved through a threat of troop withdrawal, [t]his security framework [between West Germany and US] was a series of largely tacit understandings that kept American troops in Germany, nuclear weapons out of the hands of Germans, and the Soviets out of West Berlin. A crucial part of this arrangement was the FRG’s commitment to help strengthen the dollar and protect the US gold supply by offsetting and neutralizing the foreign exchange cost of the American forces stationed in Germany. If this offset arrangement unraveled, the American payments deficit would balloon and gold losses would increase. This could force the Johnson administration to withdraw troops from Germany, increasing the pressure on the FRG to get its hand on a nuclear trigger and scaring the Soviet Union into a far more hostile posture. The de´tente and relative stability that had been created in Central Europe would be shattered. (Gavin, 2003, p. 20; see also Echengreen, 2011, p. 71 and Gavin, 2004)

Susan Strange likewise notes that West Germany has always been the “obedient ally” which helps maintain the dollar standard even after the US’ gold convertibility was suspended in 1971 (Eichengreen, 2011, p. 71; Strange, 1980). Regarding other countries dependent on US military protection, some even find a positive correlation, that extends far into the post-Cold War era, between the number of US troops deployed in a country and the country’s use of dollars (Posen, 2008; see also Table 2).

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Table 2.

Global Ranking of US Military Base Size in the Top Five Foreign Holders of US Treasury Bonds.a

1988

2000

2009

Top five holders of T-bond

Ranking of military base size

Top five holders of T-bond

Ranking of military base size

Top 5 holders of Tbond

Ranking of military base size

Japan Germany UK Canada Belgium

3 1 4 Nil 16

Japan UK China Germany Taiwan

2 5 Nil 1 Nil

China Japan Brazil Russia Taiwan

Nil 3 Nil Nil Nil

a

Size of US Military Base measured in total number of military personnel stationed in the country concerned. Sources: US Treasury and Department of Defense.

This dollar-security nexus ensured that the dollar would remain the dominant foreign reserve currency in Western Europe and Japan. It also warranted that the monarchial and authoritarian oil-producing states, which were always vulnerable to internal rebellion and needed US protection even more, to invoice their oil exports in dollars (Posen, 2008). Large-scale governmental purchases of dollar instruments among key capitalist powers and the use of dollars in oil trades contributed to the persistent global liquidity of the dollar, and it created what economists call “network externality” or a bandwagon effect, motivating private enterprises and governments around the world to use the dollar for their reserve and invoices. This geopolitical support of dollar hegemony remained unchallenged until the end of Cold War in the 1990s. With the Soviet bloc as a common security threat gone, regional powers used to being held hostage by the US security umbrella tried to break free of the US dollar-security nexus. Europe and Iraq were such powers. These attempts to break free were best characterized by two events in the early 1990s: The Maastricht Treaty in 1992 that presaged the euro and Iraq’s invasion of Kuwait in 1990 that opened Iraq’s decade-long gamble to unlock the US’s grip on oil-producing states in the Middle East. In response to these serious geopoliticalmonetary challenges, US strived to reinstate its military supremacy and safeguard the dollar through war-making in the long 1990s, either in the name of “humanitarian intervention” or “preemptive strike.” The containment of Iraq’s ambition in the First Gulf War of 1991 and the trade

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embargo thereafter, the Kosovo War in 1999, and the Second Iraq War in 2003 were exemplars of such war-making efforts. Confronting the emergent challenge of the euro, the US’s strategy of creating obstacles to Europe’s integration and expansion by seeking allegiance with Eastern European countries and exploiting cleavages between France, Germany, and other European countries has been well documented (Gowan, 1999, 2004). The culmination of such efforts was the Kosovo War of 1999. In the escalation of conflicts between the Serbian government and Albanian rebels in Kosovo, the United States sabotaged European efforts to alleviate the crisis diplomatically by offering supportive signals to both sides of conflict, making them reluctant to negotiate under the impression that the United States was on their side. When the conflicts grew beyond diplomacy, France and Germany broke ranks with other European powers to support the NATO bombing of Belgrade. Once the war was made, the United States revitalized the NATO structure and reproduced its Cold War role as an indispensable guardian of Europe’s security (Gowan, 1999, 2004). While the renewed military subjugation of Europe to the United States preemptively checked the prowess of the euro by setting a roadblock to Europe’s quest for greater integration and autonomy, the Second Iraq War in 2003 was equally devastating to the future of the new currency. On the eve and amidst the launch of the euro, Saddam Hussein’s regime was reportedly making a backroom deal with France and Germany that Iraq would denominate its oil exports in euro in exchange for France and Germany’s support of the lifting of UN embargo on Iraq. The shift to euro by Iraq, which possessed huge oil reserves and could become the second largest oil exporter only after Saudi Arabia, could induce other oil producers to shift at least some of their oil export invoices to euro, and this would be a blow to the dollar (cf. Gulick, 2005; Kirshner, 2008; Posen, 2008). Viewed in this light, one consequence, intended or unintended, of the toppling of Saddam Hussein in the Second Iraq War was that the nascent euro had lost a golden opening to dominate a substantial portion of the oil market. With the US’s global war machine remaining unchallenged and the euro’s capability in displacing the dollar neutralized, the dollar managed to continue its global dominance after the Cold War. The US’s geopolitical supremacy during and after the Cold War gave Washington unparalleled leeway to adjust the value of the dollar, either unilaterally or through twisting the arms of its geopolitical clients, to meet the needs of the US domestic economy, hence helping maintain the long- and short-term attractiveness of the dollar, as well as its top currency status.

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Fig. 2 shows that though the short-term fluctuations of dollar’s value might stem from developments beyond Washington’s control (such as the Iranian hostage crisis), every single long-term, major turn of direction of the dollar was fomented by Washington’s action alone. Each such action by Washington, though may be not primarily targeting currency issues but devised to solve specific domestic economic problems such as inflation (see Krippner, 2011), led to alternate rises and falls of the dollar over the last four decades in a way that served the purpose of balancing the long- and short-term attractiveness of the dollar as a top currency, many times at the expense of US’s trading partners. In the 1970s, a weakening dollar after the collapse of the Bretton Woods system helped contain the US current account deficit, but it also fueled inflation and unleashed immediate concern about the stability of the dollar’s value. Then, at the turn of the 1980s, Federal Reserve Chair Paul Volcker, with the backing of Ronald Reagan, radically tightened money supply and drove interest rates to about 20 percent to “slain the beast” of inflation. It resulted in a surge of the dollar’s value and hence the short-term %

$

155

Plaza Accord

2

USD weighted major currencies index 145

Current account balance as GDP%

1

Volcker shock 0

135

Greenspan’s put Rubin’s reverse Plaza

125

–1

–2

105

–3

95

–4

85

–5

75

–6

65

–7 2-Jan-73 2-Jan-74 2-Jan-75 2-Jan-76 2-Jan-77 2-Jan-78 2-Jan-79 2-Jan-80 2-Jan-81 2-Jan-82 2-Jan-83 2-Jan-84 2-Jan-85 2-Jan-86 2-Jan-87 2-Jan-88 2-Jan-89 2-Jan-90 2-Jan-91 2-Jan-92 2-Jan-93 2-Jan-94 2-Jan-95 2-Jan-96 2-Jan-97 2-Jan-98 2-Jan-99 2-Jan-00 2-Jan-01 2-Jan-02 2-Jan-03 2-Jan-04 2-Jan-05 2-Jan-06 2-Jan-07 2-Jan-08 2-Jan-09 2-Jan-10 2-Jan-11 2-Jan-12

115

Fig. 2.

Trade-Weighted Currency Index of USD and US’s Current Account Balance as % of GDP, 1973 2010.

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65

attractiveness of the currency. But it also led to the deterioration of US’s current account deficit, damaging international confidence in the long-term stability of the dollar. The concern about the current account deficit, coupled with the outcry of domestic exporters (such as Caterpillar, Boeing, and Midwest farmers) and manufacturers (such as Detroit carmakers) seeing their domestic market conquered by foreign imports urged Washington to put political pressure on Germany and Japan to make them appreciate their currencies vis-a`-vis the dollar in the Plaza Accord at 1985. It brought down the US’s current account deficit but also the value of the dollar. In the mid-1990s, complaints from the financial sector, which has been the dominant faction of the capitalist class while the US economy was undergoing extensive financialization and has been hurt by the weak dollar, in conjunction with the advent of euro, induced Washington to shift to a strong dollar policy by raising interest rates and strengthening the dollar at the expense of the improving current account balance. In the wake of the bursting of the new economy bubble in 2000 and the 9/11 terrorist attack that shocked the financial market, Greenspan initiated the series of “Greenspan puts,” cutting interest rates aggressively to push down the dollar and fuel an economic recovery. It led to a protracted drop of the dollar. But this time, the weak dollar did not improve US current account deficit as many anticipated. On the contrary, the deficit accelerated its deterioration in the 2000s. We will come back to this anomaly later. In other words, ever since the collapse of the Bretton Woods until circa 2000, Washington had enjoyed vast freedom of action to swing the dollar up and down, alternately defending the short-term attractiveness of the dollar (by boosting its value at the cost of a deteriorating current account deficit) and its long-term stability (through pushing down its value to improve the current account balance) when it saw fit. The federal government’s power in unilaterally determining the value of dollar vis-a`-vis other major currencies at different times brought improvement in current account balance or strengthening of dollar at any given moment in prolonging the dollar’s top currency status. As we have seen earlier, Washington’s freedom of action in manipulating the dollar’s value would not have possible if the United States had not precluded the rise of potentially competing currencies through its political-military supremacy. The dollar standard, stemming from its master currency, negotiated currency, and top currency statuses, is ultimately grounded on the political-military supremacy of the United States that continued into the post-Cold War world (Fig. 3). Needless to say, such political-military supremacy was in turn supported by the persistent dollar standard, which

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Preclusion of completing currency

Freedom of action in manipulating currency value to meet own econ needs

Currency strength/ healthy current account bal. Political-military supremacy

Top currency status

Master currency status

Subjugation of trade partners

Fig. 3.

Dollar hegemony

Negotiated currency status

Foundations of US Dollar Hegemony Since 1971.

enabled the United States to maintain its military spending through massive borrowing. But after 2000, the opposite movement of dollar’s value and US’s current account balance started to be replaced by a simultaneous fall of dollar and deterioration of current account deficit, leading to a twin fall of the dollar’s long- and short-term attractiveness. This twin fall, which unprecedentedly jeopardizes Washington’s freedom of action in maintaining the dollar’s top currency status through currency manipulation, is largely attributable to the rise of China as a formidable low-cost exporter to the United States with its currency pegged to the dollar. In 1994, the Chinese government aggressively devaluated the Renminbi (RMB), China’s currency, in combination with a number of policies that shifted the economy onto a path of export-driven growth. The RMB was thereafter pegged to the dollar. After 2000, when the dollar began to weaken, China started to step up its purchase of dollar-denominated assets, Treasury Bonds in particular, to keep the RMB from appreciating (Fig. 4). The boom of Chinese exports to the United States under a fixed RMBdollar exchange rate, as well as the skyrocketing global oil price partly attributable to dollar’s depreciation and partly to China’s mounting appetite for oil, led to America’s deteriorating current account deficit despite a weakening dollar in the first decade of the twenty-first century. According to an estimation, the US current account deficit, which at its height in 2006 amounted to 6 percent of GDP, was one-third due to Chinese manufactured imports and another third to petroleum imports (Desai, 2007). The one-third of the deficit originating from oil imports is also indirectly related to the rise of China. Besides driving up the price of oil globally, the rise of China’s export manufacturing also induces many oil-producing countries

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67

0.22 0.20 0.18 0.16 0.14 0.12

19

9 19 0 9 19 1 9 19 2 93 19 9 19 4 9 19 5 96 19 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 02 20 0 20 3 04 20 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 11

0.10

Fig. 4.

RMB Exchange Rate vis-a`-vis the Dollar (USD per RMB).

to increase their imports of Chinese manufactures at the expense of imports from the United States and others. Following the 1970s oil shocks, the US trade deficit with oil producers did not explode with the mounting value of US oil imports, as these oil imports were balanced by US exports to many oil-producing countries. This was no longer the case in the 2000s, when oil producers’ increasing export to the United States was not matched by their imports from the United States. The oil-producing countries’ increasing procurement of Chinese weapons at the expense of US ones also contributed to this change (Blumenthal, 2005; Economist, 2012; Fardoust, 2011). As such, nearly two-third of US current account deficit in the 2000s was directly or indirectly related to China. It is debatable as to whether China’s massive purchase of US Treasury bonds in its support of export-oriented growth is a blessing or curse to the sustenance of the dollar standard. To be sure, the RMB-dollar peg established by Beijing, coupled with China’s growing contribution to the US’s current account deficit, reduced the room for Washington to strengthen the dollar and improve its current account balance alternately. Many argue that China’s hoarding of US bonds made the United States increasingly vulnerable to China, which is now capable of dumping its dollar assets anytime to induce a run on the dollar, hyper-inflation, and fiscal crisis in the United States. This assessment is reasonable provided that China, together with a group of natural resources exporters benefiting directly or

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indirectly from China’s rise like Russia and Brazil, is becoming the top US creditors which are out of the US military umbrella (See Table 2). This situation is in contrast to the times before the 2000s, when all US top creditors depend on the United States for national security and are susceptible to US military blackmail as we see in the case of West Germany during the Cold War. This means that China does have the geopolitical autonomy to lead the way for a run on US public debts. If it happens, it would spell the final demise of the dollar standard. But so far as China is not abandoning the dollar, China’s massive purchase of Treasury bonds was in fact a needed assistance to the United States, as it helped Washington pay for its ever growing budget deficit, particularly during the ongoing wars in Iraq and Afghanistan. It also established a floor of the dollar’s plummet. The dollar would have dropped much more had it not been for Beijing’s large-scale purchase of Treasury bonds. And last, but not least, China’s massive purchase of Treasury bonds also helped the United States maintain its low-interest rates for a prolonged period. To analyze why China has not abandoned the dollar so far and continue to serve as a de facto pillar of the global dollar standard despite its theoretical autonomy to break away, and to judge whether and for how long China’s addiction to US Treasury bonds will continue, we have to first go beyond the noisy floor of currency trading and gets to the logics and internal political economy of China’s export-oriented industrialization.

US TREASURY BONDS: AN EAST ASIAN ADDICTION China’s rapid growth under export-oriented industrialization is nothing new and is more or less a replication and extension of earlier export-oriented growth of Japan and other East Asian economies, though in a much larger scale. The earlier rise of Japan and the East Asian Tigers (Korea, Taiwan, Hong Kong, and Singapore) was largely attributable to Cold War geopolitics (Arrighi, 1996; Hung, 2009b, chapter 1). During the Cold War period, Communist China’s support of rural guerrillas in Southeast Asia and its involvement in the Korean War and the Vietnam War led the region into a permanent state of emergency. Washington regarded the region as the most vulnerable link in the containment of Communism, considering its key Asian allies, that is, Japan and the four Tigers, too important to fail. This consideration accounts for Washington’s generous offering of financial and military aids to these East Asian governments, providing them with

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abundant financial resources to jumpstart and direct industrial growth. Washington also kept the US’s and Europe’s markets wide open to East Asian manufactured exports. Without this openness in the Western market for their manufactures, it is simply unimaginable how these Asian exporters could have had any chance of success. Viewed in this light, the rapid economic growth of Japan and the Tigers was consciously facilitated by the US as part of its effort to create subordinate and prosperous bulwarks against Communism in the Asia-Pacific. These East Asian economies never meant to challenge the US’s geopolitical and geoeconomic interests. Instead, they were subservient partners that helped the United States realize its geopolitical design in the region. It is what Wallerstein called “development by invitation” (1979, p. 90). Staring in the 1980s, when Cold War tension was easing and when the US fiscal deficit was mounting as a result of neo-liberal tax cuts and escalating military expenditure at the final stage of the Cold War and beyond, the Asian exporters, instead of breaking away from the orbit of US hegemony, tightened their ties to the United States by financing US’s skyrocketing fiscal deficit. East Asia’s export-oriented industrialization had been coupled with low rates of domestic consumption. The resulting trade surplus and high saving rate enabled these Asian exporters to accumulate substantial foreign exchange reserves. Regarding US Treasury Securities as the safest investment in global finance, most East Asian exporters voluntarily parked their hoarded cash in US Treasury bonds, turning themselves into the largest creditors to the United States (see Hung, 2009a; Krippner, 2011, chapter 4). Their financing of the US fiscal deficit allowed the US government to expand expenditures while cutting taxes. It also prevented Asian currencies and hence the prices of Asian exports from rising in the US market. It fueled the escalation of the US appetite for Asian exports, and the resulting increase in trade surpluses in Asian economies led to yet more purchase of US Treasury bonds. These constituted two mutually reinforcing processes of increasing Asian exports to the United States and increasing Asian holding of US debt that continuously deepened the market and financial dependence of East Asia on the United States. Asia’s massive investment in low-yield US Treasury bonds is tantamount to a tribute payment through which Asia’s savings were transferred into Americans’ consumption power, prolonging the US’s fragile prosperity in the 1980s and beyond. Beginning in the 1980s and accelerating in the 1990s, China’s market reform turned it into a late-coming Asian exporter. As we have discussed, China is potentially the unique Asian exporter capable of breaking away

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from Asia’s twin dependences on the United States, due to China’s geopolitical autonomy from the United States and its exceptional demographic and economic size in comparison to other Asia economies (Table 2; Arrighi, 2007, chapter 12). But so far China has not overcome the servitude of providing cheap credits and low-cost export to the United States as practiced by earlier Asian exporters. Worse, the extremity of China’s export-led and private-consumption-repressing growth model has made China’s market and financial dependence on the United States even greater than earlier East Asian Tigers. Comparing the most important aspects of China’s macro political economy with its East Asian neighbors in comparable stage of development, we can readily find that the Chinese model of development is largely an extreme replication of the earlier East Asian one, which was grounded on export-oriented industrialization, low consumption, and high saving (Hung, 2008, 2009a). The Chinese economy’s export dependence, as measured by total export value as a percentage of total GDP, has been mounting continuously and has reached a level that other East Asian economies (average of Japan, Taiwan, and South Korea; Hong Kong and Singapore were excluded because of the large share of entrepot trade in their economies) never attained. On the other hand, the weight of private consumption in China’s national economy, as measured by household consumption as percentage of total GDP, has been declining and has dropped well below the level in other Asian exporters during takeoff (Hung, 2008, 2009a; see Fig. 5). China’s reliance on export and its low consumption level are two sides of the same coins. China’s export competitiveness has been built upon a long-term wage stagnation, which in turn was precipitated by an agrarian crisis under an urban-biased policy regime generating “unlimited” supply of labor to the manufacturing sector (Hung, 2009a). Without sharing a larger part of their profit with the workers and peasants, the thriving export sector turned more of their profits into enterprise savings than converting them into a rising living standard and consumption power of their employees. These enterprise savings constituted a large proportion of the aggregate national saving (National Development and Reform Council of China, 2005). The fall of total wage as share of GDP occurred in tandem with the fall of private consumption as share of GDP over the 1990s and beyond. These two falling trends are in contrast with the mounting share of GDP that went to corporate profits (Hung, 2009a: Figure 8). Like earlier Asian Tigers, the United States constituted the single most important market for China’s exports, only to be surpassed by the EU as a whole recently. China has been the biggest exporter to the United States

Cold War and China in the (Un)making of the Dollar Standard

71

60 %

50

40

30

20

Export share of GDP

10

Household consumption share of GDP Gross fixed capital formation share of GDP 0 80 982 984 986 988 990 992 994 996 998 000 002 004 006 008 010 1 1 1 2 1 1 1 1 1 2 2 1 2 2 2

19

Fig. 5.

Export, Private Consumption and Investment Share of GDP, 1980 2010.

among all Asian exporters. The drastic expansion of China’s export engine not only accounted for its stellar economic growth, but also led to China’s rapid accumulation of foreign exchange reserves largely in the form of US Treasury Securities. After 2000, when the United States started to weaken the dollar, China concomitantly stepped up its purchase of US Treasury securities to prevent the appreciation of the RMB against the falling dollar. As the RMB became virtually pegged to a weakening dollar, its value against other major currencies in the world weakened too. In so doing, China’s export-led growth accelerated after 2000, and China became the biggest holder of foreign exchange reserve, surpassing Japan, in a few years (Fig. 6). While China’s low-cost exports helped lower US inflation, its massive purchase of US Treasury bonds helped lower their yields and therefore interest rates across the US economy. In other words, China has become in recent years the most significant savior of US economic vitality and the dollar standard through its low-cost manufactured exports and low-interest credits.

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HO-FUNG HUNG 60

%

50

Japan China

40

30

20

10

Fig. 6.

10

09

20

08

20

20

07

06

20

04

05

20

20

03

20

20

02

00

20

94

20

89

19

19

84 19

19

78

0

China’s and Japan’s Holdings of US Long-Term External Debts as Percentage of Total Foreign Holding.

These benefits that China’s developmental model brought to the United States outweighed the damage that this same model brought to the United States, that is, a deteriorating current account deficit despite a weakening dollar. It is why on the eve of the global financial crisis of 2008, though Washington occasionally complained about the RMB exchange rate and China’s obsessive focus on exports, it never seriously attempted to change the status quo of US China economic symbiosis. On the other side, the vested interests of China that propagated the export-oriented model of growth in the 1990s, comprised of coastal provincial governments, export manufacturers, and their lobbyists, plus officials from the Ministry of Commerce, became entrenched in Beijing’s corridor of power, perpetuating China’s model of growth and preempting China’s transformation to a more balanced developmental model driven by domestic consumption (for more discussion, see Hung, 2009a). Some may argue that given China’s high investment share in GDP (as shown in Fig. 5), Chinese growth is at least as much driven by domestic investment as export. But one thing we need to bear in mind is that most of fixed asset investment in the Chinese economy was financed by bank lending, and a large portion of liquidity in the banking system originates from a “sterilization” process in which exporters surrender their foreign

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exchange earnings to state banks in exchange of an equivalent amount of RMB issued by the People’s Bank of China, China’s central bank. In other words, a large part of liquidity in China’s banking system originates from the ballooning trade surplus so far as the RMB-dollar peg is maintained and China’s capital account is closed. At the height in 2007, China’s current account surplus amounted to 47 percent of the increase in monetary supply, as measured in M2, in the Chinese economy in that year (World Bank). This liquidity, in the context of China’s high saving rate, is mostly channeled to bank loans that finance fixed asset investment by state enterprises and local governments. China’s export-oriented growth, which relies on incessant growth in manufacture exports to the Global North at the expense of the growth of its domestic consumption, makes the Chinese economy vulnerable to any major contraction of consumption demand in the Global North. The large incentive of Chinese and other Asian governments to employ their foreign reserves to purchase US debt is not only a result of the presumably stable and safe return of the US Treasury bonds, but also a conscious effort among Asian central banks to finance the US’s escalating fiscal deficit, to prevent a free fall of the dollar and uncontrollable inflation in the United States, and hence to secure the continuous increase in US demand for their own exports. This symbiosis between China and the United States, despite occasional squabbles over RMB revaluation and China’s responsibility for the US’s worsening current account deficit, was strengthened in the immediate aftermath of the global financial crisis of 2008.

GLOBAL CRISIS, THE DOLLAR, AND THE RMB In the immediate aftermath of the global financial crisis starting in 2008, the first things that Washington worried about included a run on the dollar, explosion of fiscal deficit under the massive stimulus plan, and runaway inflation caused by the above two. These problems were exactly what many economists predicted as inevitable repercussions of the crisis. Many commentators postulated that these problems would deteriorate rapidly and in the end dissolve the dollar standard once and for all. From this vintage point, China’s continuous purchase of US Treasury Securities was much needed as it would provide support to the dollar, finance the federal deficit, and contain inflation, helping the United States forestall the dissolution of the dollar standard.

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The challenges that the crisis posed to China were more complicated. In the short run, China needed a recovery of the US consumer market so that its export sector would not stall for too long, while boosting some temporary alternative sources of growth to pick up the slack before the export sector recovered. China also feared a run of the dollar, since a drastic collapse of the dollar standard would annihilate much of its foreign exchange reserve, which was in large denominated in dollars. A logical response to these short-term challenges for China would be to increase the purchase of US Treasury Securities to support US recovery and the dollar, and at the same time open the floodgate of bank lending to pump up fixed asset investment within China as temporary alternative growth engine. But the long-term challenge for China is to reduce its dependence on US market for its products, as well as on dollar assets to store its wealth, so as to minimize the consequences for China of a future collapse of the dollar. But responding to this long-term challenge is not easy. If China decided to reduce its exposure to the dollar by reducing its purchases or even dumping US Treasury Securities, it would immediately trigger a run on the dollar and a collapse of the US consumer market that would be contradictory to what China needed to do to tackle its short-term challenge. Before the current financial crisis struck, the Chinese government had been experimenting with different ways to diversify and increase the return of its foreign reserve investments. It had tried investing in foreign equities and financing state-owned companies’ acquisition of transnational corporations, but nearly all attempts ended up in embarrassing losses (Hung, 2009a, pp. 17 18). These losses are more a result of the constraint given by the exceptional size of China’s foreign reserves than a result of bad investment decision per se. Due to the size of China’s foreign investments, it is difficult for China to move in and out of certain financial assets freely without disrupting the global market for those assets. There are simply a lack of financial markets besides the US debt market that has liquidity large enough to absorb China’s gigantic reserves. China had effectively been caught in a “dollar trap,” in which it had few choices other than to keep purchasing US debts and other dollar assets to help perpetuate the hegemonic role of the dollar (Krugman, 2009a). A more reasonable way to reduce China’s exposure to the risk of the dollar is to reduce China’s trade surplus altogether by shifting China’s model of development from an export-oriented one to a domestic-consumptiondriven one emphasizing increase in consumption power among peasants and workers. Private consumption has been growing in absolute terms over

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the years, but this growth has been much slower than the growth of investment (Hung, 2009a, Figure 8). As an impetus to rebalance China’s development, the central government has tried since about 2005 to fuel a takeoff of China’s domestic consumption by boosting the disposable income of the peasants and urban workers, even at the expense of China’s export competitiveness. The first wave of such initiatives include the abolition of agricultural taxes, increases in government procurement prices of agricultural products, and an increase in rural infrastructure investment. Though these attempts were no more than a small step in the right direction, its effect was instantaneous. The slightly improved economic conditions in the rural-agricultural sector slowed the flow of rural urban migration. This process, on top of the demographic transition characterized by the diminishing of younger people, led to “labor shortage” and wage hike in the coastal export-processing zones. This abrupt tightening of the labor market is reflected in the steep increase in Chinese manufacturing wage as share of US manufacturing wage after 2005 (Zhan & Huang, 2013). Whatsoever, this rebalancing of the Chinese economy is a long road, as shown by the data (Fig. 5; see also Hung, 2009a). Whether and how such rebalancing could continue is uncertain, provided that the new leader who assumed power in 2013 manifests a deep-rooted connection to the export-oriented coastal provinces throughout his prior career. With the difficulty of shifting China’s mode of development away from the export-oriented one and China’s continuous dependence on the export sector in the foreseeable future, China’s response to the financial crisis was dominated by its concern over the short-term challenges. As a result, China stepped up its purchase of US Treasuries (as shown in Table 3) to redouble its effort to support the dollar, finance the US’s escalating fiscal deficit, and preemptively tame inflation in the US economy. China’s fiscal stimulus, which totaled $589 billion US, in combination with the government dictation of lax bank lending to support infrastructural projects, pushed the investment share of Chinese GDP to more than 45 percent in 2010. As such, China managed to foster an impressive economic rebound in 2010. It also helped stabilize US economy, and more importantly the dollar, with its increasing purchase of US debt. More, China’s investment spree that sucked in huge amount of imported raw materials helped natural resource exporters like Brazil, Australia, and Canada avert any substantial impact of the global financial crisis. Into 2010, nevertheless, the consensus that US was heading toward inflationary spiral was replaced by the fear of deflation. Why the massive fiscal

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Table 3. China’s and Hong Kong’s Holding of US Treasury Securities before and after the Crisis’ Outbreak (Billion Dollars and Percentage).

End of September 2008 End of January 2013

China

Hong Kong

China + HK as % of Global Total

618.2 1,264.5

65.5 142.9

24.5 25.1

Source: US Treasury.

stimulus did not trigger inflation as many economic textbooks would predict based on the stagflation in the 1970s is a matter of scholarly inquiry, and it may be related to the changing capital labor balance of forces that mediated the relation among government expenditure, wages, and employment from the 1970s to now (see Silver, 2010). With inflationary expectation overshadowed by deflationary expectation, falling dollars and rising prices ceased to be something to be feared. They even became desirable. The worry about the viability of the dollar standard dissipated further when the euro, widely seen as the only alternative that could take the dollar’s place in the event of a run on the dollar, was devastated by a euro-zone sovereign debt crisis that turned out to be in much larger scale than the original US crisis. This new circumstance allowed US policy makers not to worry too much about the dollar’s short-term viability. Improving the current account balance, and hence the long-term viability of the dollar, became a higher priority. It was in this context that the US Federal Reserve started the strategy of quantitative easing, that is, to substantially increase money supply and to initiate the Fed purchase of Treasury securities, with the expectation that it would further push down the dollar and avert a deflationary spiral. At the same time, the US renewed its effort to put pressure on China to increase the value of the RMB vis-a`-vis the dollar, and Washington threatened to resort to heightened tariffs to make Beijing yield. Halting the purchase or dumping Treasuries is no longer a weapon that Beijing could use, as now the United States could finance its fiscal deficit by Fed purchases of Treasuries. In early 2011, the Fed surpassed China to become the biggest holder of US Treasuries, though China remained the biggest foreign holder. Moreover, the further fall of the dollar, the termination of the RMB-dollar peg, and the subsequent rise of inflation that a Chinese selling of US debt would entail becomes what Washington desires. As Paul Krugman, who has been arguing that the United States need not worry about the dollar standard and fiscal deficit but only need to worry

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about its current account deficit since the very beginning of the global crisis, asserted with a foresight in early 2009 that “if the Chinese do dump dollars, we should send them a thank-you note” (Krugman, 2009b). When Washington’s priority shifted to prevent deflation and narrow its current account deficit by depreciating the dollar further and redoubling its pressure for the RMB’s appreciation vis-a`-vis the dollar, Beijing’s priorities remained to be the prevention of the rapid appreciation the RMB and full recovery of its export sector through the continuous purchase of US Treasuries, at least in the short term. This divergent economic needs and interests between the two countries in 2010 were the origins of the intensifying US China currency battle beginning in 2011. The way this battle finally ends will be crucial in determining whether the dollar standard will continue or it will see the beginning of its end.

ALTERNATIVE TRAJECTORIES OF THE DOLLAR STANDARD The United States and China have been at a standstill over the currency issue. Though China has started increasing the range within which the RMB can fluctuate, and the RMB has appreciated by 30 percent between 2005 and 2011, the United States is still not satisfied. Moreover, other developing countries facing competition from Chinese manufactured exports have started joining the United States to call for more rapid appreciation of the RMB. For example, the Brazilian government, coincidental with the US Senate debate over Chinese “currency manipulation,” filed a complaint against “currency manipulators” allegedly targeted at China at the WTO in November 2011. China’s overall trade surplus has declined since the outbreak of the global financial crisis in 2008 (from $297 billion in 2008 to $186 billion in 2010), but that was mainly a function of China’s escalating imports brought on by its investment-intensive stimulus after 2008. Meanwhile, China’s trade surplus with the United States has continued to grow (from $171 billion in 2008 to $182 billion in 2010). The continuous domination of the export sector and slower-than-desired shift of the Chinese economy to a domestic-consumption-driven mode of development makes Beijing adamant in resisting the call for faster RMB appreciation. But the threat of a full-scale trade war, in addition to US’s reorientation of its geopolitical priority to strengthening its alliance with China’s neighbors under the “pivot to Asia” initiative of the Obama

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administration, might well increase the pressure on Beijing to yield and pursue more rapid appreciation of the RMB against the dollar at the expense of its own short-term economic prospects. If that is the case, then the United States would emerge triumphant, showing the world once again that it is politically capable of arm-twisting its economic challengers to adjust their currency according to US economic need, in spite of China’s status as a strong and independent geopolitical power. In such a scenario, a sharp appreciation of RMB will force China to shift away from its export dependence in an unmanageably drastic manner. The socio-economic dislocations (such as massive unemployment in the export sector) thus generated could easily derail the Chinese economic miracle. In another scenario, Beijing might be able to withstand the pressure of revaluation, either through swallowing the harsh consequence of tariffs and trade war or through assembling an alliance of countries from Asia and the global South to defuse the pressure from Washington. If that is the outcome, it will be the first time since the collapse of the Bretton Woods that the United States fails to manipulate the value of the dollar vis-a`-vis other major currencies to meet its own economic need. The immediate result of the second scenario, if combined with a failure of the United States to increase its saving rate, boost its export, and reduce its fiscal deficit, would be the continuation of the alarming growth of the US current account deficit and the US’s precarious reliance on China and other foreign countries for credits. International investors’ deteriorating confidence in the long-term viability of the dollar would speed up the erosion of the dollar standard, and efforts to look for alternatives to the dollar standard would accelerate. In fact, while China maintained its export-oriented growth and stable RMB over the last three years, it heightened its open support of alternatives to the dollar in the world financial system, such as IMF’s Special Drawing Rights (SDR) as a new unit of foreign exchange reserves. China also makes plans to internationalize the RMB and promote its use in international trade, though such effort will be limited unless Beijing would take the bold step to liberalize and open up China’s financial system and capital account (Ma & Xu, 2012). To be sure, the institutionalization of such alternatives is no easy task, and the grave challenges confronting these alternatives deserve careful examination in future research. Besides pursuing these alternatives, China could also start to rebalance its economy and to reduce its own dependence on the export sector in a gradual, orderly fashion, reducing its trade surplus and hence its addiction to US public debt. In such case, the dollar standard will lose one of its most important pillars. If such efforts sustain and succeed, then the

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long decline of the dollar standard would be inevitable. The remaining question then would be whether the vacuum left by the dollar’s fall would be filled by a stable new international monetary order or by chaos. One or the other of the above two scenarios will likely play out in the near future. These developments are far from predetermined, but are contingent upon the contentious interaction between China and the United States over currency and other financial issues, which in turn will be conditioned by the progress in China’s economic rebalancing and hence the reconfiguration of domestic social and political forces within China. The development of the US China currency conflict, together with the transformation of the Chinese developmental model, will be the most important determinant shaping the future of the dollar standard and US global power in the years to come.

REFERENCES Arrighi, G. (1994). The long twentieth century: Money, power, and the origins of our times. New York, NY: Verso. Arrighi, G. (1996). The rise of East Asia: world-systemic and regional aspects. International Journal of Sociology and Social Policy, 16(7/8), 6 44. Arrighi, G. (2007). Adam Smith in Beijing: Lineages of the twenty-first century. London: Verso. Arrighi, G., & Silver, B. (1999). Chaos and governance in the modern world system. Minneapolis, MN: University of Minnesota Press. Bai G. (2009). The dollar standard and global production: The institutional origins of the financial crisis. Paper presented at the annual meeting of American Sociological Association, San Francisco, August 2012. Blumenthal, D. (2005). Providing arms: China and the middle east. The Middle East Quarterly, 12(2), 11 19. Brenner, R. (2003). The boom and the bubble: The US in the world economy. New York, NY: Verso. Chase-Dunn, C., Jorgenson, A. K., Reifer, T. E., & Lio, S. (2005). The trajectory of the United States in the world-system: A quantitative reflection. Sociological Perspectives, 48(2), 233 254. Desai, N. (2007). The impact of oil prices and the rise of China on US and global imbalances. Retrieved from http://globaleconomydoesmatter.blogspot.com/2007/01/impact-of-oilprices-and-rise-of-china.html Economist. (2012, April 28). Petrodollar profusion. Eichengreen, B. (2011). Exorbitant privilege: The rise and fall of the dollar and the future of the international monetary system. Oxford: Oxford University Press. Fardoust, S. (2011). Managing High Oil Prices and Recycling Petrodollars. International Economic Bulletin May 31, 2012. Carnegie Endowment for International Peace.

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Retrieved from http://carnegieendowment.org/ieb/2012/05/31/managing-high-oil-pricesand-recycling-petrodollars/b10a Gavin, F. J. (2003). Ideas, power, and the politics of America’s International Monetary Policy during the 1960s. In K. Jonathan (Ed.), Monetary orders: Ambiguous economics, ubiquitous politics. Ithaca, NY: Cornell University Press. Gavin, F. J. (2004). Gold, dollars, and power: The politics of international monetary relations 1958 1971. Chapel Hill, NC: University of North Carolina Press. Gowan, P. (1999). Contemporary intra-core relation and world system theory. London: Verso. Gowan, P. (2004). Contemporary intra-core relations and world systems theory. Journal of World-Systems Research, X, 2. Gulick, J. (2005). Rising intra-core rivalry and the US turn toward East Asia. In T. Faruk (Ed.), Allies as rivals: The US, Europe, and Japan in a changing world-system. Boulder, CO: Paradigm. Helleiner, E. (2008). Political determinants of international currencies: What future for the US dollar? Review of International Political Economy, 15(3), 354 378. Hung, H.-F. (2008). Rise of China and the global overaccumulation crisis. Review of International Political Economy, 15(2), 149 179. Hung, H.-F. (2009a). America’s Head Servant? PRC’s Dilemma in the Global Crisis. New Left Review, November/December 2009. Hung, H.-F. (Ed.). (2009b). China and the transformation of global capitalism. Baltimore, MD: Johns Hopkins University Press. Krippner, G. (2011). Capitalizing on crisis: The political origins of finance. Cambridge, MA: Harvard University Press. Kirshner, J. (2008). Dollar primacy and American power: What’s at stake? Review of International Political Economy, 15(3), 418 438. Krugman. (2009a). China’s dollar trap. New York Times. April 2, 2009. Retrieved from http:// www.nytimes.com/2009/04/03/opinion/03krugman.html?_r=0 Krugman. (2009b). Chinese new year. New York Times. December 31, 2009. Ma, J., & Xu, J. (2012). Renminbi zouchu guomen zhilu: lian shichang fazhan yu ziben xiangmu kaofang. Hong Kong: Shangwu yinshuguan (Pathways of RMB internationalization: development of offshore market and opening of capital account). National Development and Reform Council of China. (2005). Zhongguo jumin shouru fenpei niandu baogao. Annual report of Chinese resident’s income distribution. Posen, A. S. (2008). Why the euro will not rival the dollar. International Finance, 11(1), 75 100. Silver, B. J. (2010). Crisis of capital, crisis of labor: A global view from the end of the American century. Unpublished manuscript. Strange, S. (1971). Sterling and British policy: A Political Study of an International Currency in Decline. Oxford: Oxford University Press. Strange, S. (1980). Germany and the world monetary system. In W. Kohl & G. Basevi (Eds.), West Germany: A European and global power (pp. 45–62). Lexington: Lexington Books. Wallerstein, I. (1979). The capitalist world-economy. Cambridge: Cambridge University Press. World Bank. World Development Indicator database. Zhan, S., & Huang, L. (2013). Rural roots of current migrant labor shortage in China: Development and labor empowerment in a situation of incomplete proletarianization. Studies in Comparative International Development, 48, 81 111.

CAPITAL ACCUMULATION AND THE RISE OF FINANCE Marcel Knudsen ABSTRACT This chapter examines explanations for the slowdown of capital accumulation since 1980. Using Bureau of Labor Statistics data on trends on productivity and capital spending, we find that slowing productivity growth accounts for slower capital accumulation. Other explanations for the downturn, such as outsourcing, the “post-industrial” economy, and financialization, do not reflect macroeconomic trends. However, we argue that shareholder value ideology affected decisions about how to balance productivity growth and inputs such as capital and labor. We discuss the consequences of slowing accumulation on American economic hegemony. Keywords: Finance; productivity; hegemony; decline; accumulation

INTRODUCTION Does the decline in American manufacturing spell the end of US hegemony? Commentators in the 1990s argued that the United States could maintain its dominance by becoming the innovation center of the global economy

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while locating actual production abroad (i.e., Florida, 2002); now there are concerns that a manufacturing base is necessary for economic growth, power, and competitiveness. More recently, sociologists and policy-makers have begun to emphasize the value of tangible products and investments, but have recognized that investment has slowed since 1980 (Herrigel, 2009; McCormack, 2009). Researchers have incorporated the decline of capital accumulation as a self-evident fact without attending to the precise details of the slowdown. This chapter examines how theorists incorporate the slowdown into their narratives and mechanisms, and how these theories map onto macroeconomic data. In fact, we argue that the importance of material factors is problematic for narratives that overemphasize trends in corporate governance or paint a rosy picture of a transition to a service economy. The decline of manufacturing is significant to three dominant narratives of the American economy. During the 1990s, neoliberal economists proclaimed that the United States was shifting from a manufacturing economy to one based on lucrative services, innovation, and creativity (Shapiro & Varian, 1998). The argument that growth in high-skill jobs and outsourcing are moving the United States toward a “post-industrial” society remains prevalent (Florida, 2002). A contrasting narrative argues that slowing productivity growth has led companies to reduce investment. Economists have worried that this trend is problematic for the US economy. Marxist theorists have argued that it signals the end of US hegemony and that the growth of the service sector is actually the result of overaccumulation (Arrighi, 1994). Lastly, economic sociologists who study finance and corporate practices have argued that changes in corporate governance discouraged capital investment. Companies changed practices to boost shareholder value and deemphasize capital investment and growth. Each of these narratives has an argument about which factors are reducing the rate of capital growth. This chapter uses data on capital accumulation, productivity, and other macroeconomic measures to examine the accuracy of each narrative in describing changes in the US economy since the 1970s. It begins by examining each perspective on the mechanisms at the firm and economy level that are depressing capital spending. Attention to mechanisms yields contrasts between theories with regards to the direction and timing of changes. Each of these approaches provides predictions for the pattern of changes in capital accumulation, which can be adjudicated using data. The central thrust of this chapter determines which best fits the patterns of changes in capital spending. This analysis also informs a discussion of the consequences of declining capital spending. A principle difference between narratives is whether financialization the increased share of profits flowing to investors is a cause or effect of declining capital investment.

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A correct diagnosis of the sources of lower capital accumulation is important to understanding the future direction of US economic growth and hegemony. Marxists and world-systems theorist have long highlighted the importance of physical assets: the very concept of “accumulation” emphasizes the long-term expansion of stocks of capital. Marxist thought is characterized, in part, by its attention to the dynamic between social relations and capital. While David Harvey (1991) argues that “flexible accumulation” has led to widespread social changes, Silver (2003) finds that conflict between laborers and manufacturers actually follows factories abroad. The Marxist economist Paul Sweezy even went so far as to claim that accumulation was the central historical dynamic in the development of capital (Magdoff & Sweezy, 1987). Notably, Giovanni Arrighi (1994) claimed that a decline in capital accumulation occurred in the twilight of several historic empires, and so it could be considered a bellwether of the decline of American economic hegemony. Marxist economists have argued that the slowing growth of productive assets in the late 20th century is causing a number of changes in the economy, including the rise of finance, an argument that has gained currency within the wider field of economic sociology (Bellamy-Foster & Magdoff, 2009). Lastly, we encourage economic sociologists to expand mechanisms by which firms respond to macroeconomic changes and incentives. Researchers have emphasized the rising impact of finance on nonfinancial companies, but overstated the causal significance of institutional changes. We argue that companies used new institutions to respond to economic challenges, and governance changes were often mediators rather than principle causes. Shareholder value institutions are often seen as imposed by investors and other actors, but there were considerable internal pressures for change. We discuss how the diffusion of shareholder value ideology and economic pressures, when combined, can provide a compelling mechanism for slowing capital investment.

A POST-INDUSTRIAL ERA? A widespread trope claims that the decline of capital spending is inevitable as the United States moves toward a “post-industrial” built on services and innovation rather than manufacturing output. Even during the 1960s, David Bell (1976) and other forward-thinking economists argued that service sectors would replace manufacturing as an inevitable and beneficial outcome of the higher value of those sectors. In the 1980s and 1990s,

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the post-industrial narrative claimed that capital accumulation and manufacturing jobs were being replaced by more lucrative service jobs, and that this trend was beneficial to America’s economic status. Mankiw and Swagel (2006)1 speaks for many economists in arguing that the United States benefits from offshoring as it becomes a center of innovation while actual production increasingly takes place in “developing” countries. The idea that more profitable service jobs and pressure from cheap foreign labor combine to reduce capital investment in the United States continues to influence researchers (i.e., Florida, 2002), even if its optimistic predictions have been subject to criticism. The neoliberal narrative is also evoked by some critics of globalization, who focus on the downward pressure of offshoring on domestic growth but also see a fundamental shift based on labor costs. Joseph Stiglitz (2003) also points to offshoring as stunting the growth of manufacturing industries, but disagrees on whether workers will ultimately benefit. The story is similar: American capital spending has declined as companies located manufacturing oversees in search of cheaper labor costs. Stiglitz remains hopeful that service jobs can replace manufacturing jobs if the United States adopts the right policies. However, like many advocates of the “Washington Consensus,” he argues that outsourcing and the rise of other, more productive industries in the United States squeeze out investment in manufacturing and manufacturing jobs. At the firm level, this narrative implies that international productivity differentials are the mechanism for the shift in production. Offshoring occurs because productivity is higher in other countries due to lower labor costs. This is generally considered to mean that less productive or capitalintensive industries those with high labor costs relative to output will be outsourced. This process leaves productivity higher at the remaining firms. Within the United States, wages should also be increasing at more productive service-oriented companies. Advocates and critics of neoliberalism dispute whether workers will benefit from growth, but agree that productivity should increase.

HAS PRODUCTIVITY GROWTH SLOWED? Other research has argued that slowing productivity growth and declining returns to capital forced US manufacturers to curtail investment. Economists have found that the period from 1973 to 1995 had slower productivity growth than preceding decades (Jergenson, Ho, & Stiroh, 2008). Robert Brenner (2002) has argued that the response by manufacturers was

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to reduce capital spending in order to maintain profitability. This narrative of slowing productivity emphasizes changing economic fundamentals: lower growth in the 1970s and after forced firms to make decisions about whether to invest in production or focus on profitability. The sources of this decline are a subject of contention, but economists have pointed to slowing innovation (Englander, Evenson, & Hanazuki, 1988) or the inflationary shocks of the 1970s (Clark, 1982) as the primary culprits. Economic sociologists have also incorporated slowing productivity growth into their theories. Some Marxists have argued that this is a natural result of capitalist development: “monopoly capital” whose inertia and stable capital assets leads it to restrain new technologies and innovations (Baran & Sweezy, 1974). Other researchers have pointed to the turmoil and restructuring of the 1980s to argue that inertia is not responsible for the slowdown, but rather exogenous factors such as high energy prices or variation in rates of technological change. Additionally, a lack of competitiveness in world markets drove down margins at US companies as Japanese firms challenged US exporters (Krippner, 2011). While these arguments have slightly different prescriptions about the sources of economic stagnation, the result is the same: slower growth and less capital accumulation. Slowing productivity growth would manifest itself at the firm level as lower returns on new investments, and declining rewards from innovations. A firm would have to make a choice between maintaining revenue growth or maintaining profit margins, assuming that it had accurate expectations about the future.2 Therefore, declining productivity growth will impact accumulation if firms decide to value profitability over growth, and act to lower inputs such as capital in response. Potential responses also include lowering labor inputs or reducing output. However, it is not immediately clear why firms would choose to value productivity growth, or how they correctly inferred and responded to economic pressures. We hypothesize below that this shift requires institutional changes as a firm-level mechanism: changes in priorities are not rational and automatic, but require new organizational structures. While a wide range of outcomes could be attributed to lower productivity growth, this claim advances a specific narrative that incorporates institutional factors.

THE EFFECTS OF INSTITUTIONAL CHANGE Economic sociologists studying financialization have argued that in the 1980s firms began to focus on returns to shareholders, and cut costs such

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as capital spending. In his research, Neil Fligstein (2002, 2005) argues that institutional changes led to a new “conception of control” which can generally be referenced under the term “shareholder value.” This logic encouraged investors and other actors to see companies as a nexus of contracts whose goal was to benefit shareholders. Through a mix of outside pressures and internal incentives, managers shifted from a focus on revenue growth and expansion to one on profitability. Firms were encouraged to cut costs and make better use of existing resources, and the result was a decline in capital accumulation even as profitability grew. The institutional narrative discusses the reduction in capital accumulation as a consequence of shareholder value orientations (Dobbin & Zorn, 2005; Fligstein, 2005). They argue that shifting corporate strategies and the popularity of dividends and buybacks grew profits and productivity even as output growth has faltered. However, it is unclear whether these shifts are a response to slowing economic fundamentals, or if innovation has not slowed but is simply being redirected toward cost-cutting. Are institutional changes maladaptive, or are they a response to challenges companies are facing? In a particularly pointed chapter, Lazonick and O’Sullivan (2000) argue that there has been a shift in the use of corporate profits from “retain and reinvest” to “downsize and distribute.” Rather than using profits internally on expansionary projects such as capital accumulation, companies cut back on costs and give profits back to their investors. This shift has involved the diffusion of new institutions as well as ideologies and governance practices. Lazonick and O’Sullivan propose that firms with this new conception of control responded to economic pressures in a pro-shareholder fashion. As a result, we would expect to find little change in productivity, but a slowing for capital and labor cost growth. Here, the claim is that firms were responding to a new institutional environment but not necessarily a different economic environment. However, there is reason for skepticism that institutional changes had a notable macroeconomic impact. There is a healthy flow of research within the tradition pointing out that many of the changes that occurred were just “myth and ceremony” for companies that continued operating in much the same way (Zajacs & Westphal, 2001). Goldstein (2012) finds that shareholder-advocated “lean” business practices were appropriated by managers for their own ends, and so there was a divergence between the ideology of shareholder value and its actual effects. Nor do institutional factors indicate why there was a resurgence in capital spending in the 1990s followed by stagnation in the 2000s economic indicators appear to be

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better at explaining these fluctuations. It is also not clear why the late 1990s would have rapid growth in capital spending if shareholder value is the cause of declining accumulation. We expect that “shareholder value ideology” had a negligible impact compared to fundamental economic changes. It allowed companies to make changes they would have done otherwise, and provided a justification for necessary changes.

FINANCIALIZATION AND CAPITAL ACCUMULATION: EMPIRICAL STUDIES A small empirical literature has attempted to examine trends in capital accumulation, but has emphasized firm-level mechanisms. Economist Ozgur Orhangazi (2008) emphasizes two common mechanisms: first, more income paid to shareholders diverts resources from capital spending; second, companies substitute financial assets for capital investment. He finds statistically significant relationships between lower capital spending and income returned to shareholders, as well as higher investment income. These fingings clearly link lower capital spending to the growth of financial assets. However, while Orhangazi provides strong evidence that more financialized firms have lower capital spending, the direction of causality and precise mechanisms involved are not determined. He argues that income returned to shareholders directly replaces capital spending, but alternatively returns to investors may pinpoint companies with a shareholder value orientation, or ones with limited opportunities for internal investment. Thus, Orhangazi’s research implies that there is a link between capital spending and financialization, but does not strengthen confidence in any one mechanism. Stockhammer (2004) compares capital accumulation in the United States, United Kingdom, France, and Germany, and finds that rising financial share of profits predicts drops in accumulation in the United States. While he develops an economic model of shifting incentives for managers a component of institutional explanations he is unable to test this mechanism. While providing more evidence of a link between financialization and lower capital accumulation, neither he nor Orhangazi are able to confidently explain why their explanation for this link is correct. Finding an empirical link between the growth of finance and lower capital spending is a valuable achievement, but the direction of causality and mechanisms involved is still unclear.

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DATA AND METHODS These three narratives of the post-1970 period have contrasting predictions for changes in capital spending and productivity, and the timing of changes in the economy. If the growth of service industries and outsourcing is driving the United States away from manufacturing, this implies that productivity is growing in the economy as a whole, and manufacturing should actually be seeing rising productivity. Alternatively, if a productivity slowdown is the cause of lower accumulation, then the drops in productivity growth should correspond to periods of lower capital spending. The tradeoff between revenue growth and productivity should be clearly visible. If finance and institutional change are the cause of lower accumulation, then there will be a clear decline in accumulation during the 1980s, and accumulation would be lower than what might be expected given other explanatory factors. We use macroeconomic data from the Bureau of Labor Statistics (BLS) to test the validity of each of these predictions. Macroeconomic data is actually better for testing which of these narratives explains lower capital accumulation, as firm-level findings cannot easily be extended to the larger economy. Economic theory points out that underinvestment by one firm may create opportunities for other firms, and so analysis above the firm level may provide a better perspective, especially when firm decisions are highly interdependent (Fillieule, 2010). In addition, many firms share similar challenges at any given time, such as rising energy costs or higher borrowing costs. Thus, while the data does not provide direct evidence about mechanism, it can indicate which macroeconomic narrative is most valid. The BLS has generated data on productivity in the United States since 1948, which is derived from the Bureau of Economic Analysis (BEA) National Income and Product Accounts. The data includes measures of total output and inputs of capital, labor, and intermediate goods, all of which are used to calculate profitability. After 1970, the BLS generates information about Multifactor Productivity for manufacturing industries, which also includes detailed data on intermediate inputs such as energy, materials, and professional services. While the measures of nonfarm private industry and manufacturing use similar terminology, they use very different methodologies in calculating each measure and cannot be directly compared. Each measure is calculated using chained indexes that account for changes in both prices and composition. Capital inputs are measured by using asset values and rates of depreciation to estimate implicit capital rental prices by asset type. The result is that items which depreciate quickly,

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particularly computers, have a higher implicit price and are therefore overvalued in the short term. Capital stock, a measure of the combined value of capital assets, is a better measure of accumulation, while inputs are more useful for measuring productivity.3 Labor inputs are measured as total hours worked for the manufacturing industry, but for the other measures are adjusted for compositional changes in educational attainment and experience. Thus, the approach used for manufacturing provides a more direct measure of changes in productivity but may underestimate labor costs as the workforce becomes more skilled. Output is also measured differently for manufacturing and all sectors. Manufacturing output is the total value of production sent outside the industry, whereas private business output is the value-added (total value minus inputs). Thus, multifactor productivity for private business is the ratio of value added to capital and labor inputs.4 For manufacturing, multifactor productivity is the ratio of total output to capital, labor, and intermediate inputs, which since 1963 has been disaggregated to include energy, purchased materials, and purchased business services. Researchers continue to debate which methodologies are most accurate, but there is a large enough divergence in the methods for manufacturing and all private business that the two are not directly comparable (see Dean, Harper, & Sherwood, 1996 for a discussion of BLS methods).

Manufacturing Trends The data on manufacturing productivity largely supports the argument that a productivity slowdown is the cause of lower capital accumulation, but finds several periods of change. There has been a notable slowdown in productivity growth since the 1970s and an accompanying reduction in accumulation since the 1980s. After tepid growth until the early 1990s, capital inputs and productivity growth rebounded in the 1995 2000 period. While growth in output and labor inputs has declined, we find no indication that less productive firms and industries were outsourcing production and raising aggregate productivity. However, outsourcing appears to be a viable fit for the 2000 2007 period, in which manufacturing did see stagnation in capital inputs and decline in labor and every inputs. But for the other periods, the slowing productivity growth contradicts post-industrial claims.5 The argument that slowing productivity growth has led to lower capital spending finds the most support in the data. Productivity growth had averaged 1.7% during the postwar years, even with high growth of intermediate

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inputs such as business services and energy. But aggregate productivity growth stagnated during the 1970s and averaged around 1% from 1979 to 1995. Growth in productive capital stock halved after 1979, going from 3.4% growth to 1.5%. Growth in capital inputs also slowed, and the use of computers means this shift may be underestimated in this data (Dean et al., 1996).6 The slower growth of capital was mirrored by lower growth in output and no growth in labor input. In contrast, the 1990s saw higher productivity growth and higher capital growth. The comovement of capital and productivity growth discredits post-industrial theories for the slowdown of accumulation, and is problematic for institutional explanations. The 1970s are the exception that proves the rule. According to Table 1, capital accumulation and input growth were in line with the postwar period, yet productivity growth stalled. Most economic literature on this topic argues that 1973 was the start of a productivity slowdown that extended until 1995 (Jergenson et al., 2008). This discrepancy reinforces the argument that productivity growth was disrupted during the inflationary shocks of the 1970s, but corporate strategies did not immediately adapt. Instead, inertia led firms to overinvest in capital and labor, to the point of stagnating productivity. Only in the 1980s did firms reduce growth to a level where productivity growth would continue. The productivity slowdown began in the 1970s, but only around 1980 did companies respond by reducing capital accumulation. If companies reduced revenue growth to increase productivity, what does the data say about their choices when reducing inputs? We find that growth in labor inputs slowed even more dramatically than capital inputs. Fig. 1 shows the stagnation of labor input growth since 1980, a period over which capital spending slowed but continued to rise. Thus, as growth was Table 1. Period

1963 1973 1979 1990 1995 2000

1973 1979 1990 1995 2000 2007

Manufacturing Sector Annual Growth Rates: Inputs, Outputs, and Productivity. Output (%)

Capital Inputs (%)

Labor Hours (%)

Energy (%)

Materials (%)

Purchased Services (%)

Multifactor Productivity (%)

Capital Stocks (%)

4.6 3.9 2.0 3.1 3.9 0.0

4.9 4.6 2.8 2.5 3.8 0.6

1.6 1.4 −0.7 −0.1 −0.2 −3.8

4.8 1.3 0.3 1.9 0.4 −4.6

3.4 6.0 1.5 3.8 2.8 −1.3

5.5 6.0 1.9 3.5 1.2 −1.1

1.7 0.2 1.1 1.2 2.3 1.9

4.2 3.4 1.6 1.0 2.1 n/a

Source: BLS, Multifactor Productivity in Manufacturing.

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1.5 1 0.5 0 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971

Fig. 1.

Manufacturing Output, Input, and Productivity Changes: 1971 2007 (Indexed, 1970 = 1). Source: BLS.

reduced in response to falling productivity, the data shows that companies made more of an effort to minimize labor costs than capital growth. In contrast to the 1970s, companies increased productivity by cutting down on the growth of costs, and prioritized investment in capital. Capital spending is higher than one might expect from the productivity slowdown. The decision at the company level can be seen as a set of two preferences: productivity over growth; productive capital over labor.

Aggregate Trends The data on the whole economy (all nonfarm private manufacturing) is more ambiguous: it supports the claim that productivity growth has slowed, but finds little change in capital inputs or even labor inputs. Table 2 shows that capital inputs in nonfarm private companies grew at above 4% annually in both the postwar and post-1970 period, but productivity growth dropped from around 2% to around 0.6%. However, as mentioned above, these measures use a slightly different calculation than for manufacturing. Newer and less durable technology is given higher value since it uses up its value more quickly. Labor growth is primarily driven by shifts toward a higher-skill labor force, while the manufacturing data simply measures hours worked. Thus, the reported growth in capital and labor inputs for the 1980s and 1990s is likely a slight overestimate compared to earlier periods, and productivity growth is a slight underestimate

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Table 2. Period 1960 1960 1973 1980 1980 1990 1995 2000

1979 1973 1979 2000 1990 1995 2000 2007

Annual Growth Rates, All Private Nonfarm Business: Inputs, Outputs, and Productivity. Output (%)

Capital Inputs (%)

Labor Inputs (%)

Productivity (%)

4.30 4.80 3.20 3.70 3.50 2.90 5.00 2.70

4.50 4.60 4.40 4.50 4.40 3.30 6.00 3.20

1.80 1.80 1.90 2.30 2.30 2.00 2.50 0.40

1.60 2.10 0.50 0.70 0.50 0.50 1.30 1.40

Source: BLS.

(Dean et al., 1996). These measures are highly affected by the growth of real estate, the purchases of computers, and educational expansion developments which are critical to economic changes but obfuscate shifts in capital accumulation. Bureau of Economic Analysis data on national accounts also supports the conclusion that capital accumulation has slowed, although the differences are less dramatic than in the prior analysis. We focus on two measures: gross fixed capital formation (FCF) and balance sheet assets. An overview of the data on fixed capital formation supports the notion that there is noteworthy variation in the rate of growth. Fig. 2 shows that manufacturing fixed capital formation has been growing at a slower rate since 1980. From Fig. 2 and Table 3, it is visible that the late 1970s and 1993 2000 period account for the lions’ share of FCF growth over the past several decades. In fact, nearly 90% of the increase in FCF since 1980 occurred in this period. However, the whole era from 1980 onward has, by the standards of the 1970s, been a period of slow capital growth, supporting the notion of a critical shift in the 1980s (Fig. 3). The contrast between periods is even more dramatic if one looks at yearly growth in Machinery assets. Machinery assets count productive equipment, rather than all the capital that goes into the manufacturing process such as land and infrastructure costs. After growing dramatically in the 1970s, machinery assets stagnated after 1980s, aside from a period of moderate growth in the 1990s. Growth in other tangible assets outpaced growth in machinery assets in most years after 1980, although the opposite was true of the 1970s. By various measures, we are seeing the same pattern: high capital accumulations in the 1970s, low accumulation from 1980 to 1992, solid growth from 1993 to 2000, and a return to stagnation in the 2000s.

93

Capital Accumulation and the Rise of Finance 20.0%

10.0%

0.0% 1970

1975

1980

1985

1990

1995

2000

2005

–10.0%

–20.0%

Fig. 2.

Manufacturing Fixed Capital Formation Annual Growth. Source: BLS.

Table 3.

Summary of Annual Growth Rates from Figs. 2 and 3.

Period 1971 1980 1990 2000

Fixed Capital (%)

Machinery Assets (%)

6.20 2.20 5.50 0.50

4.40 0.60 1.40 0.50

1980 1990 2000 2007

Source: Bureau of Labor Statistics National Accounts.

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1970 –2.0%

1975

1980

1985

1990

1995

2000

2005

–4.0%

Fig. 3.

Machinery Assets Annual Growth. Source: BLS.

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These various measures support the argument that fundamental changes, specifically slowing productivity growth, were the cause of lower capital accumulation. While offshoring does not fit the data, nor do institutional explanations relating to “shareholder value” explain the trends in the US economy. As we describe above, our data finds that the slowdown in productivity began in the 1970s. This shift predates institutional changes, and indicates that reducing inputs would have been a necessity for firms due to economic conditions. In addition, institutions and “shareholder value ideology” explain neither the strong capital growth of the late 1990s nor the return of stagnation in the 2000s. Below, we argue that institutional changes may have shaped the strategies firms used to adapt to new economic conditions, but did not cause them. The hypothesis that firms are substituting financial assets for productive investment has intuitive power, but has its limitations as a causal mechanism. The substitution hypothesis argues for additional effect of higher relative returns on financial goods decreasing the amount of capital accumulation. However, the slowdown in accumulation continued even during financial slumps, and the only period that saw renewed asset growth was the late 1990s hardly a time of low returns on financial investments. Thus, while substitution is plausible as an explanation for some firms, its role is primarily that of a catalyst for changes resulting from slowing productivity. Thus, shareholder value and asset substitution should be seen as channels through which economic fundamentals led to a slowdown in capital spending. Companies and industries faced pressures from shareholders and their economic environment. In response to slowing growth, they devised strategies using the options available to them. In the 1980s, this meant moderating capital spending, reducing labor costs, and returning excess profits to shareholders, a bundle of activities that was forwarded under “shareholder value” ideologies. While researchers have emphasized that the institutional changes of the 1980s increased the profitability and influence of financial markets, less attention has been paid to shareholder value as a way of making sense of a changing world.

SLOWING PRODUCTIVITY AND THE TRADE-OFF BETWEEN GROWTH AND PROFITS Productivity growth had already slowed in the 1970s, a fundamental shift that provides context for the sudden shifts that occurred around 1980.

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In the 1970s, companies continued to grow capital and labor inputs, and saw productivity stagnate, while the 1980s saw inputs stagnate and productivity grow slightly. This transition implies two questions: could the conditions of the 1970s have been maintained indefinitely, and why did companies choose profitability over revenue growth? The literature on financialization has developed an explanation of why companies refocused on profit maximization, but one that we argue must incorporate material factors. There are good reasons to think that institutional pressures associated with the rise of “shareholder value ideology,” such as renewed shareholder activism, changes in corporate governance, and deregulation were crucial to this transition process. The coercive nature of these changes has been discussed by researchers (Davis, 2009; Dobbin & Zorn, 2005). Managers that pursued growth over margins had to answer to impatient shareholders and even faced takeover threats. Executive compensation shifted toward stock and equity, aligning the incentives of company decision-makers with those of investors. The shifting institutional landscape encouraged firms to focus on margins rather than profits (Stockhammer, 2004). However, this narrative barely discusses the economic conditions firms were facing, and emphasizes institutional pressures managers faced more than actual changes in firm decision-making. If firms were responding to economic pressures more than institutional ones, this raises the possibility that much of the shareholder value “revolution” was simply myth and ceremony (Meyer & Rowan, 1977; Zajacs & Westphal, 2001). There were substantial reasons for firms to change their practices, and institutional changes were part of a response to economic conditions, rather than a cause. We argue that two mechanisms by which discourses and diffusion of shareholder value ideology affected firm decision-making require more attention. First, they made sense of economic conditions and framed decision-making. In the turbulent economy of the early 1980s, discourses about shareholder value and American competitiveness helped managers locate the struggles their firms were facing within a broader economic context. They provided information about how other firms were dealing with these struggles.7 Following Fiss and Hirsch (2005), we suggest that framing and sensemaking are parts of normal economic activity. Expectations are central to economic action, and the role of prescriptive discourses in altering expectations may play a larger role than their direct impact on actions. In addition, “shareholder value” provided a new framework for decision-making that was better suited to the conditions of the 1980s. By reminding managers of the importance of owners and markets, and shifting

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the incentive structure in favor of profitability, shareholder value enabled new corporate strategies. Even without institutional changes, companies may have changed their practices gradually based on their perception of the market, but new institutions were required to swiftly adapt to new economic conditions. While Dobbin and Zorn (2005) ask whether this new conception of control encouraged malfeasance and maladaptive behavior, proponents of the changes argued the restructuring of the 1980s made the United States more competitive internationally (Kliesen, 1993). If organizational change in response to new economic conditions is difficult and uneven (Stinchcombe, 1965), these institutional pressures may improve and quicken decision-making. The question of whether the shift away from growth and toward profits was necessary also becomes theoretically important in this context. How much prodding did managers need to financialize or downsize their firms? Our data indicates that the choices of the 1970s were not optimal: inputs, which are controlled by firms, maintained their growth while factors such as productivity and output growth stagnated. Had productivity stayed constant during the next decade, international competitiveness and profitability would have suffered. Nevertheless, a willingness to forgo profits in order to increase revenue growth may have proved beneficial once productivity growth recovered. Irregardless of whether it would have been economically feasible to maintain the trends of the 1970s, the dissatisfaction they generated among shareholders would have intensified the pressure on managers, and so the decision to emphasize profitability was all but inevitable in a stagnating economy.

FROM BOOM TO BUST: THE LAST TWO DECADES The late 1990s saw a dramatic increase in productivity growth and a corresponding increase in capital growth. As a period of abnormally high productivity growth, it is an anomaly that supports the argument that conditions of growth would lead to higher accumulation. Indeed, economists studying the 1990s often emphasized the productivity growth and technological advances of the period (Jergenson et al., 2008). The popular skill-based technological change explanation for growth in inequality argued that productivity-enhancing technologies were becoming more pervasive since the 1980s (Goldin & Katz, 2008). Commentators often claim that

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the success of the 1990s is due to the computing revolution and accompanying innovations in service industries. However, it is clear in our data that capital growth and manufacturing recovered strongly. In fact, all our measures point to the late 1990s as an exceptionally strong period of accumulation. One wonders if this implies that a return to stable and productivity growth would also mean a return to previous patterns in accumulation. However, the late 1990s also saw some commentators ask whether the present boom was exhausting growth opportunities. Perhaps the best way to see the 1990s is a case of unsustainable “irrational exuberance” (Shiller, 2000) with real consequences for the following decade. Faith in the computing revolution, economic strength compared to other countries, and free-flowing capital led to a surge of investment and capital spending. But the overinvestment of the 1990s left fewer opportunities for growth in the 2000s. Productivity growth continued, but involved cutting back on noncapital costs and outsourcing less productive industries. Similarly, the 1990s may have benefited from prior underinvestment, as the economic turbulence of the previous period may have discouraged firms from making expensive capital investments. While the computing revolution improved productivity growth, if the 1990s is located in the business cycle it is understood as a boom that benefited from previous stagnation and whose overinvestment limited future opportunities. The data from the 2000s also support the claim that offshoring of production was a factor in lower capital growth in that decade. Productivity growth was nearly as high as the 1990s, but capital and output stagnated and labor inputs actually declined. These trends suggest that a decline in physical production and manufacturing has taken place, and productivity increased as less productive companies relocated or closed their factories. While outsourcing was certainly not absent from previous periods, the 2000s are the first period where it is the most significant factor in accumulation trends. This conclusion is corroborated by other research on the topic: Houseman, Kurz, Lengermann, and Mandel (2011) find that imported material inputs rose from 17% in the late 1990s to 25% of inputs in 2007. The Congressional Research Service (Jackson, 2012) finds that employment of US multinationals by foreign affiliates rose marginally in the 1990s from 27.6% of total employment to 29% of total employment in 2000, and then jumped to 36% by 2008. Houseman et al. argue that the increase in offshoring began around 1997, and has biased productivity measures upward.8 Offshoring has generated a new dynamic in US manufacturing, in which productivity “gains” emerge primarily from relocating production.

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THE IMPACT OF “FINANCIAL INFLATION” One macroeconomic factor that may have driven companies to emphasize profitability was the high rate of return on financial investments, which provided an alternative outlet for growth for nonfinancial corporations (NFCs). In Capitalizing on Crisis, Greta Krippner (2011) argues that the runaway inflation of the 1970s was diverted into financial assets in the 1980s. Demand for these assets grew rapidly, leading to “financial inflation” as investors substituted financial assets for productive assets. As the return on financial assets was higher than the return on productive assets, financial firms and even non-financial firms with excess cash diverted funds toward those assets (Krippner, 2005). The higher returns on financial investments reinforced the slowdown in accumulation, but can be seen as a mechanism in any of the three primary narratives. In bubbles, almost by definition, financial assets are growing faster than actual returns, but what differentiates the post-1980 era from previous periods is the extent to which financial assets became preferable to real ones, and the acceptance of NFCs using investments to raise their revenue. Starting in the 1970s, nonfinancial firms quickly increased the percentage of income derived from investments, which quickly rose from under 15% in 1970 to nearly 40% in 1981 (Krippner, 2011). Companies devoted more of their assets to financial investment assets that could have gone to productive use. This is the macro equivalent of Orhangazi’s (2008) argument about the substitution of financial assets financial inflation means that both investors and companies are likely to prioritize financial assets. The ascendance of financial assets is causing lower accumulation, in contrast to claim that fundamental factors such as slowing growth are at work. Since other periods, such as the 1960s, also had high asset growth, it seems that institutional changes are necessary for substitution as well as for financial trends. The corporate bond market enabled firms to use cash for financial investments (Krippner, 2011). Companies could use existing assets as a source of leverage to borrow for financial investments. Private equity firms would also use stable manufacturers as a source of cash while neglecting long-term investment (Davis, 2009). Similarly, investors came to accept, and even encourage, firms that reoriented their profit streams toward financial markets (Zajacs & Westphal, 2001). These institutional changes were necessary for freeing up assets in low-growth companies to flow back into financial markets.

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If the amount of investment was growing, why would this not leading to more capital spending? After all, actual profit growth is necessary for firms to justify investment in them. An intuition can be found in Marx’s writing on money. Investors aim to gain profits by temporarily investing money into capital, M-C-M*. However, the ideal form of investment for bankers is purely financial, M-M*. Investors want to increase the value of their investments, but investing in actual capital is a source of risk. Flows of investment capital put pressure on the owners of assets to avoid entangling those assets in long-term or illiquid assets such as machinery or equipment (Arrighi, 1994). However, this mechanism cannot itself explain the data, as returns on financial assets were not much higher than productive assets in the period since the 1980s, and certainly not out of the ordinary for the 20th century. In addition, if there is an underinvestment in capital assets in one period, this should mean more opportunities for investment in the future. The substitution explanation is intriguing but is ultimately a complementary phenomenon rather than an actual explanation for reduced capital spending. Indeed, the claim that slowing productive growth has led to increased demand for financial assets and is therefore a cause of financialization has been made by multiple researchers (Arrighi, 1994; Stockhammer, 2004). But alternatively one can see substitution in the context of wider institutional changes associated in the literature with the rise of shareholder value.

HISTORICAL PREDECESSORS OF STAGNATING CAPITAL ACCUMULATION A few theorists have developed theories linking accumulation and the post1980 slowdown in growth. Notably, Giovanni Arrighi (1994) argues that the downturn is similar to changes that occurred during the twilight of previous European empires, such as Britain and the Netherlands. These downturns involve a period of global stagnation and reappropriation of profits by financial firms as they search for new investment opportunities. Arrighi begins with the materialist insight that existing capital stocks are part of a “system of production” with switching costs and interests that maintain the status quo. In addition, returns on innovations or production strategies decline after an initial period of expansion during which the best opportunities are pursued. The longer a system of expansion and dynamism is in

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place, the more countervailing pressures toward slower growth and stagnation build up. Productivity growth, and therefore capital spending, necessarily declines over time. Arrighi takes these insights and applies them in the context of worldsystems theory. He argues that empires gain power by leading other countries in the expansion of a given system of production, creating periods of sustained accumulation, a twist on Gramsci’s theory of hegemony. However, at some point the opportunities of that system become exhausted, leading to declines in growth and accumulation until a new hegemon arises. The world economic system, he argues, is currently in a state of uncertainty about the future the approaches to production of the postwar era have reached their limits, and so growth has stagnated as investors search for new sources of profit. As finance fights over profits from stable but stagnant businesses, investment becomes increasingly short term. Companies are seen as a temporary repository for flows of investments, and companies are actively discouraged from capital investments that render money illiquid. Both the slowdown in opportunities for growth and the institutional shift toward “downsize and distribute” are recurring patterns in late hegemons. Slowing productivity, Arrighi claims, has a consistent pattern of effects: financialization, lower accumulation, and a growing trade deficit. It seems that financial actors are shifting their role in the economy, but from a long-term perspective these players are removing funds from an exhausted system and searching for new sectors and regions of growth. The BLS data is consistent with Arrighi’s arguments, but also suggests a proactive response on the part of US businesses to the new economic environment. While the data from the 2000s agrees that the United States is increasingly offshoring production, particularly to China, it is not clear where a new system of production will emerge.

THE END OF US HEGEMONY? The argument that shifts in accumulation signal a shift in political and economic power gives primacy to physical production. Herrigel (2009) argues that many knowledge industries primarily serve manufacturing and other capital-intensive industries, and so are not truly “post-industrial.” Similarly, Arrighi argues that profits from production generate political and economic power. The realignment of global accumulation and shifts of investment have empowered China, but the United States has retained

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a central position in international trade, finance, and innovation. The hegemony of the United States would allow for action to retain US capital and impede China’s growth, should there be a change in political dynamics. While there are clear indications investors are searching for new opportunities, the rise of China is not inevitable. It is not clear what new industries or systems of production are being developed. While shifts in capital accumulation provide the potential for a transition in economic power, it is not clear what form China’s economic leadership would take. If China is not able to “draw other states into its own path of development” (Arrighi, 1994, p. 29), it will eventually inspire a counter-mobilization by states who seek to maintain their own productive enterprises. If US hegemony is declining, the question becomes which countries or regions can take the lead in new systems of growth. The United States is actually in position to retain its economic power and leadership through its strength in growing industries such as information technology and medical technology. If these industries become the driving sources of social changes and global economic growth, then the US’s strengths in these industries will give it a central position in any world system that emerges. However, the creation of hegemony requires internal cohesion and coordination, in addition to innovation. Without policy changes that locate more production in the United States, the United States may not be able to develop new systems of production and growth. However it is not clear that maintaining hegemony is even desirable in the long term as an aim for economic policy. Former empires, such as England and the Netherlands, continue to have standards of living that are among the highest in the world, and for many Americans, the benefits of hegemony have been negated by the costs both economic and social of maintaining political, economic, and military power. While the decline of capital accumulation and productivity growth is an indicator of weakening US hegemony, for firms and workers there have been far more immediate effects.

CONCLUSIONS It is tempting to think we can understand accumulation by looking at the individual or organizational level. Since the downturn in capital accumulation is the result of decisions at the company or industry-level, this seems at first to be the best place to study them. However, the weakness of this

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approach is not just the oft-mentioned ecological fallacy, but the tendency to see actors as traveling under their own power while missing broader currents. A next step for scholars should be to understand how financialization exacerbated trends and affected company decision-making. There has been a tendency to claim effects for financialization that may simply be responses to real challenges facing companies. As sociologists continue to try to understand the changes that have occurred in the past 40 years and will shape our economy going forward, it is important to correctly distinguish effects from broader patterns. If, as is argued here, institutional change acts as a catalyst rather than a cause hastening changes that would have occurred otherwise this points us to different methodologies and conclusions. It may be best to see “shareholder value” as an institutional shift driven primarily by actual pressures, but which then diffused independently of those pressures. In this case, the question becomes whether institutional pressures predominate at some point. Simply, if companies are under the sway of a shareholder value logic, how will they act if the situation turns to favor growth and capital spending? The growth of the 1990s implies that managers can shift their mindsets quickly, and end up making decisions in line with the actual economic fundamentals, and the goal of making long-term profits. Our analysis in this chapter gains leverage by applying the approaches that were fruitful in studying the accumulation downturn of the 1980s to the more recent period. We argued that the late 1990s were a deviation from long-term trends, which leaves us with a primarily negative prognosis for US economic growth in the immediate future. However, further study of the 2000s might force us to qualify that conclusion: although capital accumulation continued to slow during this period, the ultimate direction of the changes taking place is less clear. While there has been a tendency in the popular imagination to claim that outsourcing is at fault, we have seen that the shift of jobs abroad is as much effect as cause. Capital accumulation continues to be an important ingredient in long-term trends, and one that economic sociologists should attend to.

NOTES 1. Former Chair of the Council of Economic Advisers. 2. Return on Assets indicates how much profit is generated from a given level of physical capital and is fairly analogous to productivity or profitability.

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Owner-investors judge a firm by how much profit is generated for a given level of investment, rather than absolute profits. 3. Capital inputs may grow faster than capital stock if there is a shift to shorterterm capital, as occurred during the 1980s and 1990s with the increased use of computers. Because depreciation costs increase, firms must spend more to maintain existing stocks of capital. 4. “Multifactor” productivity compares output to multiple inputs, but labor productivity and capital productivity take the ratio of output to a specific input, such as labor or capital. 5. To see why offshoring of less productive industries would lead to higher aggregate productivity one might think of a case where a firm with below average productivity considers between investing to make workers more productive or offshoring their job to a foreign factory. Unless the investment leads to above-average productivity, offshoring production will raise average productivity while decreasing output, labor inputs, and capital inputs. 6. The BLS multiplies each unit of capital stock by an “implied rental value” to generate capital input. As the 1980s saw an increase in shorter-term capital (with a higher rental value because of higher depreciation), this temporarily overestimated input while also leading to faster depreciation of capital stock (Dean et al., 1996). 7. The related economic concept of “signals” refers to changes visible to specific firms, such as a decline in orders or an increase in prices, that inform expectations. 8. Houseman et al. argue that inflation of imported material inputs is underestimated. This creates an upward bias to productivity by understating costs, and may even bias measures of GDP.

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Meyer, J., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340–363. Orhangazi, O. (2008). Financialization and the US Economy. Cheltenham, UK: Edward Elgar Publishing. Shapiro, C., & Varian, H. (1998). Information rules: A strategic guide to the network economy. Cambridge, MA: Harvard Business Review Press. Shiller, R. (2000). Irrational exuberance. Princeton, NJ: Princeton University Press. Silver, B. (2003). Forces of labor: Workers’ movements and globalization since 1870. Cambridge, UK: Cambridge University Press. Stiglitz, J. (2003). Globalization and its discontents. New York, NY: W.W. Norton and Co. Stinchcombe, A. L. (1965). Social structure and organizations. In J. G. March (Ed.), Handbook of organizations (pp. 142 193). New York, NY: Rand McNally. Stockhammer, E. (2004). Financialization and the slowdown of accumulation. Cambridge Journal of Economics, 28(5), 719 741. Zajacs, E., & Westphal, J. (2001). Decoupling policy from practice: The case of stock repurchase programs. Administrative Science Quarterly, 46(2), 202 228.

THE FLAILING HEGEMON: MANAGING U.S. MILITARY DECLINE Ian Roxborough and Zoe Levy ABSTRACT This chapter argues that aspiring hegemons face a wide array of complex and distinct military challenges. Managing scarce military resources requires a subtle and complex global strategy that is likely to generate cognitive overload for the political system. As a result of cognitive overload, aspiring hegemons are likely to flail around, rapidly shifting from one global strategy to another. Such strategic flailing will occur independently of whether or not the economy is in crisis, though clearly economic crisis will exacerbate the tendency towards strategic incoherence. The chapter examines U.S. global strategy since the end of the Cold War, looking at the focus on “rogue regimes,” a growing concern with “global chaos,” worry about the rise of a peer competitor (China), and the debates about the root causes of, and best strategies to mitigate, terrorism. The chapter concludes with a discussion of the role of culture and notions of national identity and their role in the formulation of grand strategy. Keywords: War; military; terrorism; strategy; culture; identity

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Pity the poor hegemon. Life is hard and complicated for a hegemon. It must manage the globe. Strategists must cope with a wide array of threats and challenges. Deciding how to allocate limited resources requires clarity about the strategic environment, consensus about hegemonic interests, and coherence in prioritizing risks and relating means to ends. Developing a coherent strategy to operate and maintain hegemony is thus an inherently difficult task. It can only be made harder in a situation of real or perceived economic decline and/or relative decline vis-a`-vis the military capabilities of other global actors. Clarity, coherence, and consensus are usually in short supply. This is the case today: American strategists flail around, searching for the magic key that will unlock the riddle of how to maintain military hegemony in a turbulent international environment. When, more than twenty years ago, the Soviet enemy disappeared, there was both need and opportunity to re-define America’s role in the world. What was the nature of the new global environment, what threats faced the United States, and what should be America’s purposes in the world? As the editor of Foreign Affairs, William Hyland, noted in its Spring 1990 issue, The Great Debate has started once again; much as it did in 1914 20 and in the early years of the Cold War. The question is this: For what purpose and to what end should America commit its awesome power and resources? (p. 2)

He went on to emphasize the conventional wisdom of the time that while the United States remained “the only truly global power,” its resources were “no longer commensurate with the maintenance of the exalted position it held in the postwar period” (p. 3). The consensus in 1990 was that “the United States has lost its economic hegemony,” and that it had to put its own house in order before embarking on an ambitious foreign policy (p. 8). We are still waiting. The period since the early 1990s has witnessed a series of rapidly shifting strategic postures on the part of the United States. There has been, and will be, no coherence, clarity, or consensus on American military strategy. This chapter offers a possible explanation of why this should be so. This chapter does not argue that military spending causes economic decline. That may or may not be true. Rather, it examines the consequences of (perceived) relative economic decline for military strategy. It takes as given a widespread belief that the United States, relative to certain other states, is now losing ground. It assumes that strategists act on this belief, attempting to adjust either strategic goals or military resources to maintain some sort of balance between goals and resources. It assumes further that this effort at matching goals and resources will be increasingly difficult.

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This is partly because of economic difficulties in the United States, partly because of declining military capabilities of allies, and partly because of increased military spending by potential adversaries. The net result is that the United States will probably experience a relative decline in its currently formidable military capacities, relative to the tasks to be undertaken, and relative to potential military competitors.

STRATEGY IS A CULTURAL CONSTRUCT Strategy is not some esoteric intellectual product developed by rational actors, working away in the ivory towers of the RAND Corporation or deep in the bowels of the Pentagon, articulating a logical response to objective threats. It is, rather, the implementation of beliefs about national identity and hence, “national interests,” and these, in turn, can only be defined relationally. Self and other are mutually constitutive: defining one’s enemies requires a clear sense of self, and vice-versa. Strategy is a cultural construct (Wendt, 1999). The task of a strategist is to provide a picture of the world and America’s place in it that makes sense and provides clarity to decision-makers and publics. However, the fact that strategy is a cultural construct does not mean that strategy can be read off from national “culture” in any direct or linear manner. The connections between culture in this sense and strategy are indirect and mediated by organizational and institutional dynamics. There are connections between economic decline, American culture, and the development of a global military strategy to prevent, manage, or mitigate hegemonic decline, but they are loose and underdetermined connections. Over the two decades following the end of the Cold War, the United States has been unable to reach an enduring consensus about strategy. It has flailed around, switching from one diagnosis of the situation to another. This is not surprising: making sense of the post-Cold War world is not an easy task. A multitude of pundits have offered a bewildering array of competing understandings of the post-Cold War era. The United States has shifted between four distinct strategic orientations, grouped roughly as follows: business as usual toppling rogue states and managing Weapons of Mass Distinction (WMD) proliferation; the Pentagon’s new map managing discontent in the periphery; a new Cold War facing down China; and American jihad fighting a long war against Islamic extremism.1 The real-world problem is that American strategists and the U.S. military must be prepared to deal with all of these threats and challenges.

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It is not that all pundits are right in their diagnoses, nor even that each has accurately described a piece of the puzzle (Besteman and Gusterson, 2005). It is simply that the challenges facing a hegemon are multiple and diverse. Without some intellectual construct to order the challenges and set priorities, strategy is likely to oscillate rapidly from one event-driven nostrum to another. Currently, the United States suffers from a surfeit of diagnoses of the nature of our times, each pulling strategy in a different direction, none able satisfactorily to comprehend the whole. This chapter examines recent thinking on the part of U.S. military strategists and planners, primarily by setting these in the context of debates about American strategy since the end of the Cold War. It describes the view from the Pentagon, how defense intellectuals have tried to understand the post-Cold War world and America’s role in it. It focuses on the military consequences of economic decline.2

THE CENTRAL ARGUMENT For a period, as other powers reduced their military spending, and as the U.S. military reaped the benefits of technical changes in military operations that had been incubating over the previous two decades, it seemed as the United States was in a position to secure ambitious foreign policy goals even as its own spending on the military declined as a percentage of GDP. This rosy picture soon faded. After the attacks of early September 2011 on the Pentagon and the World Trade Center, after the disastrous invasion of Iraq and the unexpectedly protracted campaign in Afghanistan, and with a steady increase in China’s economy and in its military spending, the onset of economic recession raised red flags about America’s ability to maintain its global military dominance. For a society whose military strategy had already been one of flailing about from one strategic concept to another, these developments raised questions about whether American military hegemony would continue. This chapter argues that U.S. military strategy will most likely continue to be marked by incoherence, rapid oscillation, and overextension. America will remain a flailing hegemon. There are three elements to the argument: first, hegemonic powers have enough resources normally to match ends and means; generally speaking, they are able to identify a central enemy or threat and therefore prioritize the use of what are always scarce resources. Commitments to lesser conflicts and peripheral wars can be judged in terms of their relevance for

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the central threat. Second, there is a large element of consensus on strategy; and third, there is usually a national “mood,” a complex of emotions and cognitions, that supports the exercise of hegemony. This mood is generally upbeat, though there is likely to be an undercurrent of anxiety.3 Of course these statements hold only in the main; there are all sorts of exceptions, and there are always minorities among the public and in policy circles who dissent from the central orthodoxy. Moreover, those involved in the details of day-to-day strategy often feel that the situation is more complicated, opaque, dangerous, and uncertain that it might appear to those who look back blessed with 20:20 vision. The converse holds for a declining hegemon: almost by definition, there will not be sufficient resources to maintain hegemony. To the extent that policy-makers and strategists attempt to maintain hegemony, there will be an increasing mismatch between means and ends, there will be overextension. Secondly, achieving consensus on strategy will be extremely difficult; in the process unpleasant realities will be ignored and unrealistic strategies adopted. Great Britain faced such a situation a century ago (Friedberg, 1988; Murray, 2011). Both its economic dominance and its military (particularly naval) power were challenged. Faced with imperial overextension, economic crisis, and formidable military threats in both Europe and Asia, British strategists engaged in a substantial amount of wishful thinking. There was a lack of realism in planning for the defense of Britain’s imperial possessions, and rearmament of its land and air forces for war in Europe was left perilously late. The United States is not the only declining hegemon to put its head in the sand. It may generally be true that declining hegemons are characterized by strategic incoherence and oscillation between different strategies. Declining hegemons are flailing hegemons. Thirdly, the national mood will cease to be euphoric, triumphalist, or messianic. This does not mean that there is a realistic, if grudging, acceptance of the new realities of power. Rather, it is likely that this national mood will be marked by a considerable degree (at least in some circles) of denial, and by diffuse anxiety. The transition from hubris to denial and anxiety is likely to make the making of strategy both less coherent and less realistic. The ex-hegemon flails around as political and military elites attempt too much with too few resources, and both publics and elites find it difficult to relinquish former self-images of global potency. Hubris and a sense of a mission in the world are now joined by diffuse anxiety and frustration. Managing a retreat from hegemony proceeds by fits and starts. The ex-hegemon stumbles and flails about.

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Two obvious points need to be emphasized: first, in terms of global military strategy what matters is relative, not absolute, decline. It is power vis-a`-vis other states and military entities that matters. Second, perceptions of power matter. Of course, the reality of power matters, particularly when military conflict occurs, but perceptions of relative power (and of resolve, interests, goals, etc.) also matter, particularly in influencing decisions for war or military intervention. The United States has fought wars, at least in part, to demonstrate resolve and maintain global credibility.4 The perceptions of the politically relevant actors in the United States matter, since these will drive efforts to reverse, slow down, or otherwise manage decline. The perceptions of allies and partners matter, since this will alter calculations about the net benefits of acting together with the United States. If the United States is widely seen as a declining hegemon, some allies may decide to cut their losses and refrain from supporting the United States. American leverage may decline abruptly. Finally, the perceptions of actual and potential adversaries matter, as these perceptions will deter them from taking, or embolden them to take, actions which run the risk of precipitating conflict with the United States. These perceptions of relative military decline on the part of the United States, its allies and its adversaries may or may not be accurate: they will, nevertheless, have an impact.

WHAT WAS REMARKABLE ABOUT COLD WAR STRATEGY The Cold War, in retrospect, seems a period of historically unusual strategic clarity and consensus. The strategy was articulated by George Kennan and provided the sound-bite around which a complex set of bureaucracies could coalesce. The Soviet Union would be “contained.” A long-term competition between the two social systems would eventually lead to the triumph of the United States. In retrospect, it looks straightforward. It did not appear so at the time. For those actively engaged in strategic planning, uncertainty, risk, and ambiguity figured large in their thinking. Global war was to be avoided, and as each superpower built up its nuclear arsenal, this became a matter of intense concern, leading to arcane debates about nuclear deterrence, second strike capabilities, mutually assured destruction, accidental war, and so on. Also, in reality there was less consensus than appeared to be the case. Kennan’s original articles had oscillated between admonitions to treat

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the Soviet Union as a “normal” superpower, and a sense that irrational ideological forces drove Russian policy. In any case, other strategists were much more likely to trace Soviet foreign policy to ideological concerns. Quite what “containment” meant, and how it was to be implemented was a matter of debate. Whereas Kennan’s original view of containment had envisioned a sort of peaceful competition between two different social systems, in official planning the notion of containment rapidly became militarized. By the time the Korean War broke out in 1950 containment had come to mean a policy of encircling the Soviet Union with a ring of military bases and a policy of low-intensity conflict in the battle grounds of the Third World. Nor was containment the only strategy seriously mooted. Among certain segments of the strategy community, “rollback” of communism was promoted as a serious option, at least for the satellite states of Eastern Europe and the newer communist countries like China. Nevertheless, despite such ambiguities and disagreements, the concept of containment guided American strategy for four decades. It must be counted a success. The strategic consensus was facilitated by several factors: the over-riding conflict between the Soviet Union and the West; a coherent political elite; recent triumph in the Second World War and a sense of potency; a national culture that was amenable to viewing the Cold War as an ideological conflict; a general level of conformity (sustained in part, of course, by repression); and widespread anxiety about nuclear war. As the Cold War wore on, this remarkable level of cultural consensus and trust in government began to erode, and the Vietnam War and the rise of the counterculture sealed its demise. Nevertheless, for at least the early decades of the Cold War the ones that counted in terms of formulating strategy there existed a remarkably supportive environment for the development of clarity and consensus on strategy. This supportive environment is now lacking.

THE THREE HEGEMONIC TASKS Would-be global hegemons face a daunting array of self-imposed tasks. There are at least three things a hegemon must do. First there is a need to define and take measures to deal with the principal enemy, usually but not always a peer competitor. There are always a number of states interested in challenging the global hegemon, either locally or globally. The hegemon

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must decide which of these challengers must be dealt with as a matter of priority, and how. Second, global hegemons must establish and maintain a global institutional order. They must provide a collective good, nearly always at some considerable cost to themselves. Third, global hegemons must police the periphery, suppressing unrest or preventing its spread. Even with allies, global hegemons are hard-pressed to manage all three strategic tasks. In part, this is because political decision-makers and military strategists have a limited span of attention: organizing a bureaucracy so that each task can be managed appropriately is inherently difficult. Managing these different strategic tasks is difficult for another reason: the kinds of military forces required for each task tend to be rather different. Policing and constabulary operations, in global trouble spots generally require relatively low-tech forces, and often require large numbers of competent troops and police. Deterring a great power challenger, on the other hand, usually requires substantial investment in advanced technology and the acquisition and constant readiness of a force capable of sustained highintensity operations. This may well be accompanied by the need to project such a force across great distances, necessitating additional investments in mobility, communications, and logistical sustainment. Military organizations and their political taskmasters face a difficult problem in designing military forces capable of fulfilling all three strategic needs. They are always constrained by budgets, even by the massive budgets that define the current U.S. defense posture. Efforts to employ the same forces for more than one strategic task, and a general increase in the flexibility and adaptability of military forces, certainly help, but they are unlikely to completely solve the question of how to assign priority in the allocation of military forces to strategic tasks.

SHIFTING STRATEGIC POSTURES Managing these three hegemonic tasks requires concrete strategies: the identification of the nature of the epoch, and with this the identification and hierarchical ordering of threats and purposes. In the last twenty years there has been a surfeit of such diagnoses, and the U.S. military has responded by a series of rapid switches in strategic orientation. This chapter considers the major shifts in roughly chronological order, though it should be borne in mind that proponents of each distinct strategic orientation could be found at any time throughout the period.

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The first response to the end of the Cold War was “business as usual.” The end of the Cold War saw the United States postured for major conventional conflict against “rogue states,” possibly armed with weapons of mass destruction. The second response was a claim that the world had changed. There would no longer be any superpower conflict; instead, conflict would bubble up from the periphery. The Pentagon would need “a new map,” and would ineluctably find itself drawn into a range of peace-keeping and humanitarian missions in peripheral regions. In sharp contrast to this was the third response: a new Cold War. A rising China would need to be deterred or contained. Realists denied that the world had changed: instead, the United States would need to cope with challenges from rising new peer competitors. This view seemed to be gaining traction within the Washington Beltway when the terrorist attacks of September 2001 forced it into the background. The fourth strategic orientation, American jihad, was a direct response to the attacks of 9/11 and the belief that a new “age of terror” had dawned. The Bush administration announced a “global war on terror.” This fourth strategy rapidly mutated into the invasions of Afghanistan and Iraq, and American forces found themselves bogged down in inconclusive and frustrating counterinsurgency campaigns and “stability operations” (state-building). Finally, as the Obama administration sought to disentangle itself from the strategic mistakes of the global war on terror, the China threat returned to center stage. What is notable about these diagnoses of the strategic situation facing the United States (and hence also the identity and purpose of America and its adversaries) is that each claimed to have divined the single axis around which the United States should orient its military strategy. There was, of course, another position, namely, that as a global hegemon, the United States needed to manage all of these challenges, to articulate a set of policies that fitted all these threats together in a coherent way so that scarce resources could be allocated efficiently. It is possible to read the historical record to argue that such a careful, nuanced, balanced and all-encompassing strategy has been evolving. The United States might be a “weary Titan staggering under the too vast orb of his fate” (Chamberlain cited in Friedberg, 1988) but it could still be a rational one, adjusting goals and resources though (more or less) rational policy debate. To read the historical record in this manner is to overstate the level of rationality involved in strategy-making. Instead, a range of influences, including bureaucratic in-fighting, parochial organizational and political concerns, political log-rolling, short time horizons, a political system designed to promote checks and balances rather than coherent policy, and

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a national culture that may perhaps be described as “spectator-sport militarism,” (McInnes, 2002) have combined to prevent the emergence of clarity and consensus about American strategy. Instead, we have witnessed a hegemon that has lost its way in the world and whose strategy has oscillated from one extreme to another. This may not be a permanent state of affairs. A combination of economic crisis and military challenge might perhaps focus the American strategic mind. On the other hand, military decline relative to potential adversaries, together with fiscal difficulties at home, may simply prolong and exacerbate the current situation of strategic attention deficit disorder. It is, of course, possible that the cacophony of competing strategic arguments that has characterized the United States since the end of the Cold War is an optical illusion, obscuring real consensus on fundamental issues. With the advantage of hindsight, future scholars may see the lineaments of a grand strategy in ways that we are unable to do. Our judgment, however, is that a more pessimistic assessment is warranted.

STRATEGIC ORIENTATION #1: BUSINESS AS USUAL: OVERTHROWING ROGUE REGIMES Containment had proven to be a winning strategy. The end of the Cold War was a moment of triumph. The end of History was announced (Fukuyama, 2006). The world now agreed that the only viable model was that of liberal democratic capitalism. America had become “the indispensable nation” and the “sole superpower.” For a brief moment a general feeling of euphoria dominated. Very quickly notes of alarm were sounded: how durable was this “unipolar moment?” Not surprisingly, the immediate response of the U.S. military to the end of the Cold War was a vehement denial that the security environment had changed. In 1995, Richard Kugler summarized the emerging consensus with a RAND book entitled, Towards a Dangerous World (Kugler, 1995). There was no longer an obvious enemy: but there were many threats out there. The world remained a dangerous place. It is hardly surprising that, as a risk-averse bureaucracy with multiple interested constituencies, the initial response of the military complex was to focus on maintaining and enhancing current military capabilities. Since the 1970s, American force planners had been developing ways to use a range of new technologies mainly in computing and communications to greatly

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enhance the effectiveness of their military operations. Dubbed the “revolution in military affairs” (RMA), this promised to place the United States in a league of its own as far as conventional combat was concerned. It would provide the technical foundation for an enduring military predominance (Kagan, 2006). While the RMA suggested rapid and profound change in the way the military services conducted operations, its implications for strategy were remarkably conservative. Despite much hype about a new American “way of war,” maintaining and building a force around the RMA meant, effectively, a prolongation of a traditional view that the core of military operations remained inter-state warfare. This view was shortly to come under sustained attack from those who believed that globalization meant the end of traditional inter-state warfare and the rise of “new” wars (Kaldor, 1999; Munckler, 2005; Smith, 2008). Meanwhile, those who were responsible for force sizing decisions took operation Desert Storm as their model. Future conflicts would be like this, only better, in that the full potential of the RMA still remained to be developed. Planning assumptions were that the United States could sustain a force able to fight two “medium regional conflicts”5 against rogue states, possibly armed with weapons of mass destruction. It was a convenient way convenient, that is, for maintaining the status quo in military organizations of defining the threat environment. During this period certainly, and possibly later, the desire to maintain intact the inherited force structure and organizational frame of the U.S. military drove strategy, rather than the other way round. In addition to confrontation with rogue states, the early nineties was a time of “peace operations,” most notably in the former Republic of Yugoslavia and in Somalia. American military forces operated here with organizations, weapons and doctrine inherited from the Cold War. They saw little need for radical change in the way they went about their business. Despite the proliferation of a vast range of theories about the nature of the new world order, force planners perhaps correctly hewed to improved versions of what already existed.6 A residual Cold War force was gradually and incrementally changed to deal with what was felt to be the most likely scenario: conventional conflict with medium-sized regional powers. The tendency of organizations is to default to the defense and promotion of their narrow interests. They are concerned to maximize resources and to promote opportunity for their key officials. In the Pentagon, rhetoric of “revolution” was used to justify remarkably conservative force planning: business as normal.

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Over time, in response to budgetary pressures, the costs of actually conducting military operations, and the need to spend money on other things, the two-war standard gradually became whittled down to one-and-a-half and then one medium-sized war. Later, as we shall see, strategists came increasingly to ask how such a force could be used to deter Chinese expansion in the Asia-Pacific region.

STRATEGIC ORIENTATION #2: GLOBAL CHAOS AND THE PENTAGON’S NEW MAP We have seen that early responses to the end of the Cold War were bifurcated: on the one hand, there was a general sense of euphoria and triumphalism; on the other hand, there were those who insisted that the world was still a dangerous place and perhaps becoming even more dangerous. This was the setting for the humanitarian and peace operations of the 1990s, and American attitudes to these, too, displayed great ambivalence. On the one hand, there was a belief, widely held both in the Clinton administration and the G. W. Bush administration, that the United States could intervene effectively in peripheral countries, either to prevent genocide, stop civil war, or topple a dangerous dictator. On the other hand, some strategic thinkers who surveyed the world at this time were drawn to dark, Conradian views of the periphery as a heart of darkness, a world of irreducible violence and depravity, of primordial hatreds and endemic conflict, and of anarchy, which had surfaced now that the constraints of the Cold War had been lifted. That there was little sound empirical basis for such views did nothing to affect their popularity. In the early 1990s, it appeared as if ethnic conflicts had boiled up across the globe. In fact, this was something of an optical illusion (Hewitt, Wilkenfeld, & Gurr, 2008). For many, ethnic conflicts were seen to be manifestations of primordial forces, of “ancient hatreds,” a view expressed by the protagonists themselves. Robert Kaplan put forward a typical, if much hyped, view. The world would witness the withering away of central governments, the rise of tribal and regional domains, the unchecked spread of disease, and the growing pervasiveness of war … Surging populations, environmental degradation, and ethnic conflict are deeply related. (p. 9)

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Kaplan then used a metaphor which divides the world into those who participate in, and benefit from, globalization and those who are excluded. Outside the stretch limo would be a rundown, crowded planet of skinhead Cossacks and juju warriors, influenced by the worst refuse of Western pop culture and ancient tribal hatreds, and battling over scraps of overused earth in guerrilla conflicts that ripple across continents and intersect in no discernible pattern meaning there’s no easy-to-define threat. (Kaplan, 2000, pp. 29 30)

Other thinkers, most notably Thomas Friedman and Roger Barnett, took a more nuanced and sociological view of what they agreed was a coming disorder in the poorer parts of the globe. Friedman (1999) argued that while globalization brought considerable benefits to many, it would also generate a backlash by those who felt threatened by it. Against the Lexus, the high technology and consumption of the market, stands the Olive Tree, the need for rootedness and identity (Freidman, 1999). When cultures and identities are threatened by the spread of American culture which is an inevitable effect of globalization, there will be a backlash. As in classical modernization theory, the dialectic is between the rationality of modernization on the one hand, and the affective and identity dimensions of social life on the other. In Friedman’s view, the most dangerous form this backlash might take are the “Super-Empowered Angry Men” who will use terrorist techniques to strike back at a force they both fear and fail to understand. In this view, the principal challenges to the security of the United States would come from a motley range of largely irrational forces opposed to globalization. Adopted by a broad range of policy-makers and intellectuals during the Clinton administration, this perspective seized on the amorphous concept of “globalization” to account for the sudden salience of a remarkably diffuse range of potential threats to the security of the United States. Outside the developed world, in what used to be called the Third World and among the fringes of the ex-Soviet empire, fragile states appeared to be collapsing under the weight of ethnic and micronationalist conflict. As their economies failed to adapt to the forces of globalization, a variety of complex and messy conflicts tore those societies apart. Ecological stress added to economic collapse and the fragility of the state. Globalization became something of a catch-all phrase to cover this diverse array of challenges. Roger Barnett, a strategist at the Naval War College, summarized much of this thinking in his notion that the Pentagon needed “a new map.” In Barnett’s view, the world could be divided into two zones: the “functioning

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core” and the “non-integrating gap” (Barnett, 2004). The root cause of terrorism and other problems was that these societies had fallen behind globalization. terrorists are nothing more than parasites feeding off this political and economic isolation. Once that isolation is ended, and broadband connectivity is achieved for the masses, the forces of terror and repression can no longer hold sway. (p. 193)

Barnett argued for greater American intervention in the poorer regions of the world. He, along with overt imperialists like Niall Ferguson (2004), believed that America had a special mission. deep down I truly believe that not only is the United States Government the greatest force for good the world has ever known, but the U.S. military is the single greatest instrument of that good as well. (p. 270) America has long stood as the beacon of liberty to the rest of the world … [A]s globalization extends its reach, it forces us to engage distant threats not out of mindless aggression but out of an expanding definition of the self we seek to preserve. For much of our relatively isolated history, that self was merely these United States. After World War II, it expanded to a “free world” that was, in fact, nothing more than a closed-club West … Now … the self has grown to the Core as a whole …. (pp. 295 298)

Barnett, like so many intellectuals who identify with the hegemonic project is both an optimist and a crusader, a promoter of liberal intervention. These theories of global chaos could thus be turned to a variety of political purposes; what they had in common was an image of the United States as a fundamentally decent liberal society confronting the risks and dangers generated by a range of irrational responses to globalization. By the end of the decade, globalization looked as if it might replace communism and containment as the master rhetoric of military strategy in the post-Cold War period. Globalization theories had acquired traction within the military. According to the Commandant of the Marine Corps, Before us is a complex international security landscape, characterized by the opposing forces of globalization: fragmentation and integration. On the one hand, longsimmering ethnic, tribal, religious and nationalist pressures have erupted, splintering peoples, states, and even regions. On the other hand, growing interdependence draws peoples and nations into increasingly symbiotic relationships, where even minor regional instability can reverberate across the globe. The tension between these forces produces a volatile sociopolitical and economic environment in which the efforts of the military are prominent. (Jones, 2001, p. 2)

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The director of the Institute for National Strategic Studies, Stephen Flanagan, noted that: “Globalization does not necessarily foster integration or stability, as columnist Thomas A. Friedman and economist Dani Rodrik have suggested (Flanagan, 2001).” A research group at the National Defense University, in a report entitled “Challenges of the Global Century,” identified a “southern belt of strategic instability” running from the Balkans and Caucasus through the Middle East and central Asia to the South and East Asian rimlands. The report asserted that most nations in that region are presently ill-suited for globalization … Such countries exhibit some combination of weak or closed political institutions, inflexible or divisive social cultures marked by vengeance and distrust, predominantly tribal or clan loyalties, and excessive regulation accompanied by a high degree of corruption. While these countries face incentives to democratize and create market economies, their deeply held values and social structures often make the transition difficult, if not impossible. (15)

The report claims that a “widespread backlash is building against Western values and practices.” Globalization, by promoting rapid change, would lead to instability and turbulence in less developed societies. In a chapter entitled “Controlling Chaos: the new Axial Strategic Principles,” Richard Kugler argued that the idea that the outlying world is marked by strategic chaos is not a prediction of the future. Ample chaos, of a violent sort, already exists there … In varying ways … all of these countries are being buffeted by the adverse chaotic trends that … are now sweeping over the outlying world … Whereas the great drama of the 20th century was democracy’s struggle against totalitarianism, the defining issue of the early 21st century will be whether the democratic community can control chaotic strategic affairs in the vast, troubled regions outside its borders. (Kugler, 2001, p. 88)

Few of these thinkers believed that the United States could or should turn its back on the disorder of the periphery: it could not effectively retreat into a new isolationism. They therefore, whether from the right or the left, were driven towards an advocacy of hegemonic intervention. The institutional bases of a new international regime which promoted international peace and prosperity had to be created. This new regime should avoid placing the United States in the position of global policeman. As Richard Haass (Director of Policy Planning for the State Department) put it, America should instead strive to be “a reluctant sheriff” leading ad hoc coalitions or “posses” of law-abiding states to control international “outlaws” (Haass, 1997). War had become assimilated to crime and

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policing. All those images of America that had been presented in Hollywood westerns when they were children now seemed to be relevant once more. The metaphor, strained though it might be, was deeply American.7

STRATEGIC ORIENTATION #3: THE NEW COLD WAR WITH CHINA Such views about the end of conventional inter-state warfare and its replacement by a range of messy, sub-state conflicts were not universally popular. The Department of Defense is a large and complex organization in which different parts often have quite specific axes to grind. During the Cold War, the Office of Net Assessment, under its director, Andrew Marshall, was tasked with evaluating how the United States was doing in its global competition with the Soviet Union. When the Cold War ended, Marshall sought a new role for his organization: it would now inform the Secretary of Defense of the new threats facing America. His answer was straightforward: future dangers would come from an emerging “peer competitor.” Realist theories of international relations suggested either some form of “balancing” against the United States or the rise of a peer or nearpeer competitor. The United States was not facing a strategic pause or vacuum, but was in an inter-war period and had to guard against the inevitable challenge posed by a peer competitor. Initially, strategists were reluctant to specify which country might become such a peer or “near peer” competitor, simply insisting that the logic of great power dynamics meant that the United States could not expect its current global primacy to go unchallenged. While a “resurgent Russia” was sometimes identified as a likely peer competitor, China rapidly emerged as the enemy of choice. The Navy in particular focused on China and by the early 1990s its annual Global War Game at the Naval War College posited conflict with China as the central strategic problem to be solved. Indeed, throughout this period, influential voices within the Navy continued to press the case for preparations for war with China. There were economic arguments to back up this realist vision. In 1989, Paul Kennedy had published his best-selling The Rise and Fall of Great Powers. He argued that the costs of hegemony would lead to slower economic growth, as resources were diverted from productive investment to military outlays. Rival states would grow faster, and their military potential

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would increase faster than that of the hegemon. Eventually, they would challenge the hegemon, setting off a round of catastrophic general war. In the early 1990s, it appeared to some that Japan might be such a challenger. Freidman and Lebard (1991) published The Coming War with Japan. It was meant quite literally: economic competition between Japan and the United States would likely lead to war between them. The collapse of the Japanese economy shortly afterwards blew that forecast out of the water.8 Because of the severity and persistence of such a threat, the United States would need to focus its military strategy on deterring, and possibly defeating, a peer competitor. All else would have to be subordinated to this central concern. Again, developing and implementing the RMA offered perhaps a way forward. It was not necessary, however, to base arguments about an emerging peer on economic dynamics: a realist vision of inter-state dynamics was sufficient. There were good cautionary arguments about the sudden rise of militaristic states that could threaten poorly-armed democracies: that, after all, was the great lesson of Munich and appeasement. And so there was a steady drumbeat for preparations to meet a threat from a future peer competitor. We return to discussions of how to deal with a rising China below. Meanwhile, we must examine a sudden shift in America strategy: the global war on terror.

STRATEGIC ORIENTATION #4: AMERICAN JIHAD: THE GLOBAL WAR ON TERROR (GWOT) AND ITS MUTATIONS For America as a whole, the attacks of September 2001 came as a bolt from the blue, causing great consternation. Some strategists and intelligence operatives had, for many years, concerned themselves with the risk of catastrophic terrorism. It had not, however, achieved salience as a major concern for strategy. The most spectacular terrorist attacks in the United States had come from Americans themselves (e.g., the 1995 bombing in Oklahoma City) and attacks by Islamists had mainly happened elsewhere (e.g., the attack on the U.S.S. Cole in Aden in 2000, the bombing of the U.S. embassy in Nairobi in 1998.) In the popular mind, at least, the connections between threats to the American homeland and foreign terrorists had not been made: only a small number of intelligence operatives and strategists had made the connection. This was to change within a matter of days.

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What all approaches to understanding 9/11 had in common was linear extrapolation. A single terrorist attack was now taken to define the nature of the epoch and determine strategy for the indefinite future. The experiences of the Second World and the Cold War had led American strategists to think in global terms: they are comfortable with the notion of an epochal and existential threat. Many contemporary strategists aspire to be the “new Kennan” who will provide the key that elucidates the contemporary strategic situation. This willingness to view the strategic context in terms of an existential threat was heightened after 9/11. For example, Eliot Cohen (2001), writing shortly after the attacks, argued that A more accurate name [for the Global War on Terror] is World War IV. The Cold War was World War III … The analogy with the Cold War does, however, suggest some key features of that conflict: that it is, in fact, global; that it may go on for a long time; and that it has ideological roots. The enemy in this war is not “terrorism” but militant Islam. (Cohen, 2001, p. 18)

Whatever the specific diagnosis, all these pundits concurred that we were now living in an “age of terror.” The Bush administration took up the mantle and declared a sweeping “global war on terror (GWOT).” As a consequence, Special Forces were expanded, and although there were also other motivations both Afghanistan and Iraq were invaded. The dominant commentary on the Al Qaeda attacks of September 2001 was the assertion that the world had changed utterly and irreversibly. Very rapidly, a new frame was presented to enable Americans to make sense of what, for most, had come as a great shock. The Pearl Harbor analogy was invoked: an enemy had attacked American soil with no warning; there had been a bolt out of the blue. For much of the public the clear lesson was that some enemy “out there” intended to attack “us” at home. A sustained organizational panic ensued as institutional measures to prevent a recurrence were put in place. Stable doors were well and securely bolted. The principal answers to the question of who was the new enemy were three. The first was that the threat came from radical Islam, a difficult notion for a bureaucracy which had been created to deal with threats from other states. The second was a re-hash of the popular theories of globalization and backlash. Third, a group of neoconservative thinkers sought to recast the war on terror in terms of a struggle between liberal capitalist democracies and authoritarianism. The policy implication was that overthrowing rogue regimes would lead to a flowering of democracy. There would be an international demonstration effect and democracy would

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spread rapidly through regions like the Middle East currently dominated by authoritarian regimes.9 How the new enemy was to be dealt with was far from clear. At one level, it meant the implementation of a set of familiar public security and intelligence measures to thwart or mitigate small-scale acts of terrorism. Some sort of ideological or informational dimension to the conflict would also be essential. At another level entirely, it involved military intervention in Afghanistan to destroy the Al Qaeda organization in that country, a task that gradually evolved into counterinsurgency and statebuilding. And at yet another level, under the inspiration of the neoconservatives in the Bush administration, the global war on terror was used as a frame for taking down the regime of Saddam Hussein in Iraq, leading again to a painful and protracted period of counterinsurgency and state-building. The intricacies of the neo-con reasoning need not concern us here. What the attacks of September 2011 had done was to add another set of strategic problems to an already unmanageable list. The other threats and concerns had not gone away. It was simply that terrorism and Islam had (perhaps temporarily) risen to the top of the list and, in so doing, had pushed all other strategic concerns aside at least for the duration of the global war on terror.

THE THREE VERSIONS OF THE GWOT: PART 1: ISLAM The initial response was to understand the attacks of 9/11 in terms of religious doctrine. There was something about the doctrinal content of Islam, or particular currents within it, that could explain the attacks. There was something about the theology of Islam which generated violence. Paul Berman (2003), for example, argued that a particular strain within Islam had emerged. It was a form of totalitarian theory, and ought to be taken as seriously as the previous threats from Soviet Communism and Nazism had been. The conflict might take the form of a war of ideas; or it might entail military operations. Whatever its form, there was something inherent in at least some versions of Islamic religious doctrine that made it dangerous.10 These early diagnoses, while attractive to broad sections of the public, were too sweeping to be fully embraced by American strategists. Instead, it was accepted that there were “good” Muslims and “bad” Muslims. The latter

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could perhaps be identified by their espousal of particular doctrinal positions. Military strategists preter concrete adversaries: they are uncomfortable with wars of ideas. They are not organized to deal with such a vague threat. On the other hand, the strategic ambiguity of positing a doctrinally-defined adversary had, at the same time, a great political merit: it could rally large segments around what appeared to be an existential challenge to fundamental beliefs (Lincoln, 2003; Loveland, 1996). There were those in the military who, for ideological reasons, found this line of interpretation despite the difficulties inherent in translating a war of ideas into military strategy appealing. More sophisticated versions of this view shifted the emphasis from religious doctrine to the broader sociological impact of religion: there was something specific about Muslim societies, rather than Islamic doctrine, that generated terrorism. Intellectual foundations for this strategic reorientation were not lacking. Samuel Huntington’s (1996, 2004) notion of a clash of civilizations offered an easy explanation, as did assertions like those of Bernard Lewis (2002) that Islam had “failed” and lost out in the move to modernity. As in the globalization theories, the realization of failure would generate rage at the West. Huntington’s notion of a clash of civilizations was hugely popular. It suggested that “values” or perhaps religion defined distinct civilizations. Across the vast span of history, civilizations (religions?) had fought each other. The borderlands between civilizations were bloody. The Cold War had been an aberration: a secular ideological conflict. The map of the Cold War had divided the world along an East West axis. With Communism now relegated to the dustbin of history, the deep axial conflicts between civilizations would re-emerge. What the “clash of civilizations” and the “global anarchy” approaches had in common was an attempt to move away from state-centric thinking. Globalization and the end of the Cold War required, in this optic, new ways of thinking about security that no longer focused on the nation-state as the primary locus. These kinds of ideas were attractive across the political spectrum. On the left, they led to arguments about “new” wars.11 Conservatives tended to move their thinking “upwards” to the larger entities of civilizations, leftists and liberals moved their thinking “downwards,” towards sub-state actors and intra-state wars. Casting the conflict as a religious or civilizational one implied an assertion that we live, not simply in an “age of terror” but in an epoch defined by a deep clash between religions or between styles of religion, pitting, if

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not Islam against Christianity, then extremism and fundamentalism against religious tolerance. In most variants, America defined itself as part of a liberal tolerant West. Christians of a certain sort, on the other hand, have been prone to see the war on terror simply in terms of Christianity versus Islam. Whatever the appeal of this in various religious publics, this is an unpopular view in strategic circles, as the outcry over Lieutenant General William Boykin’s assertion that his God was stronger than the Islamic God attested. This vision made for a coherent but frightening approach to strategy. The United States (and “the West” more generally) would have to gird itself to engage in prolonged conflict with Islam. The emotional attractiveness of the theory to some sectors of American society was independent of central problems with it as a social scientific construct. Huntington himself acknowledged the difficulties of defining civilization. Moreover, even an elementary understanding of history suggests that conflicts within civilizations are at least as likely and as destructive as those between civilizations. Nor have all conflicts between a state belonging to one civilization and a state belonging to another civilization been due to civilization differences as such. The mere fact of contiguity creates security issues, and what appear on the surface to be wars between religions turn out often simply to be wars between neighbors.

THE THREE VERSIONS OF THE GWOT: PART 2: GLOBALIZATION AND FAILED STATES Within the broad frame of a global war on terror, the second set of theories sought to explain terrorism as a response to globalization. Thomas Friedman was the leading advocate of this view. Something about globalization would generate terror, and this might not be directly linked to any one religion. This approach made sense in a society where religious competition had led to a comfortable co-existence of diverse beliefs. The United States was a liberal, tolerant society; other parts of the world, challenged by globalization,12 would experience stress and strain, and angry young men would be driven to take out their rage on the West. Other versions of the globalization theory shifted attention from angry individuals to failed states. Here, the image of Afghanistan as a motley collection of warring tribes and venal warlords drove thinking. America’s central problem, it was held, would be the need to create order in disorderly

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parts of the world. The enemy in this version was failed states and ungoverned regions. Failed states would permit warlords, terrorists and insurgents to operate on their territory, and they would survive in the ungoverned and inaccessible regions. The 9/11 Commission endorsed this view: .

In the twentieth century, strategists focused on the world’s great industrial heartlands. In the twenty-first, the focus is in the opposite direction, toward remote regions and failing states. The United States has had to find ways to extend its reach, straining the limits of its influence. Every policy decision we make needs to be seen through this lens. (9/11 Commission, n.d., p. 367)

It was weak states and perhaps the absence of democracy not Islam as such, which was the problem. Once more the diagnosis of the global situation had defaulted to globalization. America, in this view, was to be a champion of democracy and good governance. This might mean positive efforts to promote democracy, or it might mean a more modest, but still strenuous effort to create viable states. Counterinsurgency and stability operations would be central ways in which the military could help. In this variant, the new global war on terror could be inserted neatly into a larger theory about managing peripheral discontent. Although some sections of the military showed an interest in these tasks, much of the military establishment wedded to a self-concept as “warfighters” was distinctly unhappy about the notion of operating for extended periods as armed humanitarians and state-builders. The Navy and Air Force, in particular, had little institutional interest in counterinsurgency and stability operations, and even the Army came to be greatly stressed and frustrated by its experiences in Afghanistan and Iraq. And many strategists insisted that this was to focus only on the third task of a global hegemon: managing peripheral discontent.

THE THREE VERSIONS OF THE GWOT: PART 3: THE NEOCONS PROMOTE DEMOCRACY The third version departed most from the terrorist paradigm, and to some large extent was an opportunistic construct. The Bush administration made serious, but implausible, efforts to link Saddam Hussein to terrorism asserting, against all reasonable evidence, that a ruthless dictator allowed terrorist cells to operate with impunity in his territory. The administration did the same with WMD, and here there was more resonance. Some intelligence agencies argued that Iraq possessed some WMD capabilities, though

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there was no consensus across different intelligence agencies.13 To some extent, the Bush administration picked up on the previous discourse about rogue states and folded it into a new notion of GWOT. The explanatory factor was not so much religion or globalization as the persistence of authoritarian (rogue) regimes, thwarting efforts to create regional peace and stability. The invasion of Iraq was, in this sense, definitely seen as an integral part of GWOT. The “axis of evil” a rogue regime construct was now elided into a war on terror which was now a war on evil. The war on terror had mutated back into a war on rogue states. At the same time, the rhetoric was now elevated to a shriller level, and cast in terms of a new “world war.” It was but a short step to cast this war as one for freedom and democracy. A return to the comfortable and familiar rhetoric of the Cold War, and of the earlier Wilsonian crusade for democracy, was easy. Bolstered by the theory of the interdemocratic peace, American strategists now simply substituted Iraq and Al Qaeda for the Soviet Union. While this version of the GWOT was the least sociologically plausible of the three, it met organizational needs and was the most compatible with the kind of force structure that the United States had developed. The armed services were happy with a mission of a rapid take-down of an authoritarian state. This played to their strengths and in 2006 they did a remarkably effective job of overthrowing the Iraqi regime. The problems, of course, were to emerge once it transpired that there would be no swift and painless move to democracy. When key players in the Bush administration made decisions to invade Iraq, they had expected a rapid victory and the swift transfer of power to an Iraqi administration. Instead, the United States found itself bogged down in difficult counterinsurgency operations in both Iraq and in Afghanistan. The levels of sectarian conflict (in Iraq) and regional fragmentation (in Afghanistan) had been grossly underestimated, and during these early years, U.S. military forces scrambled to re-learn what little they had ever understood about counterinsurgency operations. Many military thinkers came to accept the view that the present global epoch would be one of global counterinsurgency. Extrapolating from the experiences of Iraq and Afghanistan, it seemed as though the GWOT was, in fact a protracted conflict. It came increasingly to be labeled simply “the long war,” which would be fought as a series of counterinsurgency campaigns. State-building and stability operations would dominate. Special Operations Command grew rapidly, created its own “university” and had virtually become a new, fifth military service.

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For the Armed services, the great merit of the new term the long war was its insistence a duration rather than adversary. It was something that would define the mission and provide the resources for the armed forces for the next generation or two. Other than that, it was a totally vacuous concept since it specified neither the enemy, nor the goal, nor the means of fighting, and said nothing about how the conditions for “victory” would be defined. That very emptiness was perhaps a political bonus, enabling the military to slide over disagreements about the very nature of the war that they were engaged in. As always, what seemed like deep strategic thinking turned out to be short-term linear extrapolation. The American withdrawal from Iraq and the sustained efforts to wind down the commitment to Afghanistan during the presidency of Barak Obama were parts of yet another reassessment of U.S. military strategy. The hyped rhetoric of the “global war on terror” was ratcheted down, and phrases like “long war” and “war on terrorism” were dropped or used less frequently. A slow and cautious U.S. withdrawal from both Iraq and Afghanistan was set in motion. Substantial sections of the armed forces greeted this with relief. The Air Force and Navy had been marginal players in most versions of the war on terror, and the Army had been frustrated and stressed by its operations in Iraq and Afghanistan. There was a widespread, if poorly articulated, feeling among many in the military that getting involved in these messy and protracted conflicts was a losing proposition. It was time for a rebalancing of American military posture. There was now to be a “pivot” to the Pacific. What did this mean?

STRATEGIC ORIENTATION #3, VERSION 2. CHINA REDUX By 2012, it looked as if American military strategists had once more focused on what some considered the single most serious threat to American power: the increasing military power of China. Department of Defense strategic guidance noted that, while the U.S. military will continue to contribute to security globally, we will of necessity rebalance toward the Asia-Pacific region. (Department of Defense, 2012) [Italics in original]

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For military strategists of a realist persuasion, the question that needed to be addressed was a simple one: how to assert American interests in the face of a rising China. This need to deal with a peer competitor is the primary task of any great power, and a fortiori, of a global hegemon, particularly a declining one. Of course the concern about China, particularly among strategists in the Navy, had never gone away, even during the heady days of the global war on terror and the invasion of Iraq. For example, the Commander of Fleet Forces Command noted in 2006, at the height of the conflict in Iraq, that even while our nation is engaged in a protracted struggle against extremist totalitarianism … nations that seek general or focused parity with the U.S. on economic, political, technological, or military terms will remain a strategic concern … Today’s principal struggle pits the United States against radical Islamists, but if the past is prologue, America will again find itself confronting an aggressive state. (Nathman and Harris, 2006, p. 18)

Planning for war with China has moved from embarrassed ambiguity in the early 1990s when China was never mentioned by name to a clear and public focus on the mechanics of war with China. These planning efforts are cast as a form of deterrence. If the United States publicly demonstrates that it has both the will and the capability to respond forcefully to Chinese expansionism, then if deterrence works, the Chinese will hesitate before making such moves. By 2012, China was clearly once again on the top of the strategic agenda. Civilians, in government and academia, issued a stream of warnings about the Chinese threat (e.g., Friedberg, 2011). The Naval War College had set up a center for studies of Chinese maritime issues, and the Navy and Air Force began to develop a concept for AirSea Battle (Van Tol). With a sense that major operations in Iraq and Afghanistan were over or at least winding down, American strategy began a shift from a focus on counterinsurgency and stability operations, to conventional combat, pivoting to a renewed focus on the Asia-Pacific region. This pivot, if fully implemented, will entail a shift from manpower-intensive operations on land to a focus on deterrence of China by preparing for a major conventional conflict with that country, to be conducted primarily in the maritime, air, space, and cyber domains. If this strategic shift is accomplished, there will be another major rebalancing of U.S. military forces. Whether this renewed focus on China will prove to be as ephemeral as the other strategic constructs remains to be seen. It has the potential to

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become the focus for a new Cold War, and could thereby provide a durable anchor for U.S. strategic thinking. However, other crises will call out for American intervention and it may be difficult for U.S. strategists to sustain a focus on fighting China, even as a deterrent strategy. The broad scenario generally accepted by U.S. military planners in 2012 had China making a move to assert control over the South China Sea or to pressure U.S. allies and/or small states in the region, with the United States desiring to reverse these moves and restore the status quo ante. This is surely a clear case of a hegemon refusing to accept change. While both sides talk about a “peacefully rising China,” U.S. strategists also talk about the need to maintain a “balance” of power in Asia. The two notions are not easily compatible: when powers rise, almost by definition the balance must shift. The central military problem from the point of view of the United States in this scenario is the difficulty of projecting power into a region where the Chinese have developed robust anti-access and area denial measures. The working assumption is that hostilities would begin with a sudden (possibly surprise) missile and air attack by China on U.S. and Japanese military bases in the Western Pacific. In particular, the U.S. base at Guam would be a priority target for Chinese attack. There would be crippling losses on the U.S. (and Japanese) side. Chinese anti-ship missiles would force U.S. aircraft carriers to operate at a great distance. Relatively quiet Chinese diesel submarines and large numbers of naval mines would further complicate U.S. naval access. An anti-submarine and mine detection and clearance campaign would take time and scarce resources and would, in any case, require local air or maritime dominance. The short range of most America aircraft would make it difficult for them to penetrate into Chinese airspace. Given the massive (and growing) and sophisticated air defenses over China, only stealthy long-range bombers (of which the United States has only a few) could successfully attack targets within China. The situation would be further complicated by Chinese attacks on the communications networks (particularly via satellite) used by U.S. forces for command and control, surveillance, communications, and many other tasks. Because much of China’s command and control networks are carried through buried landlines, they would be less vulnerable to a military strike than U.S. networks. China has already demonstrated an anti-satellite capability and could, in any case, produce a high-altitude nuclear explosion which would probably severely degrade U.S. satellite communications. Since smart weapons, drones, navigation

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devices, and communications depend heavily on satellites, this is a key American vulnerability (VanTol, 2012). The Chinese would also be expected to launch effective cyber attacks. These would blind U.S. forces and negate many of the technological advantages that the RMA has conferred. They would force much of the U.S. military to revert (temporarily perhaps) to lower level of technological sophistication in warfighting. In all domains of conflict, China would have the advantage of fighting on or close to its home ground, while the United States would have to project power with all that implied for logistical sustainment over great distances. In this scenario, China would deliver a knock-out punch and hope to force the United States into accepting a fait accompli. The alternatives for the United States would be either nuclear strikes on China (considered an unacceptable escalation) or a relatively prolonged conventional war to regain superiority at sea and in the air over the Western Pacific, in space and in cyberspace and to then impose a crippling economic blockade on China. America would have to accept a long war in order to bring its superior economic might to bear on a distant adversary. If AirSea Battle were put into place, whether it would work to deter China from expanding its influence in the Western Pacific is by no means certain. Deterrence always carries with it two sorts of risks: credibility and arms racing. Maintaining a credible deterrent generally requires active preparation for war: without this, military threats are likely to be ineffective. On the other hand, one state’s improved military posture may pose a security threat to the other state, triggering off an arms race. This can be destabilizing, particularly as uncertainty about technical military capacity as well as political intentions increases. The risks can be mitigated by simultaneously pursuing a strategy of engagement: a carrot and stick approach. Unfortunately, large bureaucracies and polarized political systems are not well suited towards the careful balancing of two distinct approaches. In any case, such a focus on China will not be cheap. Whether the United States would be prepared to increase military spending, particularly if the political consensus is that it is facing economic decline, cannot be known for sure. It is, moreover, quite unclear whether China or the United States would be better able to absorb the costs associated with the arms race implied by AirSea Battle. Long-run deterrence sometimes works by forcing the adversary to spend more to counter one’s military threats than it costs to develop the weapons and forces necessary to make these threats

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credible. Whether this is so, or whether the reverse is true, depends on technical factors, not simply on political will and economic willingness. There is moreover an important difference between China and the Soviet Union as Cold War adversaries of the United States: the dense economic mutual dependency of China and the United States. The credibility of the military deterrent postulated in the AirSea Battle concept may break apart on this rock. In this strategic concern with peer competitors, much hinges on how China evolves politically. Will China democratize, and if so, how and when? Will the process be accompanied by political instability and military adventurism (Snyder, 2000)? Is China likely to experience fragmentation, a slowdown of economic growth, ecological problems, and massive social unrest? Will it continue to be a fast-growing stable authoritarian system? Only the wisest or most foolhardy of social scientists believes that he or she knows the answer to this question.

THREATS MULTIPLY: STRATEGY BY LIST During the two decades since the end of the Cold War, the defense bureaucracy has been in a quandary. Pundits were rapidly spinning new theories about the nature of the post-Cold War era and the sources of new threats. These existed in profusion and there seemed little prospect of an emerging consensus on the nature of the new global order. But widely-used terms like “globalization” were too broad to provide clear guidelines for policy. Early on, as we have seen, the bureaucracy settled on a compromise: threats were most likely to come from rogue states and a variety of messy ethnic conflicts that would require intervention to prevent wider and more prolonged war. Both rapid, decisive strike and peace operations were likely to be the norm. While defense intellectuals were happy to flirt with a wide range of theories about the nature of the new epoch, force planners remained fixated on the military force that had been developed over the years since Vietnam. This compromise worked reasonably well for force planning purposes, but it signally failed to capture the complexity of global politics. The result was conceptual muddle and a period of planning by list. For example, the January 1991 annual report of the Secretary of Defense listed four threats to regional stability: the proliferation of high technology weapons, narcotics trafficking, terrorism, and low-intensity conflict arising from ethnic and

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religious tensions. By 1995, the list of threats mentioned in the annual report had grown to nine: regional hegemons, ethnic and religious conflicts, WMD proliferation, threats to democracy and reform in the ex-Communist countries, subversion and lawlessness, terrorism, threats to U.S. prosperity and economic growth, global environmental degradation, and the illegal drug trade. This was now a long and quite vague (lawlessness?) shopping list of things to worry about, not a clear guide to the formulation of a focused strategy. By the end of the decade concern about a global peer competitor had made its way into the list. The 1998 report noted the absence of a global peer competitor, the 1999 report mentioned the “potential” for such a competitor, and the 2000 report accepted that a global peer competitor was a “potential security challenge.” Two things had occurred: on the one hand, the defense bureaucracy, unable to cope satisfactorily with the ambiguity of the global strategic situation, had opted to provide policy-makers with a long and vague list of concerns that needed to be attended to; on the other hand, those within the defense establishment that had been warning about an emerging peer competitor were clearly making considerable progress in placing their concerns on the agenda. In their efforts to do so, they were aided by the wide acceptance of the theory that an RMA was taking place; that the United States was uniquely placed to take advantage of it; and that the RMA also brought with it a number of strategic challenges. By the turn of the millennium it looked as if American defense planning would be dominated by concerns about China and that the response would be heavily conditioned by the application of new technologies to military operations. Then came the Al Qaeda attacks in the fall of 2001, followed in short order by the military interventions in Afghanistan and Iraq. Suddenly terrorism rose to the top of the list, and counterinsurgency and state-building were not long in following. A new epoch of global terror was discerned and a new, long war was embarked upon. These developments came rapidly to swamp strategic coherence and drive out other concerns. Slowly, other strategic concerns re-asserted themselves. Some in the strategy community, however, maintained a steady drumbeat of alarm about the threat from a rising China, and increasingly came to dominate the strategy debate. By 2012, as strategists vowed that they would never again be lured into frustrating and ineffectual interventions like those of Iraq and Afghanistan, and as the long effort to manage the impact of terrorism seemed to be reaching an acceptable level of effectiveness, it seemed possible that strategic consensus was at last within America’s grasp.

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WHY STRATEGIC CONSENSUS IS UNLIKELY: IDEOLOGY, IDENTITY AND FANTASY This chapter has argued that the problem facing U.S. defense planners since the end of the Cold War has not been a fiscal constraint, but rather an inability to develop a coherent long-term strategy. The United States has oscillated between one diagnosis and another of the global security environment. This is not some simple cognitive “error” that could be corrected with the adoption of the “correct” policies. There are several reasons for this failure of strategy. Some are constant; others are situation dependent. The first set of reasons is that articulating and implementing a coherent strategy is inherently difficult. The world is a complicated place and we have little ability to predict the future. Strategists tend to muddle through. Although their short-term expedients are clothed in high-flown rhetoric, strategy turns out to be little more than a collection of ad hoc responses to crises that were either unforeseen or threats that were simply ignored. This is a constant. The second set of reasons for strategic failure concerns the operation of organizational inertia and bureaucratic politics within the military and within the Federal government more generally. The armed services have developed rationales for their organizational existence. Their officer corps has been socialized into a set of professional identities. Organizational interest and professional identity seldom change rapidly. Controlling these large and powerful organizations is a challenge: repeated efforts to reform the defense establishment (for example, the Goldwater Nicholls legislation requiring the services to operate more “jointly”) have had an impact, but the defense establishment still retains many of the features of a permanently squabbling feudal system. This has acted as a drag on strategic change: strategic is constrained by the forces available, and these can neither be changed rapidly nor simply at the behest of the civilian political leadership. This is also a constant. There is a third set of reasons why clarity, coherence and consistency in strategy is unlikely, having to do with the ways in which the American polity operates to identify “enemies” and, as a result, to define “national identity.” Here, we are dealing with factors that are situation dependent. The need for a clear and simple definition of an enemy is constant: the identification of that enemy varies, as does the degree of consensus on who that enemy is. It is our claim that in situations of hegemonic decline it will be harder to achieve consensus on the identification of the enemy. The multiple tasks of a would-be hegemon will prove overwhelming in

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a situation of economic decline, and there will be much strategic flailing around. This chapter has argued that a central dynamic in American strategymaking has been the search for identity and the social construction of the world in terms of mutually-defining poles, self, and other. There is a need for narratives of identity, both on the part of publics and on the part of bureaucracies, such as the defense establishment, that are charged with the task of preparing to meet future threats. These narratives must be simple and they must frame both self and other in moral terms. Identity narratives must be simple, preferably encapsulated in a soundbite (like “containment”). Although formally tasked to manage complexity and uncertainty, the defense establishment works best when there is a simple and clearly-understood goal to which every part of a vast and complex set of organizations can put its shoulder to the wheel. It is certainly the case that official statements are always carefully nuanced; and many of the vast number of research papers produced by the defense bureaucracy are sophisticated and carefully calibrated. Nevertheless, these careful statements must be translated into slogans to mobilize and orient large organizations and publics. Over-simplification is inevitable. There is no point in lamenting the fact: it is like the weather, we must live with it. Identity narratives must also be moral (Vlahos, 2008). The debates about national identity and hegemonic strategy described in this chapter were not simply cognitive. Identity narratives are always, in part, moral narratives. They concern issues of moral identity and are invested with deep emotions. At a cultural level, a sense of mission, a certain imperial hubris (the winning team), and a deep, diffuse, and inchoate anxiety blended together into an unstable cocktail. In a society where many people like to think of themselves as morally good, a narrative about the benign role of the United States in the world plays to a receptive audience. In a society where winning in sports is highly valued, a sense of being on the winning team evokes considerable passion. The two impulses combine in the image of the United States as the U.S. cavalry (or the Lone Ranger), riding to the rescue, routing evildoers and setting the world to rights. Yet this image is countered by other emotions: by frustration that America’s benign intentions are seldom recognized, by fear of attack at home by fanatics of one kind or another, by a sense that vast regions of the world are no longer (sic) receptive to American leadership or susceptible of control; and by anxiety about a host of global problems environmental degradation, climate change, and the like. These

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concerns and emotions can lead to quite different strategic postures: isolationism, on the one hand, or willful assertion of power, on the other. Such deeply held moral and emotional stances are, to some considerable degree, impervious to the results of social science research. Many of the efforts to define the basic fault lines of the post-Cold War world have involved considerable empirical and/or social science mis-specification. In other words, they have been fantasies. This is true of the Cassandra-like warnings of coming anarchy and global chaos, of the notion of a clash of civilizations, of the notion of primordial hatreds, and of the view of history that casts it as a struggle against the fanatical fringe (or dangerous mainstream) of a militant Islam. All these fantasies have been debunked by professional historians and social scientists. Of course this debunking has little impact: the Beltway and the wider public need this kind of narrative, and pundits make their living by providing it. The element of unreality might not be an obstacle to strategic coherence were it not for the uncertainties about what it means to be “America.” Durkheimian sociology has as a central proposition that ritual acts enable societies to define themselves and cohere around a common identity. Complex and fragmented societies find this hard to do, and massive and routine efforts by governments are undertaken to build patriotism and national identification. In homogeneous societies, such efforts at generating national identity usually succeed: in a society that is deeply divided as is likely to be the case in periods of economic decline and geopolitical challenge achieving this cultural consensus on identity and meaning is harder. And so the elements of fantasy some into their own: strategic problems are not dealt with in terms of sober assessments of the realities of power, but in terms of the passing emotional resonance of one ideological construct or another.

CULTURAL EXPLANATIONS The cultural turn has come to the military. There is now a substantial literature purporting to explain American strategy by reference to the specifics of American culture. It does so variously: by reference to “national culture,” by reference to an American “strategic culture,” and by reference to the organizational cultures of the various component parts of the defense establishment theory (Gray, 1994; Sherry, 1995; Katzenstein, 1996; Barnett, 2009; English, 2004; Zisk, 1997; Muth, 2011; Weigley, 1973;

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Farrell, 2005. Cf also Englehart, 1995; McDougall, 1997). The implication is that the specificity of American strategy can best be explained by the peculiarities of American culture, by something that makes America different from other countries. Some analysts, for example, have argued that, at least for some important publics and decision-makers, ideological themes originating in Protestantism have led Americans to think of themselves as having a special mission in the world (Preston, 2012). For some Americans, their beliefs about strategy are clearly linked to religious doctrine; for others a process of de-linking from religious origins has occurred, but the sense of a special mission has been retained. America has, in this view, long been a redeemer nation, with a proclivity for moral crusades. There is something special about American society that gives it a special mission in the world. Few other societies see themselves as possessing a mission to save the world or a sense that they are superior to the rest of humankind. Certainly, large segments of both publics and policy-makers (including military strategists) in the United States seem to believe that America is a force for good in the world. This makes assumption of a hegemonic role seem both natural and inevitable. The United States may not be a global policeman, but it is certainly the Lone Ranger. This self-image will be unsustainable in a period of hegemonic decline; there will, however, be great resistance to jettisoning these comforting fantasies and accepting a more realistic view of America’s place in the world. Not everyone is convinced that culture, however defined, is as powerful an explanatory factor as its proponents suggest (Porter, 2009). Nor is it entirely clear how different American culture is from that of other countries. Strategy is a cultural construct. It does not follow from this that there is a logical necessity to explain a cultural product (strategy) by a cultural cause (national, strategic, or military organizational culture). It is, at least in principle, possible that some other factor is a determinant of those cultural responses we call strategy. We simply don’t know: there have not been enough comparative studies to know how unique American culture (national, strategic or military organizational) is, and whether the specifics of culture explain the strategic flailing around of the last two decades. Some cultural influences are clearly not specific to the United States but are characteristic of modern societies in general. For example, in most modern societies, wars and foreign affairs are consumed passively, through television. What some have called “spectator-sport militarism” has come to characterize modern societies (McInnes, 2002). The kind of primitive

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nationalism that simply roots for “our” team and our soldiers does seem to be a peculiarly American cultural trait, though it may perhaps be more highly developed in that country than elsewhere. There is another possibility: that the kind of hegemonic hubris displayed by the United States may not be specific to American culture: it may be a feature of all hegemonic societies. Correlatively, as hegemons decline, they experience the kind of flailing and emotional disorientation that has happened in the United States. A further reason for caution with regard to culturalist explanation stems from the heterogeneity of American culture. There is always political opposition and there are always cultural counter-currents. Indeed, American culture today is so heterogeneous that it is hard to claim that there is even such a thing as “American culture.” Along these lines, it can be argued that the strategic clarity of the Cold War masked, and repressed, the effect of a growing culture war in America. Beginning in the sixties, and continuing ever since, the cultural homogeneity of American society dissolved, to reveal a deeply divided society, at odds with itself over a wide range of issues. There were increasingly deep divisions about identity, about the nature of American society and its purposes in the world. This would have resulted in strategic disarray had not the Cold War consensus on containment prevented cultural change from having an immediate and direct effect on strategy. With the end of the Cold War, this barrier was removed, and the cultural tensions in American society were immediately reflected in the strategic sphere as strategists flailed about, looking for a formula that encapsulated some national interest. In political systems which are not well designed to cope with ideological polarization, there may well be a prolonged crisis or impasse, with no party able to dominate the political process sufficiently to implement major reform. A combination of a struggle over identity discourse poorly anchored in empirical reality and a polarized political system is a recipe for disaster. Not only does it reduce the likelihood that policies capable of arresting decline (or adjusting to it) can be implemented, it increases the likelihood of dramatic swings in political identity narratives and the strategies that flow from them. Military strategists are part of the body politic and the national culture. They are not technicians imbued with pure rationality, focused on promoting some objective national (or even imperial) interest. They take their ideas from those that surround them (Gat, 1989). They are a prism through which debates about how to address hegemonic decline are refracted.

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To be sure, they do not do so randomly: strategists have a proclivity for worst-case scenarios. That is their job: to be prepared for the worst. They are natural doom-and-gloom merchants, professional paranoids. To some extent, strategists operate in relatively autonomous fields and institutional complexes and this means that the organizational interests (themselves socially constructed) of the various military services (and other military organizations) play a role, perhaps a subordinate one, in tugging U.S. strategy in one direction or another.

CONCLUSION This chapter has argued that hegemons face three basic tasks: deterring a peer competitor; maintaining a global institutional order; and imposing order in the periphery. Balancing these three tasks is inherently difficult, and more so when there is fiscal constraint and/or an increase in military capabilities on the part of a challenger. Developing sound strategy is difficult for several reasons: bureaucratic politics, domestic political constraints, the role of particular interests, short time horizons of politicians, the dysfunctional institutional arrangements of the political system, and the multifaceted impact of both organizational and national culture. We have argued that strategy is itself a cultural construct: it is the crystallization of debates about national identity, about the nature of world order, and about the identity of adversaries. But while strategy is inescapably a cultural product, the explanation of strategy in cultural terms is not unproblematic. We speculate that perhaps it is the recognition (realistic or otherwise) of hegemonic decline that generates or reinforces strategic flailing. Debates about national identity and purpose are harder to resolve, and so strategy is susceptible to sudden shifts. U.S. military strategy since the end of the Cold War has been like a ship without a rudder, responding to momentary changes in the wind, uncertain of its course and destination. Decline will only make consistent (and realistic) strategy harder to achieve. If America is indeed in economic decline, and if China continues to grow and expand its military capabilities, and if the periphery continues to generate concerns that call out for American military intervention, then the tendency towards flailing will likely be exacerbated, not diminished. Bureaucratic politics and budgetary squabbles have complicated, but not determined, the picture. If America is in decline, it is a multifaceted

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malaise. Military expenditure and strategic posture are but one aspect of the larger picture: part cause, part effect, and mostly symptom of dreams of global hegemony.

NOTES 1. This is, of course, a very approximate and highly stylized representation of a complex debate. Proponents of nearly every position discussed in this chapter will, no doubt, feel that the complexity and subtlety of their analysis has been has been abandoned in favor of sweeping generalization, and those that have not been mentioned will feel even more aggrieved. The authors can do no more than apologize and say that they have done their best not to misrepresent any individual position. 2. Much of the literature has focused on the causal impact of U.S. military spending on fiscal crisis and economic slowdown. A full discussion of that side of the equation is beyond the scope of this chapter. 3. The argument is not that strategic consensus necessarily implies realistic strategy; often global hegemons succumb to an ideologically driven temptation towards overextension and crusading. The argument is not that strategy is realistic, but that a consensus is more or less easy to achieve. 4. This was the case with the war in Vietnam, for example. 5. Terms changed. This was replaced with “Medium Theater War.” 6. All these theories were widely disseminated and debated within the Washington Beltway. They were required reading in the various war colleges. Yet none of this intellectual effervescence had much impact on force planning. 7. The social science underlying these theories was suspect. Despite the considerable differences between individual versions of these theories, they were assimilated into the policy discourse of official Washington as a composite. What was termed “global chaos theory” by Yahya Sadowski (1998), “penetrated Washington discourse not as an integrated system of analysis, but as a piecemeal assemblage of epigrams. The metaphors and icons that the chaos theorists invented such as the slogan ‘the West against the rest’ and the image of nations locked in the fanatic death grip of jihad gained greatest currency” (p. 66). The underlying conceptualization, as Sadowski has suggested, is based on a simplified version of Durkheimian theory. The popularizers took from Durkheim the notions of disruption, anomie, and consequent backlash. Anomie theory as an explanation of collective violence has, to say the least, found little empirical support. For analyses that present an anomie/strain type of argument, see Smelser, 1962; Kornhauser, 1959, For critiques and alternatives see, inter alia, Cornelius, 1971; Allen, 1965; Tilly, 1982, 1984. Whether or not the popularizers have correctly applied Durkheimian concepts, there is considerable debate amongst social scientists about the utility of the Durkheimian paradigm in explaining social conflict. Of the contentious nature of the underlying social science, Washington policy circles remained blissfully unaware. 8. One of the constants in strategic punditry is the regular disconfirmation of sweeping hypotheses. This seems to have no impact on the willingness of other pundits to rush into print with equally sweeping predictions.

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9. The neocons were a disparate group, and each had different reasons for advocating an invasion of Iraq. Paul Wolfowitz was the one most closely associated with the public advocacy of the democratization argument. Others, such as Dick Cheney, were more prone to emphasize the WMD threat. It was this latter, as Wolfowitz himself noted, that formed the common denominator around which the Bush administration built a public case for the invasion. 10. This was implausible. In fact, religious doctrine is enormously malleable and subject to vastly different interpretations. One has only to consider the attitudes of Christians to war to appreciate how malleable religious doctrine can be. Some Christians see pacifism as the only stance compatible with biblical teaching; others are quick to invoke the deity on their behalf in divinely sanctioned war. This is true of all major religions and is necessarily so. Some level of ambiguity is necessary if a religion is to appeal to a wide range of people and to last for long periods of time. Too much doctrinal precision precludes adaptation. 11. The term “new,” of course, was unfortunate. It suggested a series of propositions about military history which were unlikely to be sustainable upon detailed examination of the evidence, at least in their most pristine form. 12. In this reading, globalization was simply an updated version of modernization theories. These have been carefully dissected and found wanting by a range of social scientists, most notably, Sadowski (1998). 13. Saddam was partly responsible for this. Part of his general deterrence strategy, aimed as much at Iran as at the United States, was to give the impression that Iraq had greater WMD capability than was actually the case.

REFERENCES Allen, W. (1965). The Nazi seizure of power. New York, NY: Franklin Watts. Barnett, R. W. (2009). Navy strategic culture: Why the Navy thinks differently. Annapolis, MD: Naval Institute Press. Barnett, T. (2004). The Pentagon’s new map: War and peace in the twenty-first century. New York, NY: Putnam. Berman, P. (2003). Terror and liberalism. New York, NY: Norton. Besteman, C., & Gusterson, H. (Eds.). (2005). Why America’s top pundits are wrong. Berkeley, CA: University of California Press. Cohen, E. (2001). World war IV. Wall Street Journal, 18, November 20. Cornelius, W. (1971). The political sociology of cityward migration in Latin America. In F. Rabinovitz & F. Trueblood (Eds.), Latin American Urban research. Beverley Hills, CA: Sage. Department of Defense. (2012). Sustaining global leadership: Priorities for 21st century defense. Washington, DC, January. Englehart, T. (Ed.). (1995). The end of victory culture. Amherst, MA: University of Massachusetts Press. English, J. (2004). Understanding military culture. Quebec: McGill-Queen’s University Press. Farrell, T. (2005). The norms of war: Cultural beliefs and modern conflict. Boulder, CO: Lynn Reinner.

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Ferguson, N. (2004). Colossus: The price of America’s empire. New York, NY: Penguin. Flanagan, S. (2001). Meeting the challenges of the global century. In R. L. Kugler & E. L. Frost (Eds.), The global century: Globalization and national security (Vol. 2). Washington, DC: Institute for National Strategic Studies, National Defense University. Freidman, G., & Lebard, M. (1991). The coming war with Japan. New York, NY: St. Martin’s Press. Freidman, T. (1999). The Lexus and the Olive Tree. New York, NY: Anchor. Friedberg, A. (1988). The weary Titan: Britain and the experience of relative decline, 1895 1905. Princeton, NJ: Princeton University Press. Friedberg, A. (2011). A contest for supremacy: China, America, and the struggle for mastery in Asia. New York, NY: Norton. Fukuyama, F. (2006). The end of history and the last man. New York, NY: Free Press. Gat, A. (1989). The origins of military thought, from the enlightenment to clausewitz. Oxford: Oxford University Press. Gray, C. (1994). Strategy in the nuclear age: The United States, 1945 1991. In W. Murray et al. (Eds.), The making of strategy. Cambridge: Cambridge University Press. Haass, R. (1997). The reluctant sheriff. New York, NY: Council on Foreign Relations. Hewitt, J. J., Wilkenfeld, J., & Gurr, T. R. (2008). Peace and conflict 2008. Boulder, CO: Paradigm Publishers. Huntington, S. (1996). The clash of civilizations and the remaking of world order. New York, NY: Simon and Schuster. Huntington, S. (2004). Who are we? The challenge to America’s national identity. New York, NY: Simon and Schuster. Hyland, W. (1990). Foreign affairs, 69(Spring), 2. Jones, J. (2001). Strategic agility, operational reach, and tactical flexibility. U.S. Naval Institute Proceedings, February. Kagan, F. (2006). Finding the target: The Transformation of American military policy. New York, NY: Encounter Books. Kaldor, M. (1999). New and old wars. Stanford, CA: Stanford University Press. Kaplan, R. (2000). The coming anarchy. New York, NY: Random House. Katzenstein, P. (1996). The culture of national security. New York, NY: Columbia University Press. Kennedy, P. (1989). The rise and fall of the great powers. London: Unwin Hyman. Kornhauser, W. (1959). The politics of mass society. New York, NY: Free Press. Kugler, R. (1995). Towards a dangerous world. Santa Monica, CA: RAND. Kugler, R. (2001). Controlling chaos: The new axial strategic principles. In S. J. Flanagan and E. L. Frost (Ed.). The global century. Washington, DC: NDU. Lewis, B. (2002). What went wrong? Oxford: Oxford University Press. Lincoln, B. (2003). Holy terrors: Thinking about religion after September 11. Chicago, IL: University of Chicago Press. Loveland, A. (1996). American evangelicals and the U.S. military, 1942 1993. Baton Rouge, LA: Louisiana State University Press. McDougall, W. (1997). Promised land, Crusader State. New York, NY: Houghton Mifflin. McInnes, C. (2002). Spectator-sport war. Boulder, CO: Lynn Reinner. Munckler, H. (2005). The new wars. Cambridge: Polity Press. Murray, W. (2011). British grand strategy, 1933 42. In W. Murray, R. H. Sinnreich, & J. Lacey (Eds.), The shaping of grand strategy: Policy, Diplomacy and War (pp. 147 181). Cambridge: Cambridge University Press.

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Muth, J. (2011). Command culture. Denton, TX: University of North Texas Press. Nathman, J., & Harris, C. (2006). Shaping the future. Naval Institute Proceedings, January. Porter, P. (2009). Military orientalism: Eastern war through western eyes. London: Hurst. Preston, A. (2012). Sword of the spirit, shield of faith: Religion in American war and diplomacy. New York, NY: Random House. Sadowski, Y. (1998). The myth of global chaos. Washington, DC: The Brookings Institution. Secretary of Defense, Annual Report, various years. Sherry, M. (1995). In the shadow of war: The United States since the 1930s. New Haven, CT: Yale University Press. Smelser, N. (1962). Theory of collective behavior. London: Routledge. Smith, R. (2008). The utility of force: The art of war in the modern world. New York, NY: Vintage. Snyder, J. (2000). From voting to violence. New York, NY: Norton. The 9/11 Commission. (n.d.). The 9/11 commission report. New York, NY: Norton. Tilly, C. (1982). As sociology meets history. New York, NY: Academic Press. Tilly, C. (1984). Big structures, large processes, huge comparisons. New York, NY: Russell Sage Foundation. Van Tol, J. (2012). AirSea battle: A point-of-departure operational concept. Washington, DC: Center for Strategic and Budgetary Assessments. Vlahos, M. (2008). Fighting identity: Sacred war and world change. New York, NY: Praeger. Wendt, A. (1999). The social theory of international politics. Cambridge: Cambridge University Press. Wiegley, R. (1973). The American way of war. Bloomington, IL: Indiana University Press. Zisk, K. (1997). Weapons, culture, and self-interest: Soviet defense managers in the New Russia. New York, NY: Columbia University Press.

ELITE FRAGMENTATION AND THE DECLINE OF THE UNITED STATES Mark S. Mizruchi and Mikell Hyman ABSTRACT We argue that the United States has experienced a decline of economic, political, and military power since the 1970s, and that this decline can be attributed in part to the fragmentation of the American corporate elite. In the mid-twentieth century, this elite constrained by a highly legitimate state, a relatively powerful labor movement, and an active financial community adopted a moderate and pragmatic strategy for dealing with the political issues of the day. The “enlightened self-interest” of corporate leaders contributed to a strong economy with a relatively low level of inequality and an expanding middle class. This arrangement broke down in the 1970s, however, as increasing foreign competition and two energy crises led to spiraling inflation and lower profits. In response, the corporate elite waged an aggressive (and ultimately successful) assault on government regulation and organized labor. This success had the paradoxical effect of undermining the elite’s own sources of cohesion, however. Having won the war against government and labor, the group no longer needed to be organized. The marginalization of the commercial

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banks and the acquisition wave of the 1980s exacerbated the fragmentation of the corporate elite. No longer able to act collectively by the 1990s, the corporate elite was now incapable of addressing issues of business and societal-wide concern. Although increasingly able to gain individual favors from the state, the elite’s collective weakness has contributed to the political gridlock and social decay that plague American society in the twenty-first century. Keywords: American corporations; corporate elite; business elites; American politics; business associations

Is the United States in decline in the twenty-first century? This is a difficult question to answer. The decline of other empires, although often occurring over decades, if not centuries, was more tangible because they typically held territory. The decline of the Ottoman Empire, for example, could be clearly observed by its forfeit of landholdings. The United States, on the other hand, has had relatively few formal territorial possessions, at least since it expanded across North America. In fact, some observers have questioned whether the United States actually is an empire. We do know that the United States was the world’s dominant economic and military power after World War II. If by decline, we mean a reduction in a nation’s dominance over other nations, where dominance is, following Lachmann (2003, p. 346), “a polity’s capacity to act as [a] dominant financial, commercial, or manufacturing center,” then we believe that the United States has experienced a decline since the 1970s. One must be careful to avoid overstating the case. In the 1980s, there was widespread belief that Japan was rapidly eclipsing the United States, but the Japanese economy imploded during the 1990s, and the country was no longer seen by Americans as a threat. In the 2000s China has appeared to be ascendant, but there is similarly no assurance that the Chinese will ultimately become dominant, or that even if they do, exactly when this is likely to occur. Yet a case can be made that the United States has been on a long-term downward trajectory since the 1970s, even as it has experienced periods of significant growth. Although we will attempt to document this downward trajectory, we are not alone in drawing this conclusion. Our primary goal in this chapter is to address the question of why this decline has occurred. We shall argue that although the decline is the result of many factors, a primary cause is one that has received little attention: the increasing

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fragmentation among the leaders of large American corporations we call the American corporate elite.

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BACKGROUND Historians have proposed several explanations for the decline of great powers. Not all situations are the same, of course, so those who have suggested reasons for the decline of particular nations have often posited alternative reasons for the decline of others. One distinction involves the extent to which the sources of decline were primarily external or internal. An example of the former involves the case of what is sometimes called “overreach,” in which the scope of a nation’s holdings becomes stretched beyond what it can effectively administer. Paul Kennedy (1987) sees overreach as a primary cause of the decline of Rome. As the size of the metropolis’s holdings increased, its economic and military resources experienced strains, and it became increasingly difficult to maintain control over the empire’s extensive territory. Arguments about internal sources of decline appear to be more common, and more varied. Arnold Toynbee described the decay of civilizations as “a loss of creative power in the souls of creative individuals” (Toynbee, 1987, p. 245). Vladimir Simkhovitch (1916) argued that unsustainable agricultural practices were responsible for Rome’s decline. The internal and the external are, of course, intertwined, and each can affect the other. Several authors have argued that the ability of Rome to maintain its hold on Europe was affected by the decay of Roman society (see, e.g., Buszard, 2005; Gibbon, 2003 [1776]; Toynbee, 1987). The ability of Spain to thrive at home was affected by its enduring military entanglements abroad (Kennedy, 1987). Richard Lachmann (2003) has provided an alternative, and more grounded, classification scheme for understanding the fate of four major European polities: Florence, Spain, the Netherlands, and Britain. The resource view, associated with scholars such as Kennedy (1987) and Charles Tilly (1990), suggests that the factors that allowed a polity to dominate in one period may lose their salience in a later period. Tilly (1990) argues, for example, that the city-state declined in prominence in the sixteenth century when the need for large armed forces became increasingly important. Kennedy (1987) suggests that Spain’s heavy military spending sapped its ability to develop other aspects of its economy. The actor view, associated with scholars such as David Landes (1998) and Avner Greif (1998), focuses

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on the ways in which institutions created (or failed to create) incentives that encouraged economic activity. Landes (1998) argued, for example, that polities experienced economic success when their institutions rewarded entrepreneurs and innovators rather than the idle rich. Greif (1998) argued that Italian city-states were successful when potentially rival clans were compelled to cooperate by professional administrators, backed by armed forces, who were brought in to rule for fixed terms (Lachmann, 2003, pp. 348 351). Most relevant for our concerns is Lachmann’s own argument, however, since it has parallels with ours. After raising questions about both the resource and actor models, Lachmann (2003, p. 352) suggests an alternative: the extent of competition among elites. Elites are groups of actors, with control over various organizational structures, who are able to extract resources from nonelites. Societies typically have groups of elites that compete with one another. When one group of elites is able to attain dominance over other groups, it may become rigid and begin to hoard resources for itself. This may prevent rival elites from deploying resources that might have strengthened other elements of the society. In Florence, for example, the unilateral assumption of power by the Medici “prevented rival elites, and the Medici themselves, from reallocating resources to meet new commercial and geopolitical challenges” (ibid, p. 353). This ultimately led Florence to lose its economic dominance, Lachmann argues. Spain, meanwhile, faltered because the state allowed dominant elites in the provinces and the American colonies to hoard resources for themselves, and was unable to collect sufficient revenues from them to develop its overseas economic interests. In making our argument for the sources of American decline, we develop an approach that has much in common with Lachmann’s. Although we shall focus on both external and internal forces that have sapped American strength, our emphasis will be on an internal factor: the changing nature and organization of one of the central elite groups in American society: the American business community. The sources of these changes were in part external in particular, the increasing international economic competition that American firms faced and the economic difficulties that resulted from the failed military venture in Vietnam. There were changes in relations among elite actors within American society, however, and that will be our focus. In addition to the work by Lachmann (2003, 2009), we draw heavily on a recent work by the first author of this chapter, who examined the rise and fall of the American corporate elite (Mizruchi, 2013). We shall have an opportunity to discuss the ways in which these

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works correspond with one another. Before doing so, however, we shall discuss the evidence that the United States has in fact experienced a decline in its relative position in the world.

HAS THE UNITED STATES DECLINED? Various arguments have been proposed for when the United States replaced Great Britain as the world’s leading power. Wallerstein (2003, pp. 13 14) argues that the ascendance of the United States began during the recession of 1873, as Britain began to lose its share of international markets to the United States and Germany. Others, such as Nye (2003), have suggested that the United States emerged as a world power at the end of World War I. Virtually all observers acknowledge, however, that it was the end of World War II, in 1945, in which the United States became the world’s unquestioned power. This power was reflected in the affluence that Americans began to experience. After the Great Depression of the 1930s, the war had provided an unprecedented government stimulus to the economy. Unemployment had reached virtually zero. Production occurred at a level far beyond what any nation had accomplished. And because the war was fought in Europe and Asia, the United States emerged from it virtually unscathed, unlike the world’s other leading nations, virtually all of whose economies and infrastructures were in complete disarray. The greatest problem that the United States faced at the time was that the rest of the world was in such dire economic straits that there were few outlets for American-made goods. The need to expand those outlets is what led to the Marshall Plan, a massive financial aid program to European countries. From 1945 into the early 1970s, the United States remained the world’s leading power, and its economy continued to grow. Real gross domestic product nearly tripled during this period. Real incomes nearly doubled, and the income distribution became more equal.1 Large numbers of citizens began to receive college educations, triggered by the postwar GI-bill, which provided tuition assistance to veterans.2 And home ownership became widespread increasing from 44 percent of the population in 1940 to 63 percent in 1970 (U.S. Census Bureau) as people moved out of cramped urban apartments into relatively spacious single-family dwellings. Even during the peak of American dominance there were problems. The economy experienced recessions in 1953 and 1958. The contrast between

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private affluence and the relatively shoddy state of public facilities, described by John Kenneth Galbraith (1958), continued to manifest itself even during the affluent 1950s. African-Americans remained unable to vote in much of the South. And more than one-fifth of the population remained poor as late as 1959.3 Yet things improved. In part as a result of increasing societal affluence, and in part due to an ambitious series of government programs established during the administration of Lyndon Johnson, the poverty rate dropped by one-half during the 1960s. Meanwhile, the standard of living of virtually the entire population continued to rise, and inequality reached a level significantly below its pre-World War II state. American society was wracked by turmoil during the 1960s. Yet the economy continued to grow, unemployment was low, and the general population remained optimistic that its standard of living would continue on an upward trajectory. The point at which the condition of American society began to turn downward is difficult to detect. Some observers point to the Vietnam War, which not only tore apart the national consensus on the righteousness of the nation’s foreign policy, but also created significant strains on the national budget. Another important factor was the resurgence of the economies of Europe and Japan, both of which created increasing competition for American industry. The combination of inflationary pressures caused by the simultaneous adoption of ambitious social spending, the fiscal strain of the Vietnam War, and the virtually full employment that resulted from the booming late 1960s economy precipitated a severe economic crisis during the 1970s. The concurrent appearance of increasingly high inflation and recession-level unemployment, with which presidents Nixon, Ford, and Carter were seemingly unable to cope, created a further sense that the nation was in decline. This fear was catalyzed by the 1979 occupation by Iranian militants of the American embassy in Teheran, where 52 hostages were held for more than a year, during which American officials appeared unable to respond. One could make a strong case that the United States recovered from the malaise of the 1970s and that it emerged stronger than ever. After assuming the presidency in 1981, Ronald Reagan set out to restore American military as well as economic power. To an extent he succeeded. During President Reagan’s term the Soviet Union liberalized its system, both economically and politically. The Soviets not only lost their grip on their Eastern European satellites shortly after the end of Reagan’s second term, but the Soviet Union itself dissolved in 1991, indicating a clear victory for the United States in the decades-long Cold War. The American economy,

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which endured its worst recession since the 1930s during President Reagan’s first two years in office, experienced a strong recovery thereafter, although this recovery was fueled to a great extent by an influx of foreign capital attracted by historically high interest rates (Krippner, 2010), as well as the decimation of organized labor. Moreover, although the American economy generated increased employment opportunities during the 1980s, inequality began to increase, and real wages for the larger population continued to stagnate. In addition, the Reagan economic policy of extensive tax cuts and explosive increases in military spending led to record deficits, and his administration’s lax attitude toward antitrust led to an unprecedented wave of corporate acquisitions that created enormous instability. By the early 1990s, the ballooning deficit and the aftermath of the acquisition wave left the nation in a new recession, less severe than that of a decade earlier, but significant nonetheless. Yet the recovery from that recession during the presidency of Bill Clinton led to another economic boom during the 1990s. This occurred just as Japan, the Americans’ main concern during the 1980s, was falling on hard times resulting from the collapse of its own economic bubble. If anything, reports of American decline seemed premature. The United States was again economically ascendant, and militarily unchallenged. But trouble was around the corner. First, the internet-fueled bubble of the late 1990s finally burst, leading to a sharp stock market decline. Second, the September 11, 2001, attacks created a new wave of economic uncertainty. The nation recovered after 2001, but the recovery was driven by a real estate boom that created yet another bubble. The collapse of this bubble proved to be far more severe than that from the internet boom of the 1990s. The world-wide financial crisis that followed led to a period of prolonged economic stagnation. We do not know if the crisis of 2008 and beyond is the harbinger of long-term American economic decline. Scholars such as Wallerstein (2003) and Arrighi (2007) have argued that the long-term decline of the United States began in the 1970s and has proceeded essentially continuously, albeit not monotonically, since that time. There is certainly evidence of this. Since the 1970s, real wages have stagnated for much of the population, and since 1980 inequality has sharply increased (Piketty & Saez, 2003). The educational system has continued to deteriorate with student performance in math, reading, and science in 2003 ranking below that of Poland, Hungary, and Slovakia and tied with Spain, infant mortality levels in 2012 above those of Cuba, Portugal, and Guam, and levels of life expectancy below those of Greece, Bermuda, and Bosnia and Herzegovina.4 China appears

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poised to surpass the United States on a number of indicators. And, judging by its experiences in Iraq and Afghanistan, the United States seems unable to exercise its military muscle in an unlimited fashion. On the other hand, although the United States has clearly lost the unique economic and military dominance that it possessed in the post-World War II period, it would be premature to assume that the nation is certain to cede its position to China, at least in the near term. Just as Japan took a step backward in the 1990s, there is no guarantee that China will not do the same. Yet regardless of whether the United States is, or will continue to be, the world’s leading power, it is clear that significant problems exist with American institutions. The three largest economic expansions since 1980 were all characterized by speculative bubbles that caused great harm when they burst. The level of inequality, the highest since the 1920s, threatens to create a permanent threat of depression. The cost of health care is far above that of other developed countries, yet Americans receive on average poorer care and have poorer health outcomes than those countries. And the nation’s political system has become dysfunctional, mired in what appears to be a continued state of gridlock. As serious as these problems are, all of them may be dwarfed by the imminent onset of severe environmental crises due to the continued and increased burning of fossil fuels, the outcome of which could be irreparable damage to the prospects for human life on the planet. Although culturally American society is far more open and less repressive in the twenty-first century than it was in the postwar period, the economic and political systems do not work as effectively now as they did then. There is no longer a belief among the public that problems are solvable, or that things will be better for their children than they were for themselves. If this does not represent the final or even the emerging decline of American civilization, it does at least pose a series of problems that the nation has failed to adequately address. Our question is, why have these problems become so intractable? The answer, we argue, is that they can be traced to changes in the nature of leadership among large American corporations, what we call the fragmentation, or fracturing, of the American corporate elite.

WHO ARE THE CORPORATE ELITE AND WHY ARE THEY IMPORTANT? In what way have corporate leaders played a role in the decline of the United States? To address this question, we need to consider an argument

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that dates back to the first half of the twentieth century. In his classic work, Capitalism, Socialism, and Democracy, Joseph Schumpeter (1942) acknowledged what many political scientists had hinted at in their observations of American politics: Most Americans were politically apathetic, and were not especially interested in politics. Given this apathy, Schumpeter argued that American political life was dominated by elites, those who were either directly involved in politics or who believed that they had a significant stake in it. Democracy under these conditions could work, Schumpeter reasoned, only if elites were divided. Only then was it possible for the electorate to occasionally rise up and oust political officials who had lost favor with the public. If elites were essentially unified, then the apathy of the masses ensured that the elites would be able to pursue their own interests without consequences. If elites were divided, then they would at least have to compete for the public’s support. Seymour Martin Lipset (1962) made a similar argument in his introduction to the classic work, Political Parties, by Robert Michels. The idea was given a theoretical spin by Robert Dahl (1958), who suggested that for a group to be powerful, it was necessary for it to have two qualities: abundant resources and unity. By the early twentieth century, large corporations in the United States had amassed abundant resources, which gave them a high potential for power, and a number of critics at the time expressed concern about the consequences of the concentration of corporate resources for American democracy (Berle & Means, 1932; Mizruchi, 2004). Whether corporations were unified became the source of significant controversy by the midtwentieth century. Pluralist theorists argued that corporations faced too many built-in conflicts of interest to ever be able to achieve a consistent and continuous level of unity.5 Elite theorists argued that although various relatively minor conflicts occur within the business world, corporations in general experience a high level of unity (Domhoff, 1970; Mills, 1956). The disagreement between proponents of these two views was thus empirical rather than theoretical. Both agreed that if business was unified, it would pose a grave threat to the democratic character of the United States. Of course, trying to decipher whether elites were basically unified or divided is a difficult task, since both concepts are highly abstract. Recognizing this difficulty, elite theorists shifted the focus of their argument. Rather than assume a complete unity of interest and action, they began to identify a series of mechanisms that allowed various sectors of business to resolve their differences prior to approaching the government. Director interlocks among firms allowed companies to reduce their conflicts of interest, for example (Mizruchi, 1996). Banks and other financial institutions, whose interests did not favor specific industries, served as a meeting place in which

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system-wide concerns could be aired and resolved (Mintz & Schwartz, 1985). Useem (1984) argued that although most businesses remained focused on their individual firm-level interests and thus were often in conflict with other firms, a small group of officials from leading firms, who spanned multiple organizations, were able to maintain a system-wide focus. Mizruchi (1992) argued that businesses were able to attain a unified approach to the extent that they were dependent on one another for inputs and outputs. We believe that in the period after World War II, a group roughly equivalent to Useem’s inner circle did indeed exist, and that it was able to act in a relatively unified and effective manner. The corporate elite, through its prototypical organization, the Committee for Economic Development, helped formulate and/or summon support for the Marshall Plan for the reconstruction of Western Europe, the Employment Act of 1946, which established the Council of Economic Advisers, the explosion of funding for both pre-college and university-level education during the 1960s, and various elements of Lyndon Johnson’s Great Society program. Its members played an important role in both Democratic and Republican administrations. And their views were sought and discussed by policy-makers at the top levels of government, as well as among opinion leaders (such as on the editorial pages of the New York Times and the Wall Street Journal). There is thus a massive amount of evidence that the American corporate elite exhibited a considerable amount of influence on American political life during the postwar period. Where we part company with both Schumpeter and Lipset on one hand and Mills and Domhoff on the other is in the implications of this elite unity and effectiveness for the viability of American democracy. For both the pluralists and elite theorists, the existence of a unified elite was assumed to be detrimental to democracy. We believe, on the contrary, that the United States was actually more democratic during the period in which the corporate elite was relatively unified than it was in later years when the elite became increasingly fragmented. The elite’s more recent disarray, we argue, has not only been harmful to American democracy, but it has contributed to the nation’s decline as well. On what basis was the corporate elite a positive force for democracy in the post-World War II period? The reason, we suggest, was the group’s moderate and pragmatic approach to politics. The group’s unity, and thus its ability to act collectively, meant that it was able to accomplish its goals. The group’s goals, however, were, for reasons we shall describe, consistent with the general political discourse of the era. It is possible, of course, for

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a group to be unified yet extreme or moderate yet disorganized. But the unity and moderation of the postwar corporate elite came from the same source, we suggest. The great German sociologist Georg Simmel (1955 [1923]) argued that a group that faces an external threat to its existence tends to become internally cohesive in response. American business during the postwar period faced two powerful external forces: a relatively active, highly legitimate state, and a relatively strong movement of organized workers. Although the majority of American companies continued to maintain a strongly conservative position toward government and labor, a select group of leading corporate executives from large companies adopted a more conciliatory approach. The strength of the state and the unions helped this corporate elite forge a unified perspective, but it also contributed to the elite’s relative moderation. Those businesses that refused to accept the new political reality that an active government and a prominent labor movement were here to stay became increasingly irrelevant in the nation’s political discourse.6 This willingness to play a mediating role between liberals and labor on one hand and traditional free-market conservatives on the other helped contribute to the relatively consensual politics of the postwar period. Conflict was certainly present. In fact, the 1960s in particular were a time of enormous instability. Yet the economy grew consistently during this period, and members of both major political parties were able to compromise sufficiently to pass a series of significant bills. As we shall see, the corporate elite played a significant role in helping the system to function in a relatively effective manner. So who was this elite, and from where and how did it arise? We address this question in the following section.

THE EMERGENCE OF THE AMERICAN CORPORATE ELITE Modern American capitalism, the system dominated by large corporations, emerged in the late nineteenth century. As Alfred D. Chandler Jr. (1977) described it, the development of continuous process machine production allowed for an enormous increase in productivity, and the building of the transcontinental railroad increased the ability of firms to transport their goods across great distances. Along with the development of the railroads came the rise of large industrial corporations, as well as the rise of major

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financial institutions to fund them. Great fortunes were created during this period, and the individuals who controlled these large firms assumed a considerable degree of power. Yet this rapid increase in wealth was not shared by the mass of the population, and the concentration of power begat a wave of protest, from rural Southern and Midwestern populists concerned about the banks’ control over their land, to Northern-based progressives concerned about the political corruption that accompanied the rise of great wealth. Along with these groups came an additional force, smaller perhaps but no less threatening: many of the workers in the titans’ factories, with their origins in Europe, became attracted to socialist ideas. The low pay, poor working conditions, and disdainful treatment that these workers experienced made them even more susceptible to anti-capitalist appeals. It was under these conditions that a forward-looking group of elite firms and individuals came together to form a new organization, the National Civic Federation (NCF), in 1901. Business groups had already existed by that time. Although formed only recently, in 1895, the National Association of Manufacturers (NAM) had already established itself as a significant force. The Civic Federation was different from the NAM. The NAM was focused on pursuing the interests of manufacturing firms, which they saw as the right to prevent the unionization of their workforces. The NCF, founded by a Republican journalist, Ralph Easley, had an alternative approach. However successful capitalism had been, the group’s members reasoned, it had also created a broad class of overworked, underpaid, and almost destitute employees who might have nothing to lose were they to revolt against the free enterprise system. Without some attempt to accommodate their needs, the Federation’s leaders believed, the workers might indeed work to overthrow the system. The goal of the NCF was to soften the most deleterious consequences of industrial capitalism by serving as a neutral party, mediating between the interests of business and labor. This meant a rejection of what Easley saw as the “radical” views of NAM, whose members were vehemently antiunion. The Federation, in contrast, saw the problems of capitalism as fixable, if only they adopted a more conciliatory approach (Weinstein, 1968, pp. 30 31). This meant a system of acceptance and trust between management and labor, which meant better treatment of workers and support of the right of workers to unionize. The Federation did not constitute anywhere near a majority of the business community, and its members were ultimately unsuccessful in convincing their fellow capitalists to accept independent unions. They

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did, however, help usher in a wave of what became known as “welfare capitalism,” in which companies began to voluntarily provide a range of services to their employees, including in some cases housing, pensions, and health care (Mitchell, 1989; Weinstein, 1968). These programs were often criticized by workers as “paternalistic,” and they largely disappeared when the Great Depression struck in the 1930s. The Federation itself had become dormant by the 1920s. Yet the group provided a preview of what was later to become a major factor within the American business community: the rise of a moderate, pragmatic, sensitive group of corporate leaders who acted with concern for the broad interest of society. Even as they worked to protect their own privileged positions, the members of this group understood that those privileges could sustain themselves only if the society itself operated on a strong foundation, which meant a working population that, if not comfortable, was at least provided the means for a reasonable living. Although the Civic Federation was no longer a player by the 1930s, the Depression brought forth a new group of forward-thinking corporate leaders. Scholars disagree about the extent to which businessmen supported the enactment of the 1935 Social Security Act (see, e.g., Domhoff, 1990; Quadagno, 1984; Skocpol, 1980). Once the act passed, however, a number of corporate officials began to see its potential benefits, including the fact that it allowed them to reduce the pensions they were paying their employees. A survey by Fortune in 1939 revealed that only 17 percent of corporate executives supported the repeal of Social Security (Fortune, 1939, p. 52). Meanwhile, although the National Labor Relations Act (known more commonly as the Wagner Act), which guaranteed workers the right to unionize, was fought more aggressively by business interests, only 41 percent of the executives surveyed by Fortune favored repeal of that law. President Roosevelt’s reforms did arouse considerable opposition from business, however. In an effort to quell this dissent, the president’s Secretary of Commerce, Daniel Roper recommended that the administration assemble a group of business leaders to play an advisory role to the president. This group, known as the Business Advisory Council, was formed in 1933. Among the original members of the group were such noted moderate corporate officials as Alfred P. Sloan of General Motors and Gerard Swope of General Electric (Collins, 1978). Swope in particular supported the idea of national economic planning and was also sympathetic to government regulation of industry. Some members of the group also supported the concept of full employment, as well as Keynesian deficit spending.

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THE POSTWAR CORPORATE ELITE As we have seen, the American corporate elite showed signs of moderation and pragmatism prior to the 1940s. This approach became the dominant one among the largest firms during World War II, however. The buildup to the war, and later the war itself, had lifted the United States out of the Great Depression. As the war progressed, however, many American businessmen feared that when peace came and the need for enormous military spending declined, the nation would sink back into its prewar state. Two businessmen associated with the University of Chicago, William Benton, a former advertising executive, and Paul Hoffman, president of the automobile manufacturer Studebaker, had as far back as 1939 become increasingly concerned about what they saw as the radical free-market ideology that characterized most American businessmen. This was simply not an accurate reflection of the mid-twentieth-century reality, they reasoned. Benton and Hoffman hoped to form a group of leading businessmen as well as academics to address economic policy, and in doing so to “rescue the businessman from his own neanderthalism, to wash the cliche´s of an outworn ideology from his mind” (Schriftgiesser, 1960, p. 7). Although they were initially rebuffed by Marion Folsom of the Business Advisory Council, who was considering forming a similar group, Benton and Hoffman were able to enlist the support of Jesse H. Jones, President Roosevelt’s Commerce Secretary (Collins, 1978, p. 387; Schriftgiesser, 1960, pp. 24 26). The new organization, which was originally called the Committee on Economic Policy, was renamed the Committee for Economic Development (CED) after its incorporation in 1942. Although Benton and Hoffman were themselves not major figures within the business community, many of the charter CED members were, including the presidents or chairmen of General Foods, Hormel, Coca-Cola, Scott Paper, and Quaker Oats. The organization’s marketing committee included officers of such major firms as General Motors, Armour, Standard Oil of New Jersey, Metropolitan Life Insurance, and Westinghouse. It is perhaps not surprising that most of these corporate leaders were Republicans. What is more surprising, when considering the standards of the twenty-first century, is how moderate these individuals were. The CED’s officials were not liberals. They had no intention of continuing to expand the welfare state programs that arose during the 1930s. They favored balanced budgets, even if it was necessary to reduce social spending to balance them. They did not exhibit great support for organized labor. And they, along with most other American leaders after the war, threw

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their support behind the emerging Cold War with the Soviet Union. Yet although the CED exhibited reliably conservative positions on many issues, they did not do so in the kind of doctrinaire fashion that characterized the NAM or (after a brief detour into moderation in the 1940s) the Chamber of Commerce.7 Instead, the CED, as Benton and Hoffman’s complaints about “neanderthalism” and “outworn ideology” suggested, was sympathetic to the emerging Keynesian economic consensus that suggested an important role for the government in managing the business cycle. The CED was willing to consider the possible value of deficit spending. The group was supportive of the idea of full employment, and played an important role in the development of the Employment Act of 1946, which, although not providing a mandate for guaranteed jobs, at least established the idea as a goal. Members of the CED were willing to advocate tax increases to balance the budget, and although they believed that the top marginal rates (which were as high as 90 percent during the period) were too high and needed to come down, they were willing to support general tax increases even on themselves if necessary. And reflecting the views of many large corporations during the postwar period, the CED, if not avowedly pro-union, was at least willing to acknowledge the right of unions to exist, and to see the value of collective bargaining. One of the CED’s most notable early accomplishments was its role in developing the massive economic aid package to Europe that became known as the Marshall Plan. As part of its plan, the CED resisted efforts by more conservative elements to dispense aid only if the European recipients were willing to renounce the social amelioration programs of their governments, which right-wing critics viewed as “socialistic.” From the end of the war through the Eisenhower administration, in whose cabinet members of the CED were heavily represented, through the Kennedy and Johnson years, and even well into the administration of Richard Nixon, American business leaders maintained a moderate, pragmatic approach to politics. This included an acceptance of President Eisenhower’s efforts to maintain (and even increase) Social Security benefits. It included outright support for certain elements of Lyndon Johnson’s Great Society program, including the building of low-density low-income housing in urban areas. It included continuous conflict with organized labor, but within a broad acceptance of the legitimacy of collective bargaining. And it included, by the 1970s, a serious effort to create a system of national health insurance. At no time did these moderate views represent the majority of American businesspeople. There was evidence that they may have represented the majority of the leaders of the largest corporations, however. An exhaustive

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study of business opinion conducted by Hermann Krooss (1970, p. 250) indicated that in the period after 1954, “a great many more businessmen freely accepted the so-called ‘New Economics’ with its compensatory fiscal policy,” and there was less resistance to deficit spending. Even more revealing were the results from a study by Allen Barton (1985), based on interviews with 104 Fortune 800 chief executives and 26 wealthy individuals, conducted in 1971. Barton found that 60 percent of these individuals could be classified as either Keynesian liberals or moderates, and that only 10.5 percent of them could be classified as “anti-Keynesian conservatives,” the views most commonly associated with the majority of American businesspeople. Remarkably, 60 percent of Barton’s respondents agreed with the statement that “the federal government should support the creation of jobs in the public sector for those for whom the private sector does not provide employment” (ibid, p. 85). Also interesting was the support for programs to clean up the environment that was revealed in a survey of Fortune 500 CEOs conducted by Daniel Yankelovich, Inc. and reported in the magazine (Fortune, 1970). In response to one question, 57 percent of the executives surveyed believed that the federal government should step up its regulatory activities, and 29 percent believed that the government should maintain its efforts at present levels. Only 8 percent believed that the government should cut back its regulation. Fully 85 percent of the respondents agreed that “the protection of the environment should be taken into consideration even if it [meant] reducing profits” (ibid, p. 119). Finally, during President Nixon’s second administration, the CED developed a plan for universal health care that was virtually identical to one subsequently proposed by the President himself. The plan was never adopted, in part because organized labor and other liberals believed that it did not go far enough in providing universal coverage, and in part because the Watergate scandal diverted President Nixon and Congress from pursuing major legislation. Still, the fact that the CED/Nixon plan was more comprehensive than Barack Obama’s plan that was eventually adopted in 2010, and Bill Clinton’s failed proposal in 1993 1994, provides an indication of how liberal business leaders were in that earlier generation.8 Although the ideology and behavior of the corporate elite were relatively moderate during the postwar period, this was not necessarily a reflection of genuinely liberal beliefs. In fact, the CED itself emphasized not altruism or ideology, but rather, what it called “enlightened self-interest.” As the group put it in a 1971 document explaining the responsibilities of large corporations,

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There is a broad recognition today that corporate self-interest is inexorably involved in the well-being of the society of which business is an integral part, and from which it draws the basic requirements needed for it to function at all … This body of understanding is the basis for the doctrine that it is in the “enlightened self-interest” of corporations to promote the public welfare in a positive way. (Committee for Economic Development, 1971, p. 27)

But what explains this moderate, pragmatic approach adopted by the postwar corporate elite? We argue that three factors, noted by Mizruchi (2013), compelled business leaders to adopt moderate and pragmatic policies in the postwar period: a relatively strong and highly legitimate national government; a relatively strong and generally popular labor movement; and the financial community, in particular the major New Yorkbased money-market banks. We describe each of these in turn.

THE STATE Compared to nations such as France and Germany, the United States has never had a particularly strong state. The relative strength and legitimacy of the government has varied over time, however. From the 1930s into at least the early 1970s, the American government experienced a generally high degree of acceptance from the public, and it was seen by a majority of Americans as a positive force in the society. It is widely believed that it was only in the 1930s that the state began to play a significant role in the American economy. This is not true. The government was involved in the building of canals and railroads in the nineteenth century. Agencies such as the Federal Trade Commission and the Interstate Commerce Commission, as well as the Federal Reserve, were created before World War I, and workers’ compensation laws were passed in the early 1900s as well. The conception of the appropriate role of the state did change during the Great Depression, however. For the first time, there was widespread belief, backed by social policies, that the government had an obligation to ameliorate the conditions of those who had suffered from the economic collapse. The power of the state during this period was in part a reflection of President Roosevelt’s popularity. His popularity was in turn a function of the support that his programs received from the public. This strong support for government economic action created a constraint on business, an environment that conditioned the kinds of policies that corporate leaders could

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support. Large corporations, especially in the coal industry and railroads, had learned in earlier decades that regulation could actually work in their favor (Bowman, 1989; Fligstein, 1990). By the late 1940s, corporations in the sugar, oil, and airline industries had come to support regulations as well. By the late 1940s it had become evident to many large corporations that government intervention in the economy had lifted the nation out of the Depression. Even if this intervention primarily took the form of spending on the war, it still suggested that Keynesian economics might indeed be a viable approach toward government policy. Most businessmen in the period after the war continued to support the idea of a balanced budget, as President Roosevelt himself had during the 1930s. Yet members of the corporate elite, as reflected in the policy statements of the Committee for Economic Development, were willing to advocate tax increases if necessary to balance the budget. Moreover, as we saw in the previous section, the CED supported a broadly Keynesian approach to economic policy. As discussed above, this led the CED and other business leaders to support a range of government programs, albeit often in more limited forms than were enacted, from the Roosevelt through the Nixon administrations. Overall, the strength and legitimacy of the federal government helped constrain the heads of leading American corporations to exhibit moderate and pragmatic attitudes toward the state. This moderation was reflected in the kinds of policies that the CED advocated, and by the willingness of corporate leaders to adopt Keynesian economic language and principles. The tenability of these positions was helped by the fact that the American economy performed extremely well in the postwar period. As we noted earlier, real incomes virtually doubled between the end of the war and the early 1970s, and inequality declined as well. If the United States was hardly a nirvana during the postwar period, it was nevertheless a system that worked, at least in terms of its economy.

LABOR Just as a relatively strong state imposed constraints on the actions of business during the postwar period, so did a relatively strong movement of organized labor. Relations between management and workers in the United States have been contentious since the rise of big business in the late nineteenth century. The early history of labor relations in the United States was one of strikes, violence, and almost continuous conflict.

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Management theorists such as Chester Barnard and Elton Mayo advocated cooperative relations between management and labor during the 1920s, and the welfare capitalism of that period put at least a mild damper on conflict. This occurred during a period of extreme labor weakness, however. Union membership had risen in the early twentieth century but then dropped sharply after World War I, in part as a result of a government crackdown on radicals. Membership increased again after the passage of the Wagner Act in 1935, although there is some question whether the spike in membership resulted from the act itself or from the increasing labor militancy triggered by the Great Depression (Freeman, 1998). Although management continued to resist unions during the 1930s, by 1939, 78 percent of corporate executives in a survey conducted by Fortune expressed support for the idea of labor unions (Fortune, 1939, p. 90). By the end of World War II, more than one-third of nonagricultural workers in the United States were union members. There is considerable evidence that by the 1940s, the managements of most large American corporations had begun to accept the idea that unions were here to stay, and that it would be better to work with them thus making the best of a bad situation than to try to abolish them. In some cases, this view seemed to indicate outright support for unions. As William Benton of the CED put it in an article in Fortune (1944, p. 162): To compensate for the weakness of their individual bargaining position, wage earners need the right to combine into organizations for collective bargaining. Provided that the power of these organizations is not permitted to stifle technical progress, or unduly to limit access to jobs, or in other ways to be abused, labor unions can serve the common good.

Some companies, such as General Electric and U.S. Rubber, as well as a group of Kentucky-based tobacco companies, similarly seemed to welcome unions. Most firms, however, adopted what labor historian Howell John Harris (1982) has termed “realism,” a pragmatic, if grudging, acceptance of the reality of unionization. According to one executive quoted by Harris (1982, p. 26): We signed up for two reasons. First, we believe the union has come to stay in our industry; and second, we knew we were the next citadel for assault by the CIO [the Congress of Industrial Organizations], and, in point of fact, we had to sign. Financially, we were in no position to stand a two or three months’ shutdown of production or to carry the ball for the rest of the industry. (emphasis in the original)

At the end of the war, unions, having seen their real wages stagnate during the war and their leverage decline due to various agreements not to

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strike, so as not to damage the war effort, rapidly increased their militancy. By 1946 strikes reached record numbers, and unions seemed poised for continued advances. This optimism proved short-lived, however. Perhaps in reaction to what they saw as overreaching, the American public elected a Republican Congress in 1946, which, among other things, put a stop to President Harry Truman’s effort to enact national health care legislation. This Congress also adopted the Taft Hartley Act, a bill vehemently opposed by organized labor, which became law in 1947 when both Houses overrode President Truman’s veto. Yet despite these seeming victories over organized labor, corporations remained remarkably moderate. The Taft Hartley law stopped short of repealing the Wagner Act. In fact, even the right-wing NAM, who had been instrumental in developing Taft Hartley, acknowledged that unions were going to continue to be a significant feature of American business. Organized labor’s continued strength led to the adoption of what Daniel Bell (1950) referred to as the “Treaty of Detroit”: a sweeping, five-year agreement between General Motors and the United Auto Workers, signed in 1950. Given the company’s huge profits and its goal of maintaining production without disruption, its president, Charles E. Wilson, was willing to give the workers a range of benefits. These included a guaranteed annual wage increase, cost of living increases, pension contributions, half the cost of health insurance, and a requirement that new employees join the union. The agreement between GM and the UAW became the centerpiece of what labor historians have referred to as the postwar “capital labor accord,” in which management and workers reached an accommodation: Management would provide labor with wage increases, benefits, and improved working conditions. Labor, or at least the union leadership, would ensure that workers did not strike, while also agreeing to purge radicals from its membership (Bowles, Gordon, & Weisskopf, 1983). In recent years, a number of new labor historians have begun to call into question whether a capital labor accord ever existed (see, e.g., Gross, 1995; McIntyre & Hillard, 2008). They note, for example, that conflict between management and labor remained fierce through the 1950s and early 1960s, during the peak of the presumed calm, and that American managers had never really fully accepted the right of unions to exist. It is certainly true that management labor conflict remained high during this period, and that corporations appeared to fight unions with every weapon they had. It is also true that after labor militancy spiked in the late 1960s, management began to fight back, to the point that by the 1970s the corporate elite had abandoned its accommodating position with respect to

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labor and instead embraced a more aggressive posture toward the unions. Such criticisms miss the point, in our view. Proponents of the accord never denied that management would have preferred to operate without unions, nor did they deny that companies continued to battle unions during the period. The fact is, however, that at virtually no time during the 1950s and 1960s did the leaders of American corporations seriously consider the possibility that they might be able to break their unions. The unions were sufficiently strong, and their leaders sufficiently prominent, to prevent such thinking. Labor leaders were part of the Establishment during this period, routinely consulted by the press for their views on the issues of the day, interacting with corporate leaders on policy-making committees, and able to restrict the range of possible actions that firm leaders could take. The moderation exhibited by the corporate elite toward organized labor took place in this context.

THE FINANCIAL COMMUNITY A third factor that contributed to the moderation of the corporate elite during the postwar period was the role played by the financial community, in particular the large, New York-based, money-market banks. Social scientists and political activists engaged in a long debate dating back to the early 1900s on whether banks controlled large nonfinancial corporations. There is widespread agreement that American banks were extremely powerful in the early 1900s, perhaps not at the level of their German counterparts, but substantial nevertheless. By the 1950s, however, there were few writers from any perspective who continued to argue that the banks had any special power. Virtually all leading social scientists had accepted the thesis, proposed by Adolf A. Berle Jr. and Gardiner C. Means in their classic, The Modern Corporation and Private Property (1932), that the managers who ran the day-to-day affairs of the firm were now the primary locus of corporate control. We do not take issue with this view. Although there clearly were instances in the postwar period in which banks exercised power (and even control) over large nonfinancial firms, the body of evidence to us indicates that at least when viewed historically, the banks were relatively passive during that period, due in part to the strong financial position that most of the large nonfinancial corporations held. This does not mean that the banks were unimportant, however. On the contrary, we argue that they

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played a significant role in helping to maintain the moderate and pragmatic approach to politics that the corporate elite adopted during the postwar period. The banks did this in three ways: by providing a source of information, normative consensus, and breadth, or what Mizruchi (2013) calls “cognitive range.” The banks were in a position to fulfill these roles because of their special place in the social organization of the business community. Dating back to the 1870s, large American corporations were connected to one another through their boards of directors. It became common at that time for members of the board of one firm to sit simultaneously on the board of another. These “interlocking directorates,” as they were called, became so widespread that by the turn of the twentieth century, they emerged as a major source of concern for critics of American business. The concern was partly based on the possibility that these ties served as an anticompetitive device. Prior to 1914, it was common for individuals to sit on the boards of firms that competed in the same market. The concern about interlocks also reflected fears that a small group of people the so-called “Money Trust,” could exercise power over not only the corporate world but over the nation as a whole. Future Supreme Court Justice Louis Brandeis expressed both of these views in a famous quote (1933 [1914], p. 35): The practice of interlocking directorates is the root of many evils. It offends laws human and divine. Applied to rival corporations, it tends to the suppression of competition and to violation of the Sherman law [an antitrust provision]. Applied to corporations which deal with each other it tends to disloyalty and to violation of the fundamental law that no man can serve two masters … It is the most potent instrument of the Money Trust. Break the control so exercised by the investment banks over railroads, public-service and industrial corporations, over banks, life insurance and trust companies, and a long step will have been taken toward the attainment of the New Freedom.

The Clayton Antitrust Act of 1914 outlawed interlocks between firms deemed to be competing in the same market. A study by Mizruchi (1982) indicated that between 1912 and 1919, the number of ties between the twenty largest American commercial banks declined from 124 to 19. Yet despite a decline in their frequency between the peak in 1912 and the mid1930s, interlocks continued to persist even through the Great Depression, and they even increased slightly during the 1960s (ibid, chapter 5). And one feature of the interlock network remained constant through this entire period: the central location of banks. In the early twentieth century, bank centrality in the interlock network was likely a reflection of bank power over nonfinancial corporations. In the

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period after World War II, the nature of bank centrality changed. Rather than the officers of banks or the partners of investment banks sitting on the board of nonfinancial corporations, by the 1960s the typical situation was reversed. Although banks remained in the center of the network, the basis of this centrality was the fact that the chief executives of nonfinancial corporations were now heavily represented on the boards of the leading banks. Bank boards, as James Bearden (1987, p. 50) put it, now became the meeting place for the “corporate all-stars,” the leading figures in the American business community. In 1972, for example, the board of Chemical Bank, one of the six major New York banks, included officers from seventeen major nonfinancial corporations (ibid, p. 53). The fact that the banks were in the center of the network, and that they consisted of leading figures from the entire business community, meant that they were in a position to facilitate the development of both unity and moderation. A number of studies have shown that director interlocks contribute to the flow of information among firms. Davis (1991) showed that companies were disproportionately likely to adopt anti-takeover policies when the firms with which they shared directors had recently adopted such policies themselves. Haunschild (1993) found a similar pattern with acquisitions. Firms whose chief executives sat on the boards of other firms that had recently acquired new companies were disproportionately likely to make acquisitions themselves. Useem (1984), in his interviews with directors who sat on the boards of two or more companies, found that individuals who had such experiences often cited the informational benefits of such ties. These findings suggest that the presence of corporate leaders on the boards of major banks served as an important source of information for the corporate elite in the postwar period, when such situations were especially common. In addition to the transmission of information, interlock ties have also been shown to contribute to a similarity of views, as well as practices, across firms. Galaskiewicz (1985) found that firms in the Minneapolis-St. Paul area that shared directors were disproportionately likely to contribute to the same local charities. Mizruchi (1992) showed that interlocked firms were disproportionately likely to contribute to the same political candidates and to express the same positions on issues when they jointly testified in Congressional hearings. He found, however, that the similarity of political behavior between firms was even more likely between firms that interlocked with the same banks. The banks also contributed to a normative consensus in the postwar period by sanctioning behavior by individual capitalists who behaved in what the banks considered to be an “erratic” fashion. The

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widely-publicized cases involving Howard Hughes attempting to circumvent the banks to generate financing for Trans World Airlines in the late 1950s, and Saul P. Steinberg’s attempt to acquire Chemical Bank in the late 1960s, provide examples of the banks stepping in to impose order. Finally, the broad range of industries represented on bank boards provided an opportunity for corporate leaders to see the world from multiple perspectives. As a director told Useem (1984, pp. 47 48), sitting on multiple boards “extends the range of your network … You get a more cosmopolitan view … It just broadens your experience.” This increased breadth helped individuals to develop a more moderate orientation toward economic and political issues. As Useem put it (1984, p. 108), such individuals “have a stronger understanding of the complexities and intricacies of the political environment in which business operates.” Because bank boards were the most common site for a wide range of businesspeople, they played a relatively large role in generating this understanding. Findings on corporate contributions to Congressional candidates indicate that heavily interlocked firms were those most likely to adopt a moderate, pragmatic approach toward politics (Clawson & Neustadtl, 1989).

THE TWILIGHT OF THE POSTWAR ERA The United States was far from a utopia in the postwar era. As we noted earlier, large segments of the nation remained in poverty, members of minority groups experienced systematic, and in some cases even legal, discrimination, the culture was largely intolerant of difference, and all of this occurred under the threat of nuclear annihilation. Yet despite these problems, the American system worked relatively well, both economically and politically. The standard of living improved for the vast majority of the population. Economic inequality was at historically low levels. And poverty and racism, although pervasive, began to decline. This period represented the pinnacle of American power. At the center of that power, we argue, was a corporate elite that, although operating in its own interest, held a relatively broad conception of what that interest was. Corporate leaders of the period, epitomized by the Committee for Economic Development, adopted a moderate and pragmatic approach to politics that included an acceptance of a strong role for government in both economic policy and the amelioration of social problems, and an acceptance of the right of workers to bargain collectively, led by independent

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unions. The members of this group believed that their own privileges were best served when the society as a whole was supported by a strong foundation. American power in the larger world depended on strength at home, from top to bottom, and these elites were willing to support policies that at least to some extent helped maintain that strength. Yet even during the height of American postwar dominance, developments were occurring that began to undermine it. First, although the United States was by far the world’s leading economic power at the end of the war, the rest of the world was catching up as early as the 1950s. The 1958 steel strikes were triggered in part by the fact that American steel companies were facing increasing competition from foreign producers. Second, the Vietnam War not only showed the limits of U.S. military strength, but it also weakened the nation both politically and economically. The pressures created by the simultaneous expansion of the war and the implementation of President Lyndon Johnson’s ambitious set of social programs, known as the Great Society, placed increasing strains on the American economy. Not only did the high levels of military and social spending create inflationary pressures, but the extremely low unemployment rate triggered by the economic expansion of the 1960s emboldened workers in a number of sectors, most notably construction. The tight labor market created further inflationary pressures, and a recession that began in 1969 did little to dampen them. As the nation moved into the 1970s, the corporate elite remained moderate and pragmatic, but resistance was beginning to emerge, as a group of business leaders in fields related to construction began to mobilize against their workers. The economic pressures, the social turmoil of the late 1960s, and the emerging response by the corporate elite set the stage for a decade in which the entire basis of American power began to come apart. In the following section, we discuss the road on which the group embarked.

THE BREAKDOWN OF THE POSTWAR CONSENSUS The postwar consensus, led by a corporate elite that took a moderate and long-term approach to protecting its interests, began to break down in the 1970s. Several events, some of which were linked, occurred simultaneously, and led the elite to slowly shift its course. First, the American economy began to experience an inflationary spiral that policy-makers proved powerless to control. The economy from the end

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of World War II had experienced a high level of growth with a relatively low level of inflation, averaging only 1.4 percent between 1952 and 1965. In the late 1960s, driven by increased government spending for President Johnson’s Great Society programs as well as for the Vietnam War, inflation began to steadily rise, averaging 8.4 percent from 1966 through 1979 and reaching double digits by the late 1970s. Second, American companies, especially in manufacturing, began to experience serious foreign competition for the first time since the end of World War II. One consequence of this was the 1971 decision to abandon the Bretton Woods agreement, a postwar arrangement in which international exchange rates were pegged to the American dollar. Related to this was an increasing trade deficit, in which American exports were no longer sufficient to match the nation’s imports. The increasing inability of American companies to compete internationally led to reduced profits as well as pressure to reduce costs, especially labor costs. This led many American companies to increase their overseas operations, which further weakened the domestic economy. Third, as the American economy increasingly suffered from inflation and foreign competition, the nation’s institutions were experiencing a crisis of legitimacy. The Vietnam War had divided the country, calling into question the prior assumption that the United States was a voice of virtue in international relations. The Watergate Scandal, in which President Richard Nixon and several of his closest advisers were implicated in a series of illegal activities as well as a cover-up, increased the public’s distrust of its government. The legitimacy of business also suffered during this period, as critics of American society began to question the role of companies in the nation’s foreign policy debacles, their production of unsafe products, and their despoliation of the environment. The consequence was a decline in public trust of a broad range of domestic institutions. Finally, American companies saw themselves as increasingly burdened by new forms of government regulation. As we saw earlier, many American companies had not only accepted regulations in the past, but had actually supported them (and in some cases had even pushed for their adoption). Two new regulatory agencies signed into law by President Nixon, the Environmental Protection Agency and the Occupational Safety and Health Administration, provoked widespread opposition from business, however, as their officials were seen by companies as overzealous in their enforcement of environmental and worker safety provisions. Meanwhile, the American economy continued to suffer, experiencing for the first time in the recession of 1974 a simultaneous combination of high

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inflation and high unemployment, a situation later dubbed “stagflation,” for a combination of inflation and stagnation. This was driven in part by the decision of an international cartel, the Organization of Petroleum Exporting Countries, to sharply raise the price of oil, a move that threw the economy into a recession. Given the increasing global and domestic economic pressures they faced, as well as the threats to their legitimacy, it is not surprising that many corporate leaders believed that the entire American economic system was under attack. In an effort to counter this attack, the American corporate elite began to fight back. This movement emerged slowly, starting with an effort in the late 1960s by a group of companies to try to reduce the power of the construction unions, whom they saw as holding them hostage to the severe labor shortage in the industry. This group, the Construction Users’ Anti-Inflation Roundtable, eventually merged with the March Group, a related organization of major corporate chief executives that had formed to address the political interests of big business. The product of this merger, the Business Roundtable, emerged in 1973 and became one of the most important business groups of the decade, and beyond. Although the Roundtable included several individuals who were also members of the Committee for Economic Development, the group’s orientation differed. Unlike the CED, whose members saw themselves as a mediating group whose task was to serve the interests of the society as a whole (even as they served their own interests as elites), the Roundtable was explicitly a group designed to advance the interests of large corporations (Judis, 2001). Whereas the CED included academics and other non-businesspeople even as it was dominated by corporate officers, the Roundtable’s membership was limited to the chief executive officers of Fortune 500 corporations. Along with the rise of the Business Roundtable, a conservative, probusiness intellectual movement was gathering steam, as a number of organizations came to prominence. In some cases, these organizations, of which the American Enterprise Institute was the most prominent, had existed in the past but had been quiet and relatively ineffective. In other cases, these organizations, of which the Heritage Foundation was the most prominent, were new and had an immediate impact. Both these and other organizations were part of an effort, driven to a great extent by extremely conservative businesspeople, to counter what they saw as a leftward, anti-business drift in American society. The rise of the Business Roundtable and the conservative think tanks were part of a vigorous conservative offensive, the result of which shifted the center of gravity in American politics. In reaction to both Watergate

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and the recession, the American public elected Jimmy Carter as president in 1976. The presence of Carter, along with Democratic majorities in both houses of Congress, made both liberals and organized labor optimistic that a number of initiatives would be passed. Unions in particular were hopeful that the Taft Hartley Law would be either severely weakened or repealed altogether. Consumer activists were hopeful that a new Consumer Protection Agency would be established. Economic liberals were optimistic that tax reform favoring middle and lower-income Americans would be passed. Yet to the surprise of protagonists on both sides, none of these measures were passed, and the tax laws were changed to actually favor business and the wealthy. The reason for these shocking results, agreed upon by virtually all scholars who have studied the 1970s, was a series of massive lobbying efforts by business, including not only the Business Roundtable, but small-business groups as well. Had the corporate elite actually become more conservative in the 1970s, or was this shift to the right a result of changes, largely demographic, in the group’s leadership? There is evidence that even within the CED, there was increasing dissatisfaction with some of the group’s more liberal positions. CED reports typically included opportunities for individual members to offer dissenting opinions. The number of dissents had increased steadily over time, but they became especially prevalent in the 1970s. The organization continued to offer relatively moderate proposals as late as 1975, but two developments occurred around that time. First, conservative voices in the group became significantly stronger and more vocal. When the chair of the CED’s Research and Policy Committee, Philip M. Klutznick, proposed a tax cut for lower and middle-income Americans and a $5 billion fiscal stimulus package, he was aggressively attacked by several of the organization’s trustees. One trustee, Marvin Bower, suggested that the group replace its Keynesian economic approach with that of the free-market advocate Friedrich von Hayek (Domhoff, 2011, chapter 8). Perhaps even more significant than its apparent rightward shift was the fact that as the Business Roundtable increased its prominence, the CED began to lose its influence. This was reflected in the declining number of mentions in the New York Times and the Wall Street Journal that the group began to experience. The group received an average of more than 39 mentions per year from 1952 through 1969, but this figure dropped to 25 mentions per year from 1970 through 1974 and only 17.4 mentions per year from 1975 through 1979. The American Enterprise Institute, in contrast, received only 3.3 mentions per year from 1952 through 1969, but this number increased to 15.2 mentions per year from 1970 through 1974 and to

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35.4 mentions per year from 1975 through 1979. The declining importance of the CED was captured by a December 1976 article in the Wall Street Journal, entitled “Once-Mighty CED Panel of Executives Seeks a Revival, Offers Advice to Carter” (December 17, 1976, p. 38). The article noted that the President-elect was turning to the Business Roundtable rather than the CED for advice. “Such oversights wouldn’t have happened in the CED’s early days of the 1940s,” the article claimed. The shift in the locus of big business power from the CED to the Roundtable was indicative of attempts by the corporate elite to focus on pursuing the group’s own interests rather than playing the role of a neutral mediator, standing “above the fray.” This signified the shift that was occurring during the 1970s, as the American corporate elite focused less on moderation and more on attacking the forces that had constrained it. These attacks were directed primarily toward the two institutions that had provided the bulk of this constraint: government and organized labor. The Business Roundtable, along with its conservative allies, mounted a broad assault on government regulation, attacking the Environmental Protection Agency and the Occupational Safety and Health Administration for what they saw as their overzealous enforcement of the new laws. The group also attacked organized labor for what they saw as overly rigid and bureaucratic work rules that reduced management’s flexibility. As the corporate elite began to reject Keynesian economics, the focus was no longer on a lack of effective demand. Instead, the concern was that a lack of productivity a function, they argued, of excessive regulation and union rigidity had created a lack of supply. This insufficient supply, in turn, was the primary cause of the inflation that continued to rise during the 1970s, the conservatives argued. As big business and its conservative allies became increasingly well organized and increasingly aggressive in pursuing their goals, they succeeded in weakening both organized labor, and the will among elected officials to enact government solutions to economic problems. In addition to excessive regulation, overly high taxes were now also seen by the corporate elite as a problem. Although public attitudes on the sources of the nation’s economic problems remained ambiguous, by the late 1970s, public confidence in government and organized labor had reached postwar lows. Given the pervasive economic problems of the period, conditions were favorable for a new approach. Although President Carter had already moved significantly to the right by the end of the decade, the concurrent recession, high inflation, and weakness abroad as evidenced by the holding hostage of 52 American diplomats in the American Embassy in Teheran by

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Iranian militants dent in 1980.

contributed to the election of Ronald Reagan as presi-

THE BREAKDOWN OF THE AMERICAN CORPORATE ELITE By the time President Reagan assumed office in January 1981, the American labor movement was already in significant retreat, and the prospects for continued government regulation of business had dimmed as well. The president immediately began to install as the heads of the various regulatory agencies individuals who were openly hostile to the agencies’ goals, and who were therefore reluctant to enforce the regulations. He also quickly showed his willingness to confront organized labor, by threatening to fire striking air traffic controllers in August 1981, and then carrying out his threat. Meanwhile, as Democrats joined Republicans in competing for the support of business, members of each party entered into a bidding war to see who could enact more favorable tax programs and other supports for corporations. It was evident, then, by the early 1980s, that the American corporate elite had successfully weakened two of the three major constraints it had faced: an active, ameliorative government and a strong, organized labor movement. This outcome was the direct result of the conservative offensive that the corporate elite had undertaken during the 1970s. It is not clear what alternatives the corporate elite could or should have pursued at the time. The system was in turmoil, the group had been stripped of its slack resources by the economic crisis of the period, and the solutions that had traditionally been invoked by government were no longer working. What we can say is that the actions that the corporate elite took its successful attempt to weaken both government and organized labor had the paradoxical consequence of undermining the very basis of the group’s success. By removing the constraints that had placed limits on its autonomy, the American corporate elite began to lose its ability to act collectively, even when such actions could have directly served the group’s interests. Vestiges of elite moderation were to remain in evidence for the next several years. By the 1990s, however, big business was to find itself increasingly atomized, unable to act collectively to solve a series of increasingly vexing problems. The weakening of the constraint exercised by government and labor was a major source of the elite’s subsequent decline. Two other events occurred

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during the 1980s that hastened, and ultimately finalized, the elite’s fragmentation: First, the one remaining source of constraint, the banks, began their own shift in focus, which led them to abdicate their role as the sources of consensus and moderation for the corporate elite. Second, an acquisition wave of unprecedented proportions shook the foundations of the corporate world, putting corporate managers on the defensive, and ultimately placing them in a far more precarious environment than their predecessors had experienced.

THE DECLINE OF THE BANKS Although the corporate elite’s assault on government and labor proved successful by the early 1980s, the banks remained in the center of the corporate network, presumably able to continue to play their traditional role of mediator and moderator. The nonfinancial firms within the corporate elite did not mount an offensive against the banks. Instead, the banks’ role began to change for a completely unrelated set of reasons. Nonfinancial corporations had been relatively flush with cash in the postwar period, which is one reason that the banks, although significant as we have seen, did not typically exercise control over them. By the late 1960s, as profit margins shrunk, nonfinancial firms became increasingly dependent on banks for financing. A decade later, however, two developments allowed these nonfinancial firms to find alternative ways to generate the capital they needed. First, there was a proliferation of commercial paper, a form of debt in which a nonfinancial firm sells its own promissory notes, usually through a third party such as an investment bank. These notes, although available primarily to already financially strong firms, were desirable because they typically required lower interest payments than traditional bank loans. Second, American firms began to rely increasingly on bonds floated in Europe and other overseas countries. The fact that their customers were finding alternative sources of capital meant that the banks began to lose a significant source of revenue. At the same time that corporations were finding alternative ways to raise capital, retail customers were relying less on the passbook savings accounts that served as a major source of the banks’ capital. The shift to alternatives, which included money market and mutual funds, was driven initially by the fact that the interest rates that the banks paid on passbook savings accounts were regulated by the federal government. As the consumer price

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index rose during the 1970s, these passbook rates lagged behind the rate of inflation. By the time the banks’ rates were deregulated in 1980, consumers had shifted much of their savings out of the banks. To compete, the banks offered high interest rates, but this depressed their profit margins. Faced with a loss of business from both corporate borrowers and consumers, the banks first reacted by engaging in an increasingly risky set of activities, in particular a series of loans to real estate ventures and to unstable Latin American countries. By the end of the 1980s, the leading American commercial banks were in a precarious position. The solution to this turned out to be a shift in focus, from lending toward fee-for-service activities, including those normally handled by investment banks. These included currency swaps, derivatives, capital market services, and securities underwriting. Although the Glass Steagall Act of 1933 had prevented commercial banks from engaging in investment banking (and vice versa), by the 1990s, American commercial banks were stretching the limits of these restrictions. Glass Steagall was repealed by Congress in 1999. As the commercial banks shifted their focus away from lending, and toward fee-for-service activity, they began to reduce the number of nonfinancial chief executives on their boards. The consequence of this was something that had not occurred at any point in the more than a century since large American corporations first emerged: the banks began to drop out of the center of the corporate interlock network. In 1982, nine of the eleven most-interlocked corporations in a network studied by Davis and Mizruchi (1999) were financial institutions, and eight of the nine were commercial banks. By 1994, only four of the thirteen most-interlocked firms were financial institutions. The mean number of interlocks among the 50 large banks analyzed by Davis and Mizruchi was 16.4 in 1982, but only 10.3 in 1994. This decline more than 37 percent was much higher than the decline among nonbanks, from a mean of 8.5 in 1982 to 7.5 in 1994, a drop of 11.7 percent. The mean number of executives from nonfinancial corporations who sat on the boards of the banks was 4.0 in 1982, but just 2.1 by 1994. The banks had thus abdicated, however inadvertently, their role as a source of consensus and moderation for the corporate elite. This meant that all three of the original sources of constraint that led to the elite’s moderate, pragmatic approach to politics in the postwar period were now dormant. In response, the largest American corporations, which had been able to act collectively to address issues of mutual concern, not only to themselves but in some cases to the society as a whole, were now increasingly likely to go off on their own, seeking narrow, firm-specific favors from government. Yet one further event was to put the nail in the coffin of the moderate postwar corporate elite: the 1980s acquisition wave.

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MANAGEMENT UNDER SIEGE From the 1930s through the 1970s, the professional managers who ran the day-to-day affairs of large American corporations were able to operate with a relatively high degree of autonomy, at least with respect to their stockholders. Although a number of critics argued in the 1960s and 1970s that the degree of managerial control was exaggerated (for a classic statement, see Zeitlin, 1974), in the broader historical picture the evidence suggests that management was at least relatively powerful during this period. As we have seen, corporate executives faced other constraints, primarily from government and organized labor. With respect to the firms’ owners, however, management maintained a high degree of autonomy. This situation changed markedly during the 1980s. One consequence of the economic crisis of the 1970s was that the prices of companies listed on the New York Stock Exchange were relatively low. An economic theory that developed around this time agency theory pointed to the difficulties that owners faced in monitoring the managers who ran their companies, and proponents of this view emphasized the need for an “alignment of incentives,” in which managers were to have as great an interest in maintaining a high stock price as the firm’s owners did (Jensen & Meckling, 1976). If a company’s stock price continued to lag, agency theorists suggested, then it was appropriate for investors to oust the firm’s management and replace it with a group that would be more attentive to the firm’s stock price, and more successful in raising it (Manne, 1965). In the 1980s, encouraged in part by the Reagan administration’s lax enforcement of antitrust law, an acquisition wave of unprecedented proportions took place. There had been other such waves in American history, dating back to the 1890s, and including the 1960s (Stearns & Allan, 1996), but there had never been a wave this extensive. After a century of extremely high stability among the largest corporations (Chandler, 1977), one-third of the Fortune 500 disappeared during the 1980s, the vast majority through acquisitions rather than bankruptcy. Many accounts have been given of the 1980s’ takeover wave, which occurred primarily in the period from 1984 through 1989, and it is not our purpose to recount, or even summarize, them (see Mizruchi, 2013, chapter 7 for a more detailed discussion). What is important for our purposes here is the effect that this movement had on the positions of corporate executives. If the period of management control allowed corporate leaders to operate with a high degree of security, which allowed them to adopt a more long-term perspective and to think more broadly about the fate of their companies, the takeover wave of the 1980s led to exactly

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the opposite. Corporate CEOs were now at the mercy of Wall Street investors, under constant threat of removal, and thus unable to think beyond the next quarterly earnings report and its immediate effect on the firm’s stock price. Under such circumstances it was no longer possible for CEOs to think about the long-term implications of their actions for their firms, let alone the wider problems of the larger society. One indication of the pressures that American CEOs were now experiencing was the decline in their average tenure. At the beginning of the 1980s, the average Fortune 500 CEO had been in office approximately 9.4 years. This figure began to drop during the decade, and it continued through the 1990s and into the 2000s, dropping to 6.8 years in 2002. This pressure was also felt in the companies’ philanthropic contributions. The value of corporate contributions as a proportion of revenue declined steadily during the same period. As aggregate CEO tenure declined, then, so did corporate philanthropy (Mizruchi, 2013, chapter 7). This suggests that the increasing volatility of their environments made it more difficult for corporate executives to focus on bettering their communities. Perhaps the most significant consequence of the new business environment for corporations, however, was its effect on the firms’ ability to engage in collective action to further their common goals. Fissures among the corporate elite were already becoming evident in the early 1980s, as companies experienced difficulty coming to an agreement on the ways to respond to the deficits caused by President Reagan’s tax cuts. Big business was also unable to come to a unified position during the debates over the 1986 tax reform bill, with individual firms (or small groups of firms) instead lobbying for narrowly-tailored amendments (Martin, 1991). The corporate elite was to experience one last stand its decision to pressure President George H. W. Bush into supporting a tax increase to close the deficit. As we moved into the 1990s, however, the group became more notable for its failures than for its successes.

POWER WITHOUT EFFICACY By the early 1990s, the American corporate elite was a shadow of its former self. The Committee for Economic Development, although still in existence, had become largely invisible, receiving barely a mention in the general or business press. The Business Roundtable seemed to be losing influence as well, although this became news only later in the decade. The inability of

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the corporate elite to act collectively manifested itself in two major issues of the day: tax policy and health care. In both cases, this lack of efficacy was both a cause and consequence of a shift that occurred in American political life. Corporate leaders (and most government officials) had long supported the idea of a balanced budget. Even Franklin D. Roosevelt, who was known for his willingness to engage in significant federal spending to stimulate the economy, was also wary of deficits, to the point that he cut spending significantly in 1937, just as the nation was starting to emerge from the Great Depression. Business supported the deficit spending implicit in President Kennedy’s 1963 tax cut only with great reluctance, and the idea of a tax cut that might increase the deficit was seen as if not a radical idea, at least an unconventional one (Stein, 1969). This insistence on balanced budgets meant that corporate leaders were often willing to support tax increases. The Committee for Economic Development went on record as supporting a tax increase in 1950, again in 1959, and a third time in 1966, as the costs of the Vietnam War escalated. Even the Chamber of Commerce was willing to support a tax increase during the Korean War. In the 1980s, when President Reagan’s extensive tax cuts and increases in military spending led to near-record deficits, the Business Roundtable too called for a tax increase. President Reagan himself acknowledged that the large deficits required a tax increase. His tax cuts had included relief for both corporations and individuals. The business community preferred that the tax increase accrue to individuals rather than to companies. The president preferred that the individual cuts remain, with the increase falling on business. It is not surprising that corporations supported the continuation of the tax cuts they had experienced. This was to be expected. What is remarkable, when judged by twenty-first century standards, is first, that they were willing to acknowledge the need for a tax increase at all, and second, that they were willing to support an increase on individual tax rates, of which they would be the primary targets. Because President Reagan had enacted an acrossthe-board cut at a fixed percentage, those with higher incomes who were already paying a higher rate received a far greater benefit than those with lower incomes. By advocating an increase in individual tax rates, these chief executives, whose incomes were near the top of the distribution, were willing to support a significant increase in their own taxes. Regardless of their reasons for supporting this idea, it has to be seen as an act of responsibility a willingness to sacrifice their own disposable income for the good of the broader economy. The Roundtable called for a tax increase in

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1989 as well, urging the newly-elected president, George H. W. Bush, to raise taxes to reduce the deficit. Business leaders were also willing to call for spending cuts even in areas in which they would be directly affected, as the chief executive of Lockheed did at the time. This 1989 call for a tax increase may have represented the corporate elite’s last stand. Despite the continued increase in the inequality of income and wealth through the 1990s, President George W. Bush in 2001 pushed through an across-the-board tax cut similar to that enacted by Ronald Reagan two decades earlier. As had occurred under Reagan, the Bush II tax cuts almost immediately created a record deficit. Corporate leaders continued to complain about the deficit during this period. Unlike the earlier episodes, however, there was a notable silence regarding the possibility that the Bush tax cuts had been the primary cause, and the Business Roundtable remained strangely silent about the possible need for a tax increase. An article in the Wall Street Journal (April 8, 2004) was critical of John J. Castellani, the Roundtable’s president, for his failure to mention the possible role of the Bush tax cuts during testimony before Congress in 2003. Why was the Business Roundtable unwilling to recommend a tax increase during either the Bush II or Obama years, as it had done in earlier decades, and as the CED had routinely done prior to that? As in the 1980s, it is understandable why large firms would oppose an increase in corporate taxes, but unlike the 1980s, the Roundtable was unwilling to advocate an increase in individual tax rates. One reason for the latter may have been the enormous escalation of CEO pay that had occurred over the previous two decades. Even the financial community, a group notable for its concern with balanced budgets, refused to consider a tax increase. The members of this industry, who by the 2000s were receiving staggering levels of income on which they paid extremely low capital gains taxes, were unwilling to recommend even a modest increase to address an economic situation that in the past would have raised great concern. In the fall of 2012, some elements within the corporate community were beginning to raise the possibility that an increase in “revenue” might be necessary, but, as we shall see below, they were unwilling to call for an increase in taxes. The refusal of the corporate elite to coalesce around a call for new taxes, as the group had routinely done in earlier decades, is indicative of a group that is no longer able to act collectively to address an important economic issue. Health care is another issue on which the corporate elite has stumbled. Although efforts to enact national health insurance had occurred during Franklin Roosevelt’s administration, and although Harry Truman similarly

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attempted and failed to pass a health care law during his presidency, health care costs in these years remained relatively low, and were not a drag on the larger economy. By the early 1970s health care costs had begun to increase, however, and the CED, along with President Nixon, proposed health care plans that would have provided universal coverage. These efforts failed as well, and the issue, although briefly revived in the Carter administration, faded from the public discourse during the Reagan presidency. As health care costs continued to skyrocket during the 1980s, however, policy-makers and corporate leaders became increasingly alarmed. These costs were seen as cutting into profits, and were thus becoming a significant obstacle to economic growth. During his presidential campaign, Bill Clinton mentioned health care as one of the key issues that required attention. After Clinton’s election, he embarked on an ambitious effort to develop a national health care system. The leaders of large American corporations were originally supportive of the Clinton plan. Health care costs were becoming a major burden for these companies, and they welcomed any effort to relieve them of these costs. Business leaders recognized that the large number of Americans without health insurance created a major expense, because those without coverage tended to frequent emergency rooms, which were duty-bound to treat them but at an extremely high cost. Because they had to cover the costs of emergency care, health care providers simply passed these expenses onto those who paid for insurance. This included the companies that provided health insurance for their employees. The Clinton plan was a complex array of policies that created a certain level of confusion as well as opposition. The corporate elite was divided. Large companies that were consumers of health care largely supported the Clinton plan. Firms that were providers, primarily the health insurance companies themselves, were vehemently opposed. Small businesses, which feared that they would be required to provide insurance to their employees, were fiercely opposed, and were highly unified. Given the divisions between the consumers and providers of health insurance, the Business Roundtable was unable to come to an agreement in support of the plan. Meanwhile, Republicans in Congress were becoming increasingly aggressive toward corporations that supported the president’s reform. In one case, Republicans informed officials of Ameritech that they would slap new regulations on the company if it refused to rescind an offer to President Clinton to speak to the firm about his plan. Representative John Boehner helped mobilize local branches of the Chamber of Commerce to oppose the bill, which had

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received some support from the organization’s central leadership. In February 1994, under pressure from these multiple quarters, the Business Roundtable announced that it would not support the bill. The bill ultimately failed to even come up for a vote. Health care reform, for the time being, was dead. The fact that large corporations had folded under pressure from rightwing elements in Congress represented a major shift in the political role of big business compared to earlier years. While the corporate elite failed to come to a unified perspective on health care divided between consumers and providers of health insurance small business was unified against the plan, as were their main allies, the Republicans in Congress. No longer able to act collectively on an issue of major importance, big business found itself on the defensive against legislators who were not even part of the majority in the House. That these companies could allow themselves to be dictated to by Congressional representatives was an indication of the corporate elite’s newly-experienced lack of efficacy. Despite the failure of the Clinton plan, health care costs continued to escalate. The issue was almost entirely ignored during President Clinton’s second term, but by the early 2000s the topic resurfaced, bringing together such unlikely groups as the AFL-CIO, the Chamber of Commerce, and the Health Insurance Association of America. By the time of the 2008 presidential election, the issue had returned to the forefront, with Democrat Barack Obama promising, during the general election, to enact health care reform. At this point, the problem of rising health care costs had become so severe that even the insurance and the pharmaceutical companies were willing to support an expansion of coverage. By the time President Obama introduced his plan, however, opposition within the business community had mounted. The Business Roundtable did ultimately express its qualified support for the plan, while the Chamber of Commerce and the National Federation of Independent Business (a small-business group) opposed it. Ultimately the plan did pass, but business groups played a relatively minor role in the process, especially compared to the debate over the Clinton plan (Starr, 2011, pp. 218 220). Moreover, although the new law will greatly expand coverage and will end some of the most egregious aspects of the American medical system including the ability of insurance companies to deny coverage to individuals with preexisting conditions whether the plan will put a dent in health care costs is less clear. American corporations may find themselves continuing to face debilitating costs to insure their employees.

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The inability of the twenty-first century American corporate elite to play a constructive role in health care reform is an indication of the extent to which the group now paled compared to its counterparts in the postwar period. Health care costs were not a significant drag on the American economy during that earlier time. Through the 1960s, health spending as a proportion of GDP hovered between 5 and 7 percent. Although this proportion was growing consistently, and although the problem attracted the attention of President Nixon as well as the CED, it had not yet reached crisis proportions, even in the 1970s. By 2008, however, health care spending had passed 17 percent of GDP, far higher than that of any other developed nation. Equally important, these costs were becoming a major problem for corporations, who bore the primary responsibility for insuring their employees. Mizruchi (2010) has estimated that in 2009, the 500 largest U.S. nonfinancial corporations spent approximately $375 billion on health care for their employees. These costs under a single-payer system such as the Canadian one would have been far lower. Yet due in part to ideology, but also to its inability to act collectively to address an important problem, the American corporate elite has remained incapable of solving it, despite its apparent economic interest in doing so. As with the deficit, the American big business community of the twenty-first century proved to be barely a shadow of its predecessors from the postwar period.

THE DECLINE OF THE AMERICAN EMPIRE? We have argued that the decline of the American corporate elite, as evidenced by the group’s inability to act collectively to address issues of importance both to itself and to the larger society, has played a major role in the decline of American society. The American economic and political system, although not without severe problems, worked relatively well during the period following World War II. The nation’s standard of living increased significantly, it did so with a relatively high level of equality, and the political system delivered a series of important programs that contributed toward these outcomes. There was also a general sense in the population that government and politics could be a source of constructive change, from which large numbers of people could benefit. The United States of the twenty-first century is a very different place from that of the post-World War II period. In many respects it is a much

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more liberal one. The nation is more diverse today, and it is far more accepting of difference than it was during the more conformist postwar period. Social mores are much freer, and less constraining. Racism and sexism, although still widespread, have declined significantly. Even attitudes toward gay people and lesbians have softened, to the point that nearuniversal acceptance in the not-too-distant future seems to be a legitimate possibility. In terms of its economics and politics, however, American society has changed in ways that are less beneficial to the broader population. Economic inequality began to increase in the early 1980s, and has expanded to the point that the distribution of income in the second decade of the twenty-first century is more unequal than at any point since the 1920s (Piketty & Saez, 2003). While the wealth among the top one-tenth of 1 percent of the population has reached staggering heights, that for the majority of the population has grown only slightly since the 1970s. In 2010, 15 percent of the American population was below the poverty line, a number exceeded only once since the 1960s. And other indicators of national well-being, from infant mortality rates to high school graduation rates among African-American males, are at levels closer to those of underdeveloped countries than to those of Canada and Western European nations. The American political system is experiencing its own set of crises. The system has become increasingly dysfunctional since the early 1990s, when John Boehner, a rising star in the Republican Party at the time, told the Chamber of Commerce in 1994 that the group had a “duty to categorically oppose everything that Clinton was in favor of” (quoted in Judis, 1995). In the twenty-first century, it is nearly impossible to accomplish any kind of reform in Congress. Although both major political parties bear some responsibility for the political gridlock that has afflicted the federal government, the evidence suggests that the primary cause has been the rise of a large number of extremely right-wing Republicans. Political scientist Keith T. Poole has shown that when the votes of House Democrats and Republicans are compared on a liberalism-conservatism scale from 1879 through 2011, the size of the gap between the parties was at historically low levels from the 1930s through the late 1970s but has grown increasingly wide since that time, to the point that by 2000 it was at its highest level ever.9 As Poole’s analysis shows, however, virtually the entire increase in polarization can be accounted for by the increasing conservatism of House Republicans. The question is why these right-wing elements have come to play such a dominant role in the Republican Party. The fate of Tea Party candidates in

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statewide elections demonstrates that the extreme right-wing has an extremely difficult time attracting majority support on a broad scale. We believe that segments of the electorate similar to today’s Tea Party have long been an element of American politics. This is basically the same group that managed to nominate Barry Goldwater for president in 1964. The difference between the twenty-first century and the period in which Goldwater was nominated is not the existence or even prevalence of far right elements in American politics. The difference, we argue, is that in the postwar period, these forces were seen as outside the realm of acceptable political discourse. That is, they were seen as radical extremists. President Dwight Eisenhower, as we saw earlier, for example, referred to these elements as “stupid.” And the reason that they were outside the realm of responsible political discourse, we believe, is that they were marginalized by the moderation and pragmatism of the American corporate elite. The elite, in other words, standing between organized labor and liberals on one side and traditional business conservatives on the other, was able to keep right-wing extremists in check. When the corporate elite began to fall apart in the 1980s, the group lost its ability to play this mediating role. The right-wing extremists, who had previously been kept under wraps, were then able to fill the vacuum. These extremists have included some members of the big business community, about whom much has been written (see, e.g., Phillips-Fein, 2009), and some of whom, such as the Koch brothers, are active today. Their presence has been possible, we suggest, because of the corporate elite’s abdication of the center. At the same time that the American economy and political system have failed to work for a broad segment of the population, large American corporations have become increasingly successful in gaining favors for themselves, from favorable taxation, lax regulation, and, in some extreme cases, even federal bailouts. Yet members of the financial community have fought virtually all attempts at regulation, despite the fact that requiring banks to maintain minimum cash reserves might prevent them from going bankrupt in the future. Nowhere is the lack of responsibility of the American corporate elite more evident than in the deficit crisis that the federal government has experienced during the Obama administration. In 2011, when the president and Congress were deadlocked over the debt ceiling crisis, the Business Roundtable issued a brief statement imploring the two sides to come to an agreement. The Roundtable did this without offering a single specific recommendation. Most notable was its continued unwillingness to mention the possibility of a tax increase, despite the fact that the group had done

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just that during the Reagan and Bush I presidencies. In the fall of 2012, a new group, Fix the Debt, emerged. This group, founded by former Republican senator Alan Simpson and former Clinton administration official Erskine Bowles and consisting of several former public officials as well as the CEOs of twenty-two major corporations, has offered a proposal to address the nation’s long-term debt problems. Although the New York Times (2012a, 2012b) reported that the group was willing to call for a tax increase, the organization’s position statement contains no mention of a tax increase. The statement does advocate a policy that “raises revenues, and reduces the deficit,” but it simultaneously calls for a reduction in tax rates (Fix the Debt, 2012). Isolated individuals such as Warren Buffett and Robert Rubin have explicitly called for an increase in the actual tax rates paid by high earners. As of this writing, no major organized group of corporate leaders has followed suit.

THE WAY OF THE ROMANS? In his comparative study of the decline of several European empires, including Rome, Spain under the Habsburgs, the Netherlands, and Czarist Russia, Lachmann (2003, 2009, 2011) argued that the decline of a polity is a function of the relations among its elites. Nations that contained a plurality of elites, who held one another in check, were able to generate resources and encourage innovation necessary to maintain economic growth. When a single group of elites managed to gain dominance over the other elite groups, however, the society had a tendency to stagnate. This occurred, Lachmann suggested, because the dominant elite began to prevent rival groups from using resources that might have strengthened other elements of the society. In the postwar United States, the corporate elite had a high degree of power, but it also faced strong rival groups, arguably elite ones, in the government and organized labor. In the 1970s, the corporate elite was able to defeat these rival groups, and by the early 1980s it had consolidated its power and rendered the rival groups relatively powerless. The ascendance of unilateral power by the corporate elite helped precipitate the decline of the United States on the global stage, we argue, in part because the government and organized labor were no longer generating the kinds of resources that they had in the past, nor were they serving as effective counterweights to big business.

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There is a piece of our story, however, that, although compatible with Lachmann’s account, differs from it. Once the corporate elite consolidated its unchallenged power, the group began to fragment. It is this fragmentation, we argue, that led not only to the elite’s undoing, but also to its increasing ineffectuality. In other words, the American corporate elite, by succeeding in its defeat of alternative elites, dissolved into an increasingly diffuse group that was incapable of acting collectively to address even its own problems, let alone those of the larger society. It was that fracturing, we suggest, borne of a lack of countervailing power (Galbraith, 1952), that eventually damaged both the economy and the polity of the United States. Lachmann also made another observation that is relevant to our argument, however. All of the failed European empires that he studied shared one feature in common: at a certain point during their reign, the empires’ elites began to hoard the society’s resources for themselves, while letting public services such as the infrastructure atrophy. The American corporate elite of the post-1990 period has behaved in a similar fashion. The group has accumulated an enormous, and unprecedented, level of wealth (Winters, 2011). It uses its political connections to obtain favors in ways more reminiscent of the late nineteenth century than the mid-twentieth. It has engaged in an arguably reckless array of economic activities, especially in the financial world. And it has stood idly by as the nation’s treasury is increasingly starved for funds. If wealthy Americans were taxed at the rates that applied during the Clinton administration, the deficit would continue to present a long-term concern. It would be much smaller, however, which would require fewer cuts in programs such as Medicare and spending for education and other social needs. American society has many needs, and much useful work could be accomplished by programs that helped rebuild the nation’s infrastructure, improve its schools, rationalize its health care system, and, perhaps most important, alter its energy policy to begin to forestall the imminent crisis created by global warming. Such actions would require the kind of leadership and commitment from corporate elites that was evident in the early years of the twentieth century, and especially in the years after World War II. The United States might be able to maintain its power in the international arena in the short run on the basis of its superior military technology, although the nature of contemporary warfare is not well-suited to the high-priced armaments that continue to predominate in the American arsenal (Lachmann, 2011). It will not be able to maintain its strength indefinitely on its military prowess alone, however. A society that is in decay on the inside will eventually fall behind in its relations on

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the outside. If the American corporate elite does not begin to act in a manner more reminiscent of its postwar counterparts, its members may discover that they have inadvertently destroyed the basis of their own privileges.

NOTES 1. For data on gross domestic product, see http://www.bea.gov/iTable/iTable.cfm? ReqID=9&step=1#reqid=9&step=3&isuri=1&910=x&911=0&903=6&904= 1935&905=2013&906=a. The Gini index showed a 7.4 percent decline in family income inequality between 1947 (when the Census Bureau began to study the income distribution) and 1968. 2. Between the mid-1940s and the mid-1970s, the number of Americans who completed four years of college more than tripled; see http://www.census.gov/hhes/ socdemo/education/data/cps/historical/ 3. For the poverty rates, see http://www.stateofworkingamerica.org/files//poverty_ actual_and_simulated_with_gdp_all-years.png 4. For school performance data, see http://www.infoplease.com/ipa/A0923110. html. For infant mortality data, see https://www.cia.gov/library/publications/ the-world-factbook/rankorder/2091rank.html. For life expectancy data, see https:// www.cia.gov/library/publications/the-world-factbook/rankorder/2102rank.html 5. Auto companies, for example, preferred to purchase inexpensive foreign steel, while American steel manufacturers hoped to convince the government to impose protective tariffs to render their product more competitive (Bauer, Pool, & Dexter, 1963; Prechel, 1990). 6. In a letter to his brother Edgar, President Dwight Eisenhower explained with great eloquence why he had refused to dismantle the New Deal programs originally established by Franklin D. Roosevelt. Some businessmen, most notably a group of Texas oil millionaires, continued to push for a repeal of Social Security and other Depression-era legislation, the president noted. But “their number is negligible and they are stupid,” he added. The Presidential Papers of Dwight David Eisenhower, Document #1147, November 8, 1954, http://www.eisenhowermemorial.org/ presidential-papers/first-term/documents/1147.cfm 7. The Chamber during the 1940s was briefly led by a moderate, Eric A. Johnston, who tried to push the group away from its traditional laissez faire positions. Johnston faced continued opposition from the organization’s rank-and-file, and he stepped down in 1945, after only three years in office. 8. See Mizruchi (2013, chapter 8) for a detailed discussion of the CED and Nixon plans. 9. See http://voteview.com/political_polarization.asp

ACKNOWLEDGMENT Research for this chapter was supported in part by the National Science Foundation, grant SES-0922915.

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Mintz, B., & Schwartz, M. (1985). The power structure of American business. Chicago, IL: University of Chicago Press. Mitchell, N. J. (1989). The generous corporation: A political analysis of economic power. New Haven, CT: Yale University Press. Mizruchi, M. S. (1982). The American corporate network, 1904 1974. Beverly Hills, CA: Sage Publications. Mizruchi, M. S. (1992). The structure of corporate political action: Interfirm relations and their consequences. Cambridge, MA: Harvard University Press. Mizruchi, M. S. (1996). What do interlocks do? An analysis, critique, and assessment of research on interlocking directorates. Annual Review of Sociology, 22, 271 298. Mizruchi, M. S. (2004). Berle and means revisited: The governance and power of large U.S. corporations. Theory and Society, 33, 579 617. Mizruchi, M. S. (2010). The American corporate elite and the historical roots of the financial crisis of 2008. In M. Lounsbury & P. M. Hirsch (Eds.), Markets on trial: The economic sociology of the U.S. financial crisis. Research in the Sociology of Organizations (Vol. 30B, pp. 103 139). Mizruchi, M. S. (2013). The fracturing of the American corporate elite. Cambridge, MA: Harvard University Press. New York Times. (2012a). Business leaders urge deficit deal with more taxes. Jackie Calmes. October 26, p. A25. New York Times. (2012b). Business chiefs step gingerly into a thorny budget fight. Nelson D. Schwartz and David Kocieniewski. November 12, p. B1. Nye, J. S. Jr. (2003). The paradox of American power: Why the world’s only superpower can’t go it alone. Phillips-Fein, K. (2009). Invisible hands: The businessmen’s crusade against the new deal. New York, NY: Norton. Piketty, T., & Saez, E. (2003). Income inequality in the United States, 1913 1998. Quarterly Journal of Economics, 118, 1 39. Prechel, H. (1990). Steel and the state: Industry politics and business policy formation, 1940 1989, American Sociological Review 55, 648 668. Quadagno, J. S. (1984). Welfare capitalism and the Social Security Act of 1935. American Sociological Review, 49, 632 647. Schriftgiesser, K. (1960). Business comes of age: The story of the committee for economic development and its impact upon the economic policies of the United States, 1942 1960. New York, NY: Harper & Brothers. Schumpeter, J. (1942). Capitalism, socialism, and democracy. New York, NY: Harper & Row. Simkhovitch, V. (1916). Rome’s fall reconsidered. Political Science Quarterly, 31, 201 243. Simmel, G. (1955 [1923]). Conflict and the web of group affiliations. New York, NY: Free Press. Skocpol, T. (1980). Political response to capitalist crisis: neo-Marxist theories of the state and the case of the New Deal. Politics and Society, 10, 155 201. Starr, P. (2011). Remedy and reaction: The peculiar American struggle over health care reform. New Haven, CT: Yale University Press. Stearns, L. B., & Allan, K. D. (1996). Economic behavior in institutional environments: The corporate merger wave of the 1980s. American Sociological Review, 61, 699 718. Stein, H. (1969). The fiscal revolution in America. Chicago, IL: University of Chicago Press. Tilly, C. (1990). Coercion, capital, and European states: AD 990 1992. Cambridge, MA: Basil Blackwell. Toynbee, A. J. (1987). A study of history: Abridgement of vols. 1 6. New York, NY: Oxford University Press.

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Useem, M. (1984). The inner circle. New York, NY: Oxford University Press. Wall Street Journal. (1976, December). Rehabilitation project: Once-mighty CED panel of executives seeks a revival, offers advice to Carter, 17, 38. Wall Street Journal. (2004, April). Roundtable credibility at risk with silence on U.S. budget deficit. David Wessel, 8, A2. Wallerstein, I. (2003). The decline of American Power: The U.S. in a chaotic world. New York, NY: The New Press. Weinstein, J. (1968). The corporate ideal in the liberal state, 1900 1918. Boston, MA: Beacon. Winters, J. A. (2011). Oligarchy. New York, NY: Cambridge University Press. Zeitlin, M. (1974). Corporate ownership and control: The large corporation and the capitalist class. American Journal of Sociology, 79, 1073 1119.

FROM CONSENSUS TO PARALYSIS IN THE UNITED STATES, 1960 2010 Richard Lachmann ABSTRACT I trace and explain how the ratcheting of corporate mergers and deregulation transformed the structure of elite relations in the United States from 1960 to 2010. Prior to the 1970s there was a high degree of elite unity and consensus, enforced by Federal regulation and molded by structure of U.S. government, around a set of policies and practices: interventionism abroad, progressive tax rates, heavy state investment in infrastructure and education, and a rising level of social spending. I find that economic decline, the loss of geopolitical hegemony, and mobilization from the left and right are unable to account for the specific policies that both Democratic and Republican Administrations furthered since the 1970s or for the uneven decline in state capacity that were intended and unintended consequences of the post-1960s political realignment and policy changes. Instead, the realignment and restructuring of elites and classes that first transformed politics and degraded government in the 1970s in turn made possible further shifts in the capacities of American political actors in both the state and civil society. I explain how that process operated and how it produced specific policy outcomes and created

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new limits on mass political mobilization while creating opportunities for autarkic elites to appropriate state powers and resources for themselves. Keywords: Elites; politics; state; social movements

Most of us are conditioned for many years to have a political viewpoint, Republican or Democrat, liberal, conservative, moderate. The fact of the matter is that most of the problems, or at least many of them that we now face, are technical problems, are administrative problems. They are very sophisticated judgments which do not lend themselves to the great sort of “passionate movements” which have stirred this country so often in the past. Now they deal with questions which are beyond the comprehension of most men.1 — President John F. Kennedy, 1962 (quoted in Rousseas & Farganis, 1963, pp. 358 359)

From our vantage point a half-century later, President Kennedy’s confidence in experts’ capacity to solve problems with their technical knowledge seems both touching and misplaced. Yet what appears most unrealistic, to those of us who spent the first decade of the twenty-first century in the United States, is his belief that elites or citizens more broadly could be convinced by expert judgment to abandon their ideological positions or to subordinate their particular interests to policies that would advance general prosperity and the common good. Yet, at the time Kennedy spoke there were good reasons for his confidence that ideological convictions were giving way to expert consensus. What Kennedy described in another speech as “the practical management of a modern economy” (quoted in Rousseas & Farganis, 1963, p. 359) enjoyed bipartisan support. Leaders of both parties in Congress endorsed Keynesian strategies of tax cuts and government spending.2 The consensus extended to foreign policy in the early 1960s, with agreement on an aggressive approach to armament and to counter-insurgency in the Third World. Leaders of both parties agreed not only on the broad goals of economic growth, reduction of poverty, and the containment of Communism; they also believed in the efficacy of the strategies formulated by experts in government. At the same time, there was little effective opposition to these policies from outside government in the United States. On the left, the peace movement was weak and focused mainly on ending nuclear tests, while slighting

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U.S. military intervention around the world (Wittner, 1993 2003). Unions endorsed the government’s macro-economic policies and limited their demands to wage and benefit increases that tracked the rise in productivity and corporate profits. The influence, in national politics, of what was then labeled “the lunatic fringe” was becoming marginalized as the Republican Party led by Eisenhower and Nixon embraced an internationalist foreign policy, government management of macro-economic growth, and modest efforts to gradually ameliorate poverty. Outside the South, both parties supported the gradual extension of civil rights to blacks. Capitalists, at least those who headed the largest industrial and financial firms, were in some cases supportive of, and more often resigned to government social programs, economic regulation, and the role of unions in representing their workers, even as they tried to block or slow new governmental initiatives. Capitalists did hope that the death of Franklin Roosevelt, the negative public reaction to the strike wave that followed the end of World War II, and the election of a Republican Congressional majority in 1946 would provide an opening to reverse New Deal social welfare and regulatory policies. However, continued Democratic control of the executive branch (and Truman’s unexpected allegiance to, and desire to expand, the New Deal), a return of a Democratic majority to Congress in 1948, and then Eisenhower’s unwillingness to challenge most of the New Deal and his continuation of Truman’s basic foreign policy, demonstrates the narrow limits within which even the most concerted challenges by groups of capitalists or other elites to the postwar consensus had to maneuver. Thus, capitalists’ most significant challenge to New Deal legislation, the Taft Hartley Act of 1947, did not seek to decertify or reduce the membership of existing unions. While Taft Hartley had profound long-term consequences for unions’ political power, the Act’s authors did not anticipate those effects. Businessmen’s support for U.S. foreign policy was greased by the U.S. government’s diplomatic, financial, and military protection of their foreign investments, and by the outsized profits they earned from contracts for weapons which flowed not only to large firms but to subcontractors that were located in virtually every Congressional district. Unions, treasuring the well-paying and stable jobs their members held at defense firms, supported the foreign policy that made the weapons their members built necessary. Bipartisan agreement on the goals of foreign and much domestic policy, and on the methods for achieving those goals through governmental management, was built upon a high degree of cohesion among elites. Firms

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were linked together by director interlocks, centered on the largest banks. The ability of corporate managers to pursue their own interests, rather than act as fiduciaries of their shareholders and workers, was hemmed in by their dependence on banks for financing and by a web of government regulations that stymied their capacities to alter the shares of income that went to owners, managers and workers. Firms also were constrained by unions’ ability and willingness to strike. Nonunion industrial firms outside the South faced the threat of unionization if their wages and benefits fell significantly behind those won by unionized workers. The government’s share of national income grew significantly in the 1950s and increased again in the 1960s in the absence of effective opposition to military spending, and as both political parties were committed to maintaining New Deal social programs and differed mainly on which of those programs should be expanded and at what cost. Conflict, along ideological, class, or other lines, was limited, above all, by the United States’ commanding position in the world economy and geopolitics, which provided the resources to accommodate multiple interests and priorities. Tax revenues made new social programs affordable at the state and local as well as national levels. Public sector construction, which had expanded drastically with New Deal programs, continued in the quarter century after World War II with the main focus on schools, universities, hospitals, and roads. University enrollment, which had risen gradually in the first half of the twentieth century, immediately doubled after the end of World War II and more than quadrupled by the end of the twentieth century (U.S. Census Bureau, 2010, table HS-21; National Center for Educational Statistics, 1993, figure 2). U.S. military dominance was financed by a Pentagon budget that consumed 7 10% of Gross Domestic Product (GDP) in the two decades from the end of the Korean War to the end of the Vietnam War (Office of Management and Budget [OMB], 2009, pp. 46 54), and supplemented by foreign aid, which totaled 1 2% of GDP (http://www.fas.org/sgp/crs/row/98-916.pdf). Productivity, wages, corporate profits, and GDP all grew rapidly and in tandem in the 1950s and 1960s, and the S&P stock index increased 527% from 1945 to its peak in 1969 (U.S. Census Bureau, 2010, table HS-38). The elite consensus around foreign and domestic policy was reflected in bipartisan support for Presidents Kennedy and Johnson’s commitment of troops in Vietnam, and in the heavy bipartisan majorities in favor of many of Johnson’s Great Society and civil rights bills. The Eighty-Ninth Congress of 1965 1966, in which the Democrats had their largest majorities in both the House and Senate since 1937 1938, enacted a wave of

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legislation in civil rights, the Hart Celler Immigration and Nationality Act which abolished national quotas favoring Europeans, antipoverty programs, environmental protection, including the Endangered Species Act, public broadcasting, created the National Endowments for the Arts and Humanities, and established Medicare and Medicaid, which were the largest social programs since Social Security. Many of these programs enjoyed support from significant blocs of Republicans in Congress.

THE GREAT U-TURN The American economy and public policy changed abruptly after the 1960s. Individual wages, family incomes, labor productivity, corporate profits, and government revenues, which all had risen rapidly since the end of World War II, stagnated in the 1970s. As bad as the 1970s were in comparison to the boom of the 1950s and 1960s, the rate of growth in GDP (both in total and per capita), labor productivity, and real compensation per employee fell off in each subsequent decade, reversed only by the 1995 2000 expansion that was sparked and sustained mainly by a financial bubble that was punctured with the 2000 stock market crash (Brenner, 2003). Real wages, which rose at 10% per annum in the 1960s, increased only 2.7% per year in the 1970s, which itself was more than double the rate in any subsequent decade (ibid., p. 47). Income inequality, which fell under every president from FDR to LBJ, except Eisenhower under whom it remained stable, has risen under every president from Nixon through Bush, including Clinton. Wealth inequality has widened even more rapidly since the 1970s, reaching a peak under Bush in 2007 that exceeded the peak previously set in 1929 (Piketty and Saez, 2007 2012, table A1; this shift was first documented by Bluestone & Harrison, 1988, who coined the term The Great U-Turn in the title of their book). Union membership in 2009 was down to 12.3% of the labor force, and only 7.2% of workers in private industry. Those levels are a drastic decline from the postwar peak of one-third of the labor force, a level which was sustained until the 1960s and which dropped gradually until the sharp fall off which occurred in the 1980s and 1990s (Bain & Price, 1980, pp. 88 89; U.S. Bureau of Labor Statistics, 2010). Government policy also made a dramatic turn in the 1970s. The only significant expansion of the Federal government’s regulatory or social welfare role came in the early years of the Nixon Administration with the

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establishment of the Environmental Protection Agency in 1970, enactment of the Clean Air Act of 1970 and the Clean Water Act of 1972, and passage of the Occupational Safety and Health Act of 1970.3 Since then no significant environmental laws have been passed in the United States. Efforts to further expand social benefits were defeated again and again in the four decades since the Great Society. Most famously, plans to guarantee health care to all Americans were defeated in the Nixon, Carter, and Clinton Administrations. All three defeats occurred when the Democrats controlled Congress, in the case of Carter with majorities in 1977 1978 that were almost as large as those Johnson enjoyed in 1965 1966. The plans proposed by those three presidents were each more comprehensive than the one that became law under Obama in 2010. The only civil rights legislation to pass since the Johnson years was the Americans with Disabilities Act of 1990, and a series of modest bills designed to reverse Supreme Court decisions that undercut existing laws protecting African-Americans and women from discrimination. Even when groups won court cases that expanded their civil rights, they failed to gain enhanced social benefits. American women won legal equality in many realms since the 1960s while failing to achieve the government-funded maternity leave and childcare benefits that are the right of women in other wealthy nations (Cohen, 2001 details the repeated defeat in the 1970s of legislation guaranteeing childcare). Black poverty rates, like the overall poverty rate, have not declined since the end of the Johnson administration (U.S. Census Bureau, 2009). The most consequential governmental initiative toward African-Americans since the 1970s, joined by officials at the Federal, state and local levels and during both Democratic and Republican administrations, has been the extraordinary increase in black imprisonment, which rose from 3% of all black men aged 18 65 in 1980 to 7.9% in 2000 (Western, 2006, p. 17). This has affected more African-Americans, with far more profound consequences, than have tepid Affirmative Action programs by employers or universities.4 The history of U.S. governmental policy since 1968 is not only a story of the total absence of significant new programs until Obama’s Patient Protection and Affordable Care Act in 2010, but also of a government taking affirmative steps to weaken protections for workers and consumers, while altering regulations and tax policies in ways that increased inequality and left citizens far more vulnerable to the depredations of large corporations. All the strides of the New Deal and Great Society in reducing inequality were reversed in the three decades from Reagan’s election to Obama’s as the United States returned in the first decade of the twenty-first

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century to 1920s levels of inequality in wealth. The United States also returned to the 1920s in terms of state control of capitalism. New Deal laws regulating banking and finance were almost entirely repealed in the 1990s. We already noted the drastic increase in income and wealth inequality from 1970 to 2008. That increase was due in part to changes in the tax code. The top income tax rate fell from 77% at the end of the Johnson Administration to 28% under Reagan. In 2009 2010, Congress debated whether to leave the top rate at the 35% it was under Bush or return it to the 39.6% of the Clinton years, a debate that was settled in 2013 when rates returned to the Clinton levels. Along with the rate cuts, the Federal government has acquiesced in wealthy Americans’ use of an increasing array of techniques for sheltering income. Aided by lawyers, accountants, and offshore bankers from what Jeffrey Winters (2011) calls the “income defense industry,” the 400 Americans with the highest incomes paid only half of the nominal 35% top rate in 2007, down from 85% of the nominal rate of 31% in 1992. Such tax avoidance schemes reduce Federal tax revenues by $70 billion a year. President Obama, in 2009, proposed measures to crack down on “tax cheats” and “shut down overseas tax havens.” Those measures, which would have recovered only $8.7 billion of the $700 billion that will be lost to tax avoidance by high-income taxpayers over the next decade, were rejected by the Democratic Congress (Winters, 2010). Corporate income tax receipts also have declined dramatically, from 23% of Federal revenues in 1967 to 12% in 2008, mainly because Congress has voted into law a growing array of tax credits and deductions, and Administrations from both parties have ignored firms’ use of corporate tax shelters that are similar to those used by rich individuals to hide money in foreign tax havens. The share of Federal revenues from estate and gift taxes, paid only by the richest 2% of Americans, and mainly by the wealthiest tenth of one percent, dropped in half between 1967 and 2008 (OMB, 2009, tables 2.2 and 2.5). The two main pillars of governmental support for the poor have been carved away over the past four decades. The minimum wage, which raises incomes not only for those paid at that rate, but for the entire lower half of the work force, whose wages are set in relation to that minimum, has been eroded by inflation. The minimum wage, controlling for inflation, peaked in 1968 when a fulltime worker at that wage earned 90% of the poverty level income for a family of four. That declined to little more than half the poverty level by the late 1980s, and even less in the mid-2000s. The three-part increase in the minimum wage in 2007 2009 brought it up to

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two-thirds of the poverty level (U.S. Census Bureau, 2010, table 636). Aid to Families with Dependent Children (AFDC), the Federal welfare program created in the New Deal and drastically expanded under the Great Society, was also undermined by a lack of benefit increases to make-up for inflation in the 1970s and 1980s. The program was abolished in 1996 and replaced with Temporary Assistance for Needy Families (TANF). TANF fulfilled Clinton’s campaign pledge “to end welfare as we know it.” The effects of the end of AFDC and the decline in the minimum wage were masked in the 1990s by a general expansion in the availability of low wage jobs and partly cushioned by an increase in the Earned Income Tax Credit. The recession that began in 2008 produced levels of hunger, homelessness, and extreme poverty not seen since the years before the Great Society. Finally, the Federal government has retreated in the extent to which it regulates corporations on behalf of workers and consumers. Deregulation in most sectors has been accomplished by rule changes or lack of enforcement of existing regulations rather than through outright abolition of regulatory agencies. Antitrust laws remain on the books, but Federal authorities have approved virtually every merger since the Nixon era. Television and radio stations, which are given free licenses to profit from bands of publicly-owned airwaves, had their obligations to provide public service programming and to offer equitable coverage to political candidates and controversial issues eliminated by the Federal Communications Commission in 1987 when it revoked the Fairness Doctrine. The National Labor Relations Board has become increasingly lax since the 1970s in preventing firms from using intimidation and other illegal tactics to undermine unionization efforts (Gross, 1995). Various agencies, such as the Environmental Protection Administration and the Occupational Safety and Health Administration have become far less effective as they fall ever further behind in developing new regulations to limit or ban unsafe chemicals, machines, and work practices that have been developed since the initial spate of environmental and work safety regulations those agencies promulgated in the 1970s when they were founded. Most fatefully, the banking and financial sector was deregulated in a series of administrative decisions and legislative acts, culminating in the Gramm Leach Bliley Act of 1999, a collaborative effort of a Republican Congress and the Clinton Administration which repealed the 1933 Glass Steagall Act. The deregulation of the financial sector allowed the sorts of speculative practices and outright fraud that produced the 2008 financial crisis.

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WHAT KILLED THE POSTWAR ELITE CONSENSUS IN AMERICA? How can we explain the post-1960s shift in public policy, whose contours we have just outlined? Why did the narrow range of political debate, and more importantly of the structural opportunities to challenge the balance of power among state and civil society, capitalists and workers, military and civilians, elites and masses, open in varied and dramatic ways in the decades after Kennedy’s speech. Today, we still are debating the reasons why the stasis of the early 1960s was disrupted, and who benefited from the political flux that opened. Five main culprits appear, alone or in combination, in almost all explanations for the disorganization of American politics and the weakening of the U.S. state. The five are not contemporaneous, and so in some explanations they build upon, or undermine, one another. The five factors are: (1) U.S. economic decline since the 1970s, caused by the rise of economic competitors and/or general globalization, which rendered the state unable to finance further expansion of social programs and heightened social conflict as groups fought over a shrinking or stagnant economic pie; (2) America’s loss of geopolitical hegemony, variously timed from the 1960s to the 2000s, which caused a crisis in the world capitalist system, and forced firms and the state to adopt neoliberal strategies, i.e. to reduce social expenditures to meet international competition and the demands of world financial markets; (3) the end of the Cold War, which meant, in Margaret Thatcher’s words, “there is no alternative” and therefore corporations and capitalists no longer had to restrain their pursuit of profit to avoid making American capitalism appear less desirable than the socialist alternative; (4) mobilization from the left in the 1960s and after by African-Americans, women, students, and other “New Social Movements”; and (5) mobilization, beginning in a few accounts in the late 1960s or 70s and more commonly in the 1980s, from the right by business interests or populist forces, reacting to liberal state policies, leftist movements, and/or a crisis of falling profits. These five explanations are helpful in identifying forces that disrupted the balance of power, and undermined the bases for progressive social reform. They are not so useful in accounting for the specific policies that both Democratic and Republican Administrations furthered since the 1970s and for the uneven decline in state capacity that were intended and unintended consequences of the post-60s political realignment and policy changes.

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Let us examine each of the five sorts of explanations in turn, and identify the strengths and limits of each. We then will see that the forces and interests identified in these explanations had their greatest impact indirectly. Elite and popular forces did not achieve most of the policy objectives for which they fought. Nor can we understand the changes in the U.S. state from 1970 to 2010 just as a successful adaptation to new geopolitical or global capitalist conditions. Rather, the actions of social movements on the left and right, and of self-interested elites, had the effect of weakening the Federal government’s capacities and occurred at the same time as deregulation set in train processes of intra- and inter-firm restructuring that disorganized economic elites in the United States. Once we understand the new structure of elite relations that emerged at the end of the twentieth century, we will have the basis to be able to explain the geopolitical, economic and social policies adopted by the U.S. state in recent decades, and the strategies of profit-seeking and wealth accumulation adopted by firms and wealthy Americans in those years.

America, International Competition, and the Crisis of Profits Perhaps U.S. decline and a resulting pullback in social spending were unavoidable. The overwhelming advantage the United States enjoyed as the only major power whose homeland and industrial capacity emerged unscathed (indeed vastly strengthened) by World War II, narrowed as other countries rebuilt their economies (in part with U.S. aid). Competition, facilitated by the widening of world trade and the globalization of finance, led to a falling rate of profit. When that happened the postwar practices of sharing productivity gains with unionized workers and expanding social benefits became untenable. American firms responded by demanding givebacks from their workers, and tax cuts from the Federal and state governments. Robert Brenner (2003), who offers the most sophisticated and empirically grounded version of this argument, accurately points out that the U.S. government managed to cushion and postpone the crisis for decades, beginning with Nixon’s policies of economic stimulus and de facto dollar devaluation, thereby shielding U.S. workers and firms from the consequences of their declining competitive position at the expense of their Japanese and German rivals. Ultimately, those interventions deepened the crisis since they allowed firms to maintain production in sectors that never could be competitive absent government manipulations and subsidies.

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Brenner doesn’t identify the interests that led firms to cling to declining sectors, nor the political forces that enabled workers and firms to extract benefits from the state in the 1970s. Brenner has even less to say about the political shifts that led supposedly hidebound firms of the 1970s to restructure themselves in the 80s and 90s, nor does he attempt to explain why the Reagan Administration and its successors were able to favor financial firms at the expense of industrial firms as well as workers. The shifts from a low to a high dollar and back to a low dollar under Reagan, and then a renewed high dollar under Clinton are described but the political forces that pushed through each shift are not identified. Nor does Brenner explain why the actors with power to lower the dollar lost to those in favor of raising the dollar, and vice versa. Brenner’s is a Marxist analysis with virtually no politics. Brenner’s inattention to politics, and his focus upon competition among capitalists rather than conflict with workers (Arrighi, 2003), means he is unable to account for changes in policy that do not match the temporal rhythms he identifies in the overall U.S. or world capitalist economy. Most seriously, he is unable to account for intra-class differences: Why did some capitalists gain state subsidies and protections while others did not? Why did some workers and mass groups make extraordinary gains in the 1960s or 70s while others did not? There are two problems with Brenner’s sort of argument. First, it assumes that U.S. capitalists in the quarter century after 1945, were willing to leave potential profits in the hands of workers and the state as long as their rate of profit and share of national income remained steady, and only confronted workers and demanded tax cuts and regulatory rollbacks when profits fell below some unspecified level. In David Harvey’s words (2005, p. 15), “when growth collapsed in the 1970s … the upper classes had to move decisively if they were to protect themselves from political and economic annihilation.” In fact, capitalists always seek to increase profits; this is one of Marx’s fundamental claims. If workers or the state are able to take a steady or increasing share of productivity gains, it is because they have the power to make those demands of capitalists. Capitalists’ success after 1970 in forcing wage and benefit cuts on their workers and tax cuts and regulatory rollbacks on the state reflects a shift in the balance of power, not new desires or fears on the part of capitalists. Second, this interpretation of history assumes that all capitalists everywhere react to a crisis of profits by squeezing workers and the state. Harvey, the most prominent sociologist writing on neoliberalism, contends that capitalists throughout the world advance four strategies to boost their

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income and assets at the expense of everyone else: (1) privatization of stateowned assets and commodification of public goods, including intellectual property, (2) deregulation of the financial sector which serves to shift profits from industrial to financial firms, albeit at the risk of speculative bubbles, (3) manipulation of the resulting crises to compel governments to abolish protections for domestic firms, privatize government agencies, and abolish social benefits, often as part of “structural adjustment programs” mandated by the International Monetary Fund (IMF) or World Bank in return for loans that will mitigate the effects of crises that were made possible in the first place by deregulation and financialization, and (4) redistribution of the tax burden from the wealthy to the rest of the population and increases in subsidies to capitalist firms. Harvey is vague on how capitalists, whom one could presume were weakened by falling profits and periodic crises, were able to increase their control over states and workers to extract greater benefits.5 Nor does Harvey have anyway to account for differences in which neoliberal policies have been implemented in each country. In reality, capitalists in each country, and in different industries and firms within countries, have pursued particular strategies of advantage. Some seek to drive down costs to undercut competitors; others are willing to pay relatively high wages to produce better quality goods and services that can then be sold at a premium. Capitalists and their firms do not make these decisions on their own: governments and other institutions offer incentives and impose costs that create path-dependent “varieties of capitalism,” directing investments along channels that sustain “liberal” or “coordinated market economies” (Hall & Soskice, 2001 offer the best overview of this approach; see Block, 2007, footnote 2 for other key works from this perspective). Generalizations about varieties of capitalism, or Esping-Andersen’s (1990) typology of the “worlds of welfare capitalism,” are most useful in showing that capitalists and countries vary in their capacity to insulate themselves from competition and from the pressures of globalization. They are a powerful antidote to policy prescriptions, such as those of Thomas Friedman (2005) who believes it is not just the United States but all countries that must respond to the heightened global competition unleashed by technologies that facilitate the flow of goods, people, and capital in ways all states are incapable of controlling, and to the assumptions that undergird the demands the International Monetary Fund has imposed upon debt-ridden countries to open their economies to foreign competition in return for loans. For the United States, the IMF’s prescriptions remain purely rhetorical, since America remains able to attract all the funds it

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needs to finance its deficits at low interest rates, even after the 2011 downgrade of the Federal government’s credit rating by Standard and Poor’s. Hall and Soskice and Esping-Andersen’s path-dependent explanations of national differences in welfare states or capitalist strategies are less helpful in accounting for reversals of policy within countries, whether in specific areas where neoliberalism was implemented, or the broad u-turn U.S. policy took in the 1970s. Such models also ignore the ways in which U.S. firms still draw subsidies from the state and rely upon governmental coordination to provide benefits for their employees (Block, 2007, pp. 13 14). We also need to understand these firm-state interactions if we hope to explain the uneven changes in state policies and capacities over the decades since the 1960s.

The End of American Capitalist Hegemony and Neoliberalism The United States is different from other capitalist countries, and was affected by and responded to the global crisis of capitalism differently, because it still is the hegemon of the world capitalist system. Similarly, as the hegemon, the United States experienced neoliberalism differently from other countries, a possibility not addressed by Harvey, Klein or other authors who see neoliberalism as a strategy adopted by all capitalists everywhere against states and other classes. World dominance in any realm (economic, technological, military, or geopolitical) confers vast benefits on its holder, and dominant powers therefore respond to crises differently from other polities when they adopt strategies designed to maintain their hegemony. This is the great insight of world systems theory (Arrighi, 1994, 2007; Arrighi & Silver, 1999; Wallerstein, 1974 2011). Hegemony, in Arrighi’s analysis, means that the United States is more than just another, albeit especially large and rich, competitor in the world economy. Hegemons are able to respond to crises caused by “the accumulation of capital over and above what can be reinvested in the purchase and sale of commodities without drastically reducing profit margins” (2007, p. 232) with what Arrighi, citing David Harvey, calls a “spatial fix.”6 Geographic expansion, of the hegemon’s home polity and also in imperialist control over trade routes, colonies, and dependent nations, opens new spaces for profitable investment. However, the expanding scope of capitalist investment and production spurs “uneven development” (this is the process at the center of Brenner’s analysis of the profits crisis) as backward territories take advantage of lower labor costs and newer facilities to

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undercut and out-compete the hegemon. “At this point, capitalist agencies tend to invade one another’s spheres of operation; the division of labor that previously defined the terms of their mutual cooperation breaks down; and competition becomes increasingly vicious” (Arrighi, 2007, p. 232). Capitalists respond by keeping their resources liquid, loaning their capital to governments, firms, and individuals in financial crisis. For a few decades, financialization seems to create a new boom, as it did during Britain’s Belle E´poque of 1896 1914 and for the United States from the 1980s to 2008. But the relief is temporary and the prosperity highly concentrated as “the underlying over-accumulation crisis” intensifies and “exacerbates economic competition, social conflicts, and interstate rivalries to levels that it was beyond the incumbent centers’ power to control” (p. 232). While the crises are inevitable, the responses by capitalists, states, and popular forces are highly variable across space and between each historical epoch. Here is where Arrighi moves well beyond Brenner’s economistic argument or the path-dependent analysis of varieties of capitalism and types of welfare states. His focus on the interactions among classes and states, which he uses to explain hegemons’ foreign policy decisions, above all the extent to which they go to war to stymie rising rivals’ ambitions, can be employed as well to explain internal policy decisions. Arrighi reminds us that elites and classes within polities derive resources, and have goals that extend, beyond their home countries. Their interactions with the world beyond can only be understood in terms of the world system as a whole, one whose dynamics can’t be reduced to the competition among leading economies traced by Brenner, or described in terms of unfettered markets as claimed by Friedman (Thomas or Milton), or assumed in IMF prescriptions. Arrighi’s model needs to be twinned with an analysis of political dynamics internal to hegemons such as that offered by Prasad (2006) in her comparison of the diverse forms of neoliberalism. She finds that the United States, British, French, and German governments differed in the neoliberal policies they actually were able to implement. Firms were privatized in France under Chirac and in Britain under Thatcher, as were the government-owned Council Houses where 30% of Britons lived, but there was virtually no privatization in Germany or the United States. The main neoliberal policy in the United States was tax cuts, of which there were some in Britain and almost none in Germany and France. Social benefits were cut for the poor in the United States under Reagan but not for the middle class, and social programs remained largely intact in the other three. Deregulation was confined mainly to the United States and to the financial sector in Britain.

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For Prasad, this variability points to the necessity of analyzing the specific policy-making processes in each country. To do that, we must pay attention to changes in political dynamics internal to each country as well as to global capitalist cycles. These diverse policies may all be justified in terms of market fundamentalism, an “ideology [that] insists that the private sector is efficient and dynamic while the state is wasteful and unproductive” (Block, 2008, p. 15), but they are implemented by actors constrained by domestic as well as international politics. Neoliberalism’s particular and variable successes can only be explained if we combine world system analysis with an understanding of domestic political dynamics within hegemons. That is our task in this chapter because while elites and classes are disciplined by, and derive resources from, a global economy and engage in geopolitics, they are organized and act through institutions that still remain national, above all the nation state.

The End of the Cold War and the Socialist Alternative One force that compelled capitalists to forgo profits, and to give their workers better treatment than the balance of class or market forces might have indicated, was fear of the Soviet Union. However preposterous it now seems in retrospect to imagine Soviet Communism as a viable alternative to U.S. capitalism, American elites did fear the appeal of communism or at least of socialism to their workers as the Soviet Union matched and in some years exceeded the U.S. growth rate in the first two decades after 1945 (Ofer, 1987) and demonstrated technological prowess with Sputnik in 1957. Beyond the United States, “there were many intelligent and idealistic people outside the Soviet Union in the 1950s, and even 1960s, to whom [Khrushchev’s] faith [in socialism’s superiority to capitalism] did not seem incredible” (Lieven, 2000, p. 67). Capitalists did not on their own decide to forgo profits or to treat their workers with dignity in order to score propaganda victories against the Soviet Union. Indeed, a significant minority of U.S. capitalists thought even the most modest demands for and governmental concessions on civil rights and social benefits were signs of existing communist power in the United States rather than antidotes to its appeal. (The John Birch Society was the most extreme manifestation of this view). Rather, geopolitical competition affected domestic policy through the efforts of presidents and Members of Congress whose offices spanned the foreign and domestic policy realms. The cohesive elites that set U.S. foreign policy in the postwar

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decades definitely did see the U.S. and Soviet systems in competition for the loyalties of publics in Europe and the Third World. In large part the U.S. government fought for the support of foreign peoples with economic aid, most notably in the Marshall Plan, but also sought to portray the United States in a favorable light. Fear of what Soviet propagandists could do with the dark side of American reality prompted reform measures. Supreme Court Justices and Members of Congress alike discussed civil rights as a way to counter (accurate) Soviet depictions of American racism (Kluger, 1976). President Kennedy as well, in his first and only major speech about civil rights on June 11, 1963, stated: We preach freedom around the world, and we mean it, and we cherish our freedom here at home, but are we to say to the world, and much more importantly, to each other that this is the land of the free except for the Negroes; that we have no secondclass citizens except Negroes; that we have no class or caste system, no ghettoes, no master race except with respect to Negroes?

Similarly, U.S. labor unions and their rights and their members’ benefits were held up as a contrast to the state controlled unions and low living standards of the Soviet bloc. American social benefits, from Social Security old age pensions to the high levels of college attendance were justified by their political sponsors in comparison to those offered by socialist governments, and antipoverty programs were seen as a way to eliminate yet another source of anti-American Soviet propaganda. The collapse of the Soviet Union removed the need to present an egalitarian or socially progressive American reality, or at least image, to the rest of the world. The end of ideological competition on a world scale allowed Margaret Thatcher to contend “There Is No Alternative.” Yet, it is not clear how that ideological shift has affected public policy in the United States. The end of new social legislation, and the U-turn away from the redistribution of wealth and income and the alleviation of poverty that began with the New Deal, can be dated, as we noted above, to the early 1970s, almost two decades before the collapse of the Soviet Union. While the rhetorical rejection of social legislation and egalitarianism intensified, and encountered very little challenge, only after 1989, elites developed their capacities to institute policies that achieved those ends earlier, even while an ideological alternative existed. The collapse of communism mattered little for U.S. ideological debates, since, despite the paranoid fears of a right-wing fringe that spanned the twentieth century from A. Mitchell Palmer to Joseph McCarthy to Robert Welch to Phyllis Schlafly, American ideological arguments, on both the left

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and right, drew almost exclusively upon domestic cultural traditions and engaged hardly at all with ideas and actors from the rest of the world. The fall of the Soviet Union affected domestic U.S. debates indirectly. No longer did American domestic or foreign policy need to be restrained by the concern that prejudice and inequality at home or rapacious capitalism abroad would make the United States appear less appealing in comparison to a rival power. Under those conditions of American ideological hegemony, foreign policy elites could and did withdraw from championing liberal social and economic policies. At the same time, the end of communism allowed the U.S. government and firms to press for market fundamentalism in international agencies and in third world countries whose own governments could no longer play two superpowers against each other. The United States’ capacity to impose the “Washington Consensus” restructured United States as well as world capitalism, reorganizing elites within the United States in ways that we examine below, and that facilitated those elites’ efforts to block domestic social legislation while furthering measures that redistributed wealth and power in their favor.

Challenge From the Left C. Wright Mills, in The Power Elite (1956), identified the bases of elite hegemony and then in his later writings identified sources of challenge to elite rule. Mills argued that the quiet of the 1950s and early 1960s was bought with the exclusion of most Americans from the sites where actual decisions to allocate resources and set policies were made. Mills identified the top officers of major corporations, Federal agencies, and the military as the only men (and they all were men then) with true power to set domestic and foreign policy and to make the investments that determined the future of the national economy. The men of those elites, in Mills view, had two advantages over all other Americans: First, the organizations they headed had so many more resources, including technical expertise, than every other public and private entity. Second, those elites used personal and organizational ties to harmonize their interests, allowing them to make decisions in private without having to submit them to public view or approval. Elite power and consensus, Mills argued, could survive only because of the demise after the New Deal of “voluntary associations … the working class … parties and unions” as effective agents of historical change. Yet, in 1960, only four years after he analyzed the decline of the American public

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into an apathetic and demobilized mass, Mills heralded the emergence “all over the world” of the “young intelligentsia … even in our own pleasant Southland, Negro and white students are but let us keep that quiet: it really is disgraceful” (Mills, 1960, pp. 22 23). Mills, who died two years later in 1962 (the same year in which Kennedy gave his speeches on the end of ideology), did not get the chance to evaluate the efficacy of the mobilizations whose beginnings he recognized. Later authors7 celebrated an array of “new social movements,” and asserted that African-Americans, women, gays, immigrants, students, environmentalists, and others would be able to replace the working class as effective challengers to elected officials.8 (These authors are much more modest, if not silent, about the capacity of new social movements to challenge capitalists and other private interests.) In the realm of personal rights, those movements achieved notable successes, as citizens who identified themselves in terms of race, gender, and sexual orientation, achieved real advances in civil rights and moved toward formal legal equality. Those gains were achieved largely through a combination of mass mobilization and court challenges. The movements have been far more limited in their abilities to make material demands on economic elites or on government at any level, achieving success in those realms only in brief periods. The Civil Rights movement in the 1960s enjoyed support from labor unions and became engaged in electoral politics, providing crucial political support for the antipoverty programs of the Great Society. Yet, almost all that legislation was enacted during a single two-year period, the Eighty-Ninth Congress of 1965 1966. Since then, virtually no social legislation has been enacted in the United States even as minority groups and women have gained enhanced legal rights. The environmental movement stands out as the only progressive force that was able to enact significant legislation after the Great Society, if only for a few years, adding to the environmental laws passed under Johnson with landmark legislative acts and the establishment of the Environmental Protection Agency (EPA) under Nixon (discussed above). It is especially notable in that environmentalists succeeded in forcing legislation that imposed regulations on private firms as well as creating new governmental programs. Since then no significant environmental laws have been passed in the United States. Why did the long-lasting civil rights and environmental social movements produce only concentrated bursts of legislation? How can we explain the sudden, and decades-long, inability of any U.S. social movement to

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extract benefits from government? Social movement theories, which were formulated to explain how those movements recruit supporters and sustain their commitment, are not so helpful in explaining when and how activists succeed in winning enduring concessions from government. Social movement scholars have yet to produce the equivalent for the 1960s and 70s of Theda Skocpol’s (1992) Protecting Soldiers and Mothers, which shows how movements, in her cases of veterans and mothers, found openings within the, then, patronage-based two-party political system that allowed them to win significant benefits, and also how changes in U.S. politics (partly caused by those movements) blocked further expansions of social benefits.9 Similarly, we have a far better understanding of how activists came together to oppose nuclear weapons and the Vietnam War and other U.S. interventions abroad than we do of the short- or long-term effects of their mobilization. It is difficult to disentangle the effectiveness of the peace and antiwar movements from the brute fact of U.S. defeat in Vietnam at the hands of Vietnamese willing to endure massive casualties over many years. To do so requires considering two counterfactuals: If there had been no antiwar movement could the United States have continued to maintain the war for years longer, and if the United States had “won” the Vietnam War would the draft have been abolished and would the United States have been more willing to fight other wars in the years after Vietnam? Even if we never will be able to answer those questions, we can identify the combined consequences of opposition to and defeat in the Vietnam War. The draft was ended, never to be revived. Military spending fell drastically under Nixon, from 45% of Federal outlays in 1969 to 26% in 1975 (OMB, 2009, table 3.1), and the nuclear arms race with the Soviet Union was restricted by a series of treaties. The United States switched to a strategy of foreign intervention that relied upon proxies. In contrast, the peace movement and America’s defeat in Vietnam left only a limited legacy at home. The “peace dividends” that followed both the end of the Vietnam War and the disintegration of the Soviet Union were not used to pay for any new social programs. Vietnam mainly affected American politics by weakening and discrediting Presidents Johnson and Nixon and isolating the liberal wings of both parties, preventing them from building political coalitions that could have provided support for further social programs and governmental investments in economic restructuring. Block (2007), as we will see in the next section, argues that Johnson and Nixon’s policy failures in Vietnam and on the economy, and their inability to contain dissent, undermined business support for liberal policies. The failure to manage dissent also weakened mass electoral support

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for the Great Society and for the Democratic Party. Support for Johnson, the Democratic Party, and the Great Society fell dramatically following the 1965 Watts and 1967 Newark and Detroit riots, and steadily in reaction to antiwar protests (Altschuler, 1990, pp. 38 60; Edsall, 1991, pp. 47 64; Gallup, 2011; Mueller, 1985). As Johnson put it in his inimitable way: “that bitch of a war” took money and attention away from “the woman I really loved,” the Great Society (quoted in Mann, 1996, p. 487). Johnson was correct; in the absence of the war and the splits it opened in the Democratic coalition, he certainly could have further expanded the Great Society and better financed the myriad programs that were established. We cannot study leftist social movements in isolation. Indeed, the dominant explanation for the now four-decade long drought of legislative achievements for progressive social movements is the rise of countervailing pressures from populist and/or corporate groups on the right.

The Rise of the Right The postwar liberal consensus was challenged from the right as well as the left, by the privileged as well as the impoverished and disenfranchised. Recent historical research has uncovered the ways in which backlash politics was framed, organized and legitimated by well-funded organizations that became, by the end of the 1970s, the dominant shapers of Republican Party politics and designers of the Reagan Administration’s policies (Lassiter, 2005; McGirr, 2001; Perlstein, 2001, 2008; Phillips-Fein, 2009, pp. 321 31 offers the best overview of scholarly literature about the right). Those organizations, in turn, were financed by and embodied the concerted interests of much of the economic elite, which had decisively broken from their acceptance of government regulation, labor unions, and social reform. The literature on conservative movements presents the Republican Party’s, and the nation’s, move to the right as mainly a matter of desire and resources. Conservative businessmen, in some tellings aided by social conservatives, decided they wanted to reverse the New Deal and later reforms. They then invested the resources necessary to sustain a long-term strategy of creating foundations and media outlets to develop and propagate conservative ideas. The problem with this analysis is that right-wing opposition to the New Deal existed since FDR’s election, just as businessmen had opposed the reforms of the Progressive era. We cannot explain the post-60s triumph of the right in terms of the desires or far-sightedness

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of rich businessmen, just as we can’t explain the upward redistribution of income by capitalists’ desire to compensate for stagnant profits. There have always been enough businessmen who opposed redistributive and social welfare programs to fund politicians and organizations capable of mounting a challenge to progressive government. What needs explanation is how businessmen’s desires, and the efforts those desires produced, yielded success since the 1970s that they failed to produce in previous decades. One possible explanation can be found in Fred Block’s (2007) contention that business elites turned against expansive government programs because the Johnson and Nixon Administrations failed to win or end the Vietnam War, manage political dissent, and formulate policies that could address economic decline. “It is difficult to exaggerate the cumulative impact on business of the political missteps by Johnson and Nixon between 1964 and 1974. The fact that neither of these two highly skilled and centrist politicians was able to make headway against the multiple problems that the United States faced led to an agonizing reassessment of their assumptions about U.S. politics. They decided, in short, that the ‘vital center’ could not hold and that they needed to move away from their support for big-government politicians of both parties” (p. 18). Block argues that up through the 1960s a large faction of big business supported Keynesian policies and social programs. This faction, in alliance with unions and self-aggrandizing state officials, was enough to defeat right-wing objections to new social programs. Block’s description of the 1960s tracks the picture of elite consensus we drew above. However, his explanation for the shift away from “corporate liberalism” is mainly focused on elite perceptions and ideology: big business was disillusioned by dissension and governmental failures in the 1960s and 70s, and therefore fell for the blandishments of market fundamentalism. We should be careful not to exaggerate the policy shortcomings of the 1960s. Civil rights legislation, court decisions, and Great Society social programs did succeed in their stated aims of eliminating legal segregation and reducing poverty, which fell from 22% of the U.S. population in 1960 to 12% in 1969 (U.S. Census Bureau, 2009). In actuality, dissatisfaction with governmental domestic policy during the Johnson and Nixon Administrations came mainly from popular forces on the left and right rather than from elites. Significant sectors of the population, but not corporate elites, regarded those Administrations’ egalitarian and reformist measures as ideological choices rather than objective applications of legal rules or expert knowledge and, when so framed by political opportunists on the right, including Nixon himself despite his Administration’s efforts to

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desegregate schools in the South and establish Affirmative Action (Wicker, 1991), aroused broader and more sustained, if less intense opposition on the right than did the Vietnam War on the left. Backlash politics combined various elements, and different authors have highlighted particular aspects. To some, including Martin Luther King, Jr., the backlash was a sign “that the roots of racism are very deep in America,” in the North as well as South (quoted in Branch 2006, p. 554). Others view it as a spontaneous reaction to student radicals’ arrogance and cultural obtuseness (Edsall, 1991; Gitlin, 2007), or a challenge to what Warren (1976) believes were the radicals’ liberal allies in government. Others focus on its antifeminist (Ehrenreich, 1983; Faludi, 1991) or religious fundamentalist (Williams, 2010) elements.10 In any case, regardless of their sources, the social conflicts that emerged in the wake of the Civil Rights and other 1960s social movements, and from the Vietnam War, themselves undermined confidence in the capacity of governmental leaders to mobilize mass support and elite consensus behind their objectives. The limits of Block’s political analysis are similar to those of other accounts of right-wing political success. None explain why a strengthened right wing produced the uneven accomplishments of neoliberalism that we noted above. Block accurately (2007, 2008) describes the continuing role of the U.S. state in regulating and subsidizing business, and offering benefits to the middle class, but he offers no mechanism to explain how government drew back in some realms but not others.

THE TRANSFORMATION OF AMERICAN POLITICS If we want to understand what changed and what did not, we must trace the decline of support for progressive government. That decline can be found in a combination of three sources: (1) the movement of business interests that had supported or acquiesced in liberal policies from the 1930s through the 1960s to alliance with their counterparts who had always been in opposition, (2) the decline of mass organizations capable of mobilizing supporters of existing and proposed progressive governmental policies, and (3) a loss of capacity by the government to implement public investment and social welfare programs still supported by the majority of voters. In other words, the right-wing victories from the 1970s into the twenty-first century were not the fruition of strategies set in motion in earlier decades, or the product of a sudden and complete disillusionment on the part of

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corporate liberals, but consequences of a realignment and restructuring of elites and classes that first transformed politics and degraded government in the 1970s and, in turn, made possible further shifts in the capacities of American political actors in both the state and civil society. Political actors are motivated by ideas and interests, but political accomplishments arrive at particular moments because opponents have been weakened, alliances strengthened, and structural impediments cleared away. If we can trace the sources and course of political transformation in the United States since the 1960s we will be able to understand why the right has been able to block further expansion of the state. We also will be able to specify why certain governmental programs have been vulnerable to efforts to roll them back while others have been maintained or even expanded in the decades since the Great Society.

The Structure of Elite Political Action The United States was characterized during the postwar decades of consensus by a dual elite structure, which ensured that local and national elites could limit each other’s attempts to appropriate state powers and offices. National firms, linked together by director interlocks centered on the biggest commercial banks, coexisted with regional and local banks and firms that were shielded from competition with bigger rivals thanks to Federal and state regulations that local elites had the political muscle to sustain through influence on their Congressional delegations and in their state governments (Davis & Mizruchi, 1999; Prechel, 2000). That structure of elite relations has been transformed in recent decades by waves of mergers in sectors such as banking, telecommunications, media, utilities, retail sales, and agriculture (Andrade, Mitchell, & Stafford, 2001; Calomiris & Karceski, 2000) and by the declining capacity of national banks to control firms. U.S. antitrust policy first shifted under Nixon, but the overall process needs to be seen as having a ratcheting effect. Each merger eliminated a firm that had an interest, and a degree of political sway, to block further mergers or regulatory changes that would allow national firms to encroach on local firms’ privileges and markets. As smaller and locally based firms disappeared, intra-industry differences in various sectors over government policy were reduced, creating unified voices that pushed legislative changes to enactment. The banking and telecommunications “reform” acts of the 1990’s had failed to pass Congress in earlier decades due to counter-lobbying by sectors of those industries with

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opposed interests. Mergers resolved those disagreements as secondary sectors were brought within larger firms (or merged themselves to form new large firms) and so came to share the most general interest of their industries. Deregulation then opened the way to further waves of mergers and acquisitions (Andrade et al., 2001), intensifying elite consolidation within major industries. Just as banks were the central actors in the director interlocks that set corporate and governmental policy toward business practices in the 1945 1968 era, so their consolidation and the interacting changes in U.S. financial regulation and legislation epitomized and guided the overall changes in the structure of U.S. capitalism. Bank mergers were not just, or even primarily, a process of national banks buying out smaller local banks. Rather, the Nixon and Reagan Administrations catered to their business supporters, who were for the most part outside the New York and Chicago banking centers, by allowing regional banks to merge and buyout rivals. Reagan’s base in the southern and western states easily explains this tilt. For Nixon, who began this shift, the orientation was somewhat contingent, created by his rival in presidential politics, Nelson Rockefeller’s stranglehold over support from New York bankers, and by the political opportunities in the South opened by the Democrats’ decisive shift toward civil rights in the 1960s. The formerly dominant national banks faced increasing competition in the 1980s and 1990s from the rise of new regional behemoths created by the merger of smaller competitors. That competition and the relaxation of Federal regulations, which both the national and large regional banks demanded, led national banks to focus their resources on more lucrative investment banking, further removing them from active involvement in the management of industrial firms (Davis & Mizruchi, 1999). Nonbanking firms had a widening range of financial firms to which they could turn for financing, epitomized by the rise of “junk bonds” in the 1980s and hedge funds in the 1990s. Bankers thus lost the capacity to manage firms in other sectors, just as Federal deregulation gave bankers the interest and capacity to focus on more lucrative financial engineering and speculation instead. Consolidation within sectors facilitated the capture of government agencies and powers by those elites, narrowing the room for state actors to exercise autonomy, which further reduced “the limited institutionally available means of political mobilization and communication open to a U.S. president or allied policy promoters in the 1990s” (Skocpol, 1996, p. 83). A weakened state, combined with the decline of labor unions, undermined “two of the key forces that had disciplined the business community … The

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consequence of [the commercial banks’ decline] was a paradoxical situation in which business appeared to lack any kind of unifying institution that would be the source of long-term perspective, while at the same time its power seemed virtually unchallenged. This unchecked power, combined with the absence of disciplinary forces, either internal (the banks) or external (labor or the state), may have contributed to the excesses of the late 1990s and early 2000s” (Mizruchi, 2004, pp. 607 608). To sum up, the coordination capacity of elites or capitalists as a class declined. However, the decline in the state’s capacity was greater. This has allowed individual firms and industries or small groups of capitalists to exercise more autonomy and pursue their interests with less interference from the state or from rival elites than had been the case in the decades before the 1970s. Enron, the Texas-based energy firm that collapsed into bankruptcy in 2001 after its accounting fraud was revealed, is emblematic of individual firms’ autonomy. Enron, in addition to lying about its revenues and profits, took advantage of the deregulation of California’s electricity market to manipulate supplies, allowing it to charge spot prices of up to twenty times its cost. Enron did not just cheat ordinary consumers, but bilked large firms as well, of amounts that totaled more than 10 billion dollars.11 These other capitalists were unable to discipline Enron and stop the fraud because that firm had ties to newly-elected President George W. Bush and to key members of Congress that were strong enough to allow the firm to block investigations or regulatory relief at both the Federal and state levels. Only Enron’s bankruptcy ended its manipulation of the California energy market. (Eichenwald, 2005 is the best account of Enron). Elites’ autonomy, which verges on autarky, is felt in their capacity to block new social programs that threaten their hold over existing budget items or their ability to profit by providing equivalent products in the private sector. President Obama recognized this reality when he designed his health care legislation. His plan protects the interests and profit opportunities of every private industry involved in selling health insurance and medical services and supplies. Indeed, his recognition of insurance firms’ power led Obama to include the mandate that all Americans buy private health insurance (except those who qualify for government programs). In essence, Obama accepted a mandate that quickly aroused popular revulsion in return for the insurance firms’ support. Without that deal, Congress never would have enacted the legislation. United States fiscal policy and budget priorities are increasingly set by such deals, which reflect the power of consolidated corporate elites over politics and policy. This is different from the unified national elites of

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the 1945 1968 period, described by Mills, Domhoff, and others. The contemporary elites do not coordinate policy across industries. Rather, they use their leverage over legislators and regulators to win privileges that can best be described as autarkic. Their goal is not to shape the overall economy or to formulate programs and policies with national reach. Instead, they seek to appropriate resources from the Federal, and state and local, governments, and to secure laws and regulations that protect their particular interests and profit opportunities from competitors, both foreign and domestic, and to undermine the rights of their customers, clients, and employees. As a result, a continually growing portion of the Federal budget is allocated to the long-standing claims of existing elites that also enjoy the right to shelter portions of their incomes and assets from taxation. Current examples include: (1) subsidies, water rights, and access to Federal lands for the overproduction of agricultural commodities whose prices then are propped up with government grants and loans, (2) the commitment of a sector of the Federal budget to a Medicare drug plan that pays prices significantly higher than anywhere else in the world for drugs developed mainly in Federal or university labs or for copycat drugs designed to extend patents with no medical advantage over older generic drugs (Cockburn & Henderson, 1999; Drake & Uhlman, 1993; Skocpol, 1996), (3) free access to Federal lands for mining, ranching, and logging with no obligation to pay for environmental effects which are then borne by public funds and health, and (4) Federal tax and direct subsidies for the export of technology and capital to foreign subsidiaries and customers (Silver & Arrighi, 2003, pp. 347 349). Together these claims and immunities ensure either growing deficits or, even in times of fiscal stability as in the late 1990s, an inability to finance new public projects for either infrastructure or the development of human capital. The particular combination of unity within each corporate sector at the same time as national banks have lost the coordinating role across regions and sectors through director interlocks explains the lack of corporate tax cuts in the Federal legislation of 2001 2003, and the relatively low level of corporate tax cuts in the 1981 legislation passed earlier in this process of elite transformation. Lobbying for the 2001 tax cuts was spearheaded by organizations in which large businesses did not dominate, and larger businesses increasingly focus their efforts on regulatory provisions and budget items specific to their sectors rather than on general tax provisions (Graetz & Shapiro, 2005). The new structure of elite autarky also allows individuals to loot their own firms as well as the state. Managers took some of their firms private

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and increased their share of publicly traded firms through stock options, which amounted to “one fifth of nonfinancial corporate profits (net of interest) [in 1999] … Whereas in 1992, corporate Chief Executive Officers (CEOs) held 2 percent of all equity outstanding of U.S. corporations, by 2002 they owned 12 percent” (Brenner, 2003, p. 299). The financial crisis of 2008 was due, in large part, to decisions by bankers and other financial sector executives to take risks with their firms’ funds that served to multiply the executives’ incomes at the cost (realized in 2008) of their firms’, and the entire financial systems’ viability. The reforms since the crisis, most notably the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act, have only slightly limited executives’ ability to engage in such self-serving behavior.

Mass Organizations Mass membership organizations in the United States underwent a transformation that was almost the structural inverse of the one that made American elites decentralized and autarkic. In contrast, mass membership organizations and unions lost efficacy as they became highly centralized and their local chapters lost autonomy. Skocpol (2003, 2007) finds that, prior to World War II, the largest U.S. membership organizations were cross-class in membership and had local chapters from which leaders were elected and could rise in a national hierarchy. At the local level the organizations “combined social or ritual activities with community service, mutual aid, and involvement in national affairs. National patriotism was a leitmotif” (1999, p. 465). Such organizations were highly effective at mobilizing members across the nation to lobby for government programs that addressed concerns that members raised at the local level. A prime example is the Servicemen’s Readjustment Act of 1944 or G. I. Bill, which provided subsidized home mortgages, unemployment benefits, and free university educations for returning veterans. This bill was the first significant piece of social legislation since 1937 and came long after the New Deal coalition lost control of Congress. It was pushed primarily by the American Legion, a veterans group that became notorious during the Vietnam War for its ultrareactionary political positions. The plans that Congress proposed to address the millions of soldiers who would be demobilized, and thrown onto the housing and job markets, with the end of the war were regarded as inadequate by the veterans who had suffered the consequences of a similarly

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weak program at the end of World War I. Those veterans, who met at American Legion halls to socialize, discussed the issues and formulated a stronger program. Veterans’ organized presence in every Congressional district allowed them to pressure Congress to approve the Bill. This was legislation from the bottom-up. The mass membership organizations lost potency in the second half of the twentieth century as women went to work, sex-segregated social activities lost favor, and the number of veterans declined. They were supplanted by new sorts of organizations staffed by professionals and reliant upon contributions solicited through the mail (and today on the Internet). Those organizations do not call on members for anything but money and so their proposals have little resonance with their members. Since the members are not mobilized, elected officials feel free to ignore them and instead cater to the desires of their largest financial contributors who in the United States are mainly investors and officers of large corporations. A similar process occurred in labor unions. Locals, which were the site of organizing drives, strikes, slowdowns, and other actions against employers, and mobilizations for political campaigns, increasingly lost autonomy to the national unions into which they were amalgamated. Locals lost power for a number of reasons. Some were the same that affected mass membership organizations: the professionalization of leadership, the decline of ties among members based on race, ethnicity, and residency in homogeneous neighborhoods and communities, and the weakening of sex segregation and male solidarity. A shift in governmental policy was as important. The Taft Hartley Act of 1947 made it possible for firms to sue unions for damages from losses during wildcat strikes. This gave national unions a powerful incentive to discipline and control locals, which over decades sapped locals’ autonomy and weakening militancy among members (Roediger & Foner, 1989, pp. 266 267). All this matters, not because we pine for a lost world in which cohesive ethnic groups could practice bigotry and women were confined to the role of helpmate, but because U.S. politics is constitutionally structured to reward localized power. Members of Congress are elected from districts or states, and they respond to those who hold power within a state or district or to entities that have a significant economic or organizational presence across a number of districts. From Henry Jackson of Washington State who served in the 1950s and 1960s as the “Senator from Boeing,” to Lloyd Bentsen of Texas who ran against George H. W. Bush for the Senate in 1970 in a race to become “errand boy for the oil companies,” to Charles Schumer of New York who ran interference for banks and hedge funds

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from the moment he arrived in the Senate in 1999 (and for two decades before that as a Representative), industries based in locales have had their Congressional champions and lackeys. When and where unions were strong they had their particular advocates, such as the Michigan delegation’s advocacy for auto unions or New York’s for garment workers’ unions. As unions and membership organizations lost the capacity to mobilize supporters in localities, they lost their leverage over Representatives and Senators (as well as over state legislators). Elites, whether organized through banks and interlocking directorships, or in autarkic firms, have leverage at the local level, and that leverage is magnified as they face ever-weaker worker and popular organizations. Business always has contributed far more money to congressional campaigns than have unions and liberal organizations. The advantage that liberal groups, and especially unions, have is in providing campaign workers. As local organizations lose resources and surrender initiative to national headquarters, they are ever less able to pressure legislators between elections when laws and regulations affecting them are under consideration even as unions retain the resources and organization capacity to mobilize members to work on campaigns.12 It is in the ongoing work of lobbying that elites, which can marshal contributions, and who pay attention on a continuing basis, have the advantage. When elites and popular forces were more evenly balanced in the attention they brought to government and in their ability to mobilize supporters, Members of Congress also had to balance their votes and the pressures they placed on executive agencies to satisfy both elite and popular constituents. As popular organizations have lost the capacity to educate and mobilize their members, elites have achieved close to a monopoly of influence in Congress and within the executive branch.

Governmental Capacity Citizens who turnout to vote once every two years at best, and whose votes for one party or the other are open to myriad interpretations, have ever less influence over governmental policy in the absence of popular mobilization or continuing organizational presence and pressure on their Members of Congress at the local level. Larry Bartels (2008) argues that elections still are decisive because the Democratic and Republican parties have diverged ever more sharply on key economic issues such as the minimum wage and the inheritance tax.

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Bartels makes two major arguments. First, voters focus on the incumbent party’s economic record in the year before a presidential election rather than over the whole four-year term. This favors Republicans because they attempt to concentrate growth in the pre-election year. (Bartels is unable to determine if this represents a higher capacity on the part of Republicans at economic manipulation for electoral ends, or if this is a natural outgrowth of the two parties’ divergent policy preferences, which leads Democrats to push for growth from the start to provide jobs and rising incomes for their mass base, but is hard to sustain at a high level for four years, vs. the Republican’s interest in curbing inflation which leads to recession early in their term and then recovery at the end.) Regardless, this favors Republicans and allows them to win more presidential elections than they would if voters focused on the whole four years, a time frame over which Democrats have consistently produced better results. Bartels second argument is about the policy consequences of voters’ (mistaken) preference for Republicans. He argues that inequality, which he measures as “the ratio of incomes at the 80th percentile of the income distribution to those at the 20th percentile” (p. 35) has gone up under each Republican president since 1945, but has remained stable under each Democrat except for Carter. If Bartels is correct, then the decline of unions and membership organizations and the transformation of the structure of elite relations in the United States matter little to the outcomes of elections. Nor do those structural changes explain policy outcomes, which for Bartels reflected deepseated and increasingly polarized preferences by professional politicians in the two parties. A similar logic propels Thomas Frank’s (2004) argument in What’s the Matter with Kansas? How Conservatives Won the Heart of America. Frank contends that Republicans win elections, not because voters misperceive the two parties’ economic performance, but because religiously addled fundamentalist Christians vote against their self-interest in an effort to ban abortion or to strike back at “elites” whom they define as graduates of prestigious universities or practioners of decadent lifestyles rather than the economic elites who are looting Kansas and the rest of the United States. Block (2007) sees religious conservatives as playing a secondary role in the Republican’s rise to power since 1980, but argues that the religious right plays an increasingly decisive role in setting policy, although Block’s only examples are Supreme Court appointments and support for Bush’s decision to invade Iraq, neither of which are incompatible with the economic elite’s interests and agenda that we highlighted above. The Great U-Turn then appears in Bartels’ (and Frank’s) analyses as a result of voter misperceptions that turned elections. However, Bartels’

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argument is unable to explain other data that he presents. He shows that incomes in all percentiles rose almost equally (except for the top 5%, whose incomes rose more slowly) from 1947 to 1974, a period which includes Republican Presidents Eisenhower and Nixon. After 1974, incomes were stagnant for the bottom half of the population, and only grew substantially for the very top percentiles (Bartels, 2008, p. 9). These data align closely with the path-breaking work of Piketty and Saez (2007 2012, figure 2), who find that the share of national income received by the top 0.1% was stable from 1960 to 1980, and rose continuously since then, with the sharpest increases under Clinton. That top group’s tax rate declined mainly under Carter and Reagan (Piketty & Saez, 2007, table 2). These data allow us to conclude that even if the Democrats had won more presidential elections after 1974, it would not have had a substantial effect on the dramatic increase of income and wealth inequality since then. Nor does Bartels offer any evidence that Democratic victories would have produced significant advances in social benefits, since the years when Democrats did control the presidency and Congress, 1977 1980 and 1993 1994, yielded no new social programs, not a single one. Any explanation that focuses on elections and differences between the two parties masks the dramatic shift of both parties after the early 1970s away from policies designed to maintain each stratum’s share of national income, which included high tax rates on the rich, and a commitment to expanding social programs. Only the sort of structural analysis we offered above can account for (1) the capacity of elites to appropriate resources from publically-held corporations as well as from the state, (2) the dramatic decrease in regulation of firms, (3) declining investment of public funds in education and infrastructure, and (4) the inability to legislate new social programs on any terms but ones that allow private firms to maintain or increase their claims on public resources (as demonstrated in both Bush’s Medicare Part D for pharmaceuticals and in Obama’s health reform).

CONCLUSIONS We now are in a position to reach some conclusions about what changed and why in U.S. politics from 1960 to the present, and to draw out the implications of those changes for U.S. global dominance. The ways in which the U.S. state and elites and classes in civil society were transformed, in their capacities and in their relations with one another, cannot be

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explained as a direct result of the workings of the global capitalist system or as successful responses by a coherent capitalist class to the various crises that afflicted the United States since the 1960s. The variations we saw in the sorts of neoliberal policies adopted by states does not correlate with those countries’ positions’ in the world system. In the United States, neoliberal polices were adopted after the capitalist class or business elite became divided and fragmented. We saw that capitalists’ rivals the state, unions, and other popular organizations of the left became weaker in the decades following the 1960s. The ability of any of those actors to push through and institutionalize their desired policy initiatives declined dramatically. This is seen in the almost total lack of any new governmental programs since the 1960s. Yet, what elites achieved in the face of decisively weakened popular rivals was not a coherent neoliberal program. How then can we explain the demise of the liberal consensus expressed by President Kennedy, which was institutionalized in a structure of state regulation, relations among business firms and with government and unions, and commitments to maintaining the power of the national government to sustain global geopolitical dominance and to foster economic growth and social progress at home within circumscribed limits? What accounts for elites’ ability to appropriate a dramatically rising share of wealth and income in the United States in the forty years since 1972, and to block the establishment of any new social programs, if during those decades those elites became divided and incapable of collective action? This chapter answered those questions by looking at the interaction among three changes: (1) the fragmentation of elites, (2) the disorganization of mass groups, and (3) the decline in state capacity. In other words, we cannot explain the shift in policies, or the upward transfer of resources to the elite, in terms of successful collective action on the part of one class or elite in the face of a lack of collective capacity by another class or nonelites. Instead, if we look at the long sweep of U.S. history from 1945 to 2008 we see a transition from one era of political stasis to another. Liberal consensus was replaced by autarky. The growing wealth of the top 1% (or top 0.01%) came from the capacity of those few actors to elude or manipulate the atrophying regulatory power of the state and loot the firms they ran, often at the expense of the legal shareholders as well as of the firms’ workers and customers. The elite’s political action in recent decades has been largely negative: not only have they blocked progressive reforms, they have been able to win tax breaks, regulatory exemptions and subsidies specific to themselves rather than for any collective class or institutional interest.

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This chapter does not offer a full-fledged analysis of U.S. hegemonic decline.13 Rather, this is a first step in that larger project. By tracing the transformation of internal U.S. politics and state capacity, we are in a position to then construct an explanation for the policies, and absence of policies, that have hampered U.S. geopolitical and economic competitiveness in recent decades. Hegemons must be able to mobilize resources to meet challenges from rivals abroad and to make investments necessary to maintain technological, productive and financial dominance in the world economy. American elites’ ability to appropriate resources from the Federal government (in tax reductions and subsidies) has drastically reduced the funds available for international and domestic investment on the part of the state. Elites’ capacity to dominate the sectors of state regulatory power of concern to them has fragmented policy-making, preventing the U.S. government from adopting new policies that can offer a coherent response to trade deficits, the rise of foreign competitors in one industry after another, the relative decline of educational and training levels among U.S. workers, the accelerating degradation of U.S. infrastructure, global warming, and other challenges to U.S. hegemony. Elite autarky also undermines the United States’ state ability to reshape the architecture of the global economy to ensure continued U.S. hegemony. We discussed above the U.S. government’s efforts to raise and lower the value of the dollar. Increasingly, those decisions are being made, not to further general American dominance of international trade and production, but in the service of the specific interests of narrow elites, drawn mainly from the financial sector, that have leverage over the particular Federal agencies that set monetary policy. U.S. trade policy, which over multiple rounds of General Agreement on Tariffs and Trade (GATT) negotiations from the 1940s to the 1980s was designed to increase access broadly for firms from all the competitive sectors of the U.S. economy (and to protect, at least in part, the domestic markets for firms from noncompetitive U.S. industries), has since the 1990s increasingly focused on winning privileges for the financial, pharmaceutical, and entertainment sectors at the expense of other industries. Successful autarkic elites distort governmental decisions in the global as well as domestic arena, thereby further distorting the economy and undermining global competitiveness for other industries, which weakens one of the pillars of U.S. hegemony. Thus, just as elite autarky combines with the demobilization of mass organizations to paralyze domestic U.S. politics in ways that block efforts to limit inequality or promote investments necessary for U.S. economic dominance, the same structure handicaps the U.S. state’s efforts to rework

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global economic relations in ways that could sustain U.S. hegemony. To the extent that U.S. hegemony, like that of previous dominant powers, is a construction of a powerful state able to devise and implement a coherent strategy on a global scale as well as domestically, rather than the lucky outcome of world systemic cycles, the paralysis of U.S. politics will ensure the end of American global hegemony.

NOTES 1. In another speech that year President Kennedy developed this line of thinking further: “Today … the central domestic problems of our time are more subtle and less simple. They do not relate to basic clashes of philosophy and ideology, but to ways and means of reaching common goals to research for sophisticated solutions to complex and obstinate issues. What is at stake in our economic decisions today is not some grand war-fare of rival ideologies which will sweep the country with passion but the practical management of a modern economy. What we need are not labels and cliche´s but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead … political labels and ideological approaches are irrelevant to the solutions … the problems of … the Sixties as opposed to the kinds of problems we faced in the Thirties demand subtle challenges for which technical answers not political answers must be provided” (quoted in Rousseas & Farganis, 1963, p. 359). Kennedy’s views paralleled (though there is no evidence he read it) those of Daniel Bell in The End of Ideology (1960). 2. The bipartisan faith in Keynesian “fine-tuning” of the economy encompassed tax increases as well as cuts. The Revenue and Expenditure Control Act of 1968, which added a 10% surcharge to the Federal personal and corporate income tax, was approved 64 16 in the Senate, with 31 Republicans voting yes (http://www. govtrack.us/congress/vote.xpd?vote = s1968-468) and 268 150 in the House, with 114 Republicans voting yes (http://www.govtrack.us/congress/vote.xpd?vote = h1968-357). The most prominent votes against the surcharge came from opponents of the Vietnam War, like Senator George McGovern, who otherwise favored more generous social programs financed through higher taxes. 3. OSHA passed Congress in 1970 after business interests defeated a stronger bill proposed by the Johnson Administration in 1968. Unions thought that an independent OSHA would be more vulnerable to business pressure than if its regulatory powers had been lodged in the Department of Labor, as Johnson had proposed. Those fears have proven justified in the subsequent forty years. Nevertheless, the passage of OSHA was possible because unions in 1970 still had a level of political power that forced business interests to compromise by supporting Nixon’s OSHA bill. 4. Western (2006, p. 29) shows the full effect of the prison boom on the cohort of black men born from 1965 to 1969. In 1999, 22.4% of those men had been imprisoned, while only 12.5% had received bachelor’s degrees.

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5. Naomi Klein (2007) argues that some of these crises are deliberately induced to shock citizens and their governments into acquiescing to policies they never would have accepted before the crisis dulled their capacities for analysis and resistance. In cases where crises had natural causes (e.g., Hurricaine Katrina in New Orleans), elites took advantage of the stunned vicitims’ (temporary) political quiescence to institute neoliberal policies elites previously had not been able to implement. 6. Harvey’s careful analysis of spatial fixes, unfortunately, is reduced in his discussion of neoliberalism to a set of strategies by which capitalists exploit other classes, not a process which is limited by, and only slowly and partially alters the structure of world relations among capitalists as well as against other classes. 7. Laclau and Mouffe (1985) were the first to develop a full-fledged theory of how and why class conflict has largely given way since the 1960s to New Social Movements whose participants are drawn together by their shared gender, racial, ethnic, sexual, or generational identity, or by their shared concern for nonclass issues such as the environment and human rights. Claus Offe (see 1985 for a concise statement) and Ulrich Beck (e.g., 2006) have produced a seemingly endless outpouring of books and articles that make sweeping and confident claims for the transformative power of new social movements based on impenetrable theoretical carapaces rather than any serious and sustained empirical research. Pichardo (1997) offers a summary and critique of the New Social Movement literature. Revealingly, Western European studies of new social movements, such as Melucci (1989) and Kriesi, Koopmans, Duyvendak, and Giugni (1995), are written with a self-confident tone reflecting the authors’ double certainty that those movements are replacing earlier class-based organizations that focus their efforts on the state and workplace and that the new movements will be able to supercede the transformative accomplishments of unions and parties. In contrast, American authors more often temper their hopes with realistic appraisals of the limited achievements of new social movements in the United States and clear analyses of the structural and cultural forces in the United States that can block future gains. Clawson (2003) enumerates many of the obstacles to a “fusion” in the United States of labor unions with movements based on race and gender. However, he does contend that those new movements have more potential to invigorate labor than do the existing unions themselves, and therefore believes there is a real possibility of a sudden “upsurge, leading to a period where labor’s numbers and power triple or quadruple in a short period” (2003, p. 199). Kelly (2001) notes that “broader systemic imperatives … combine with American ideological traditions and institutional constraints in such a way as to particularly handicap the new forms in the United States” (p. 5). Kelly outlines ways in which new social movements could overcome those constraints, although, like Clawson, she is less clear on the conditions that would allow for a movement upsurge today on the scale of old social movements’ successes in the 1930s and 1960s. 8. Wood ([1986] 1998) argues that the new social movements are a consequence of the defeat of the socialist left, and therefore are a dead-end rather than the basis for a successful new challenge to capitalism. 9. Piven and Cloward (1971, 1977) identify ways in which the Civil Rights movement, urban riots, and the welfare rights movement of the 1960s all led to voting rights and increased welfare benefits. Unfortunately, they have almost nothing

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to say about how popular mobilizations affected, for better or worse, future prospects for progressive politics and reform. Indeed, they look to future protests and disorder as the sole significant predictor of further political and social gains for African-Americans and the poor. 10. Williams argues that the Christian right gained power in politics by identifying issues that could bridge divisions between Northern and Southern churches, and between evangelicals and fundamentalists: first, anti-communism in the 1950s and 1960s, and then social issues. In Williams’ history Nixon emerges as the key figure in the rise of the Christian right and its position in the Republican Party. Nixon’s focus on “law and order” in his 1968 presidential campaign provided a way to focus on social issues in a way that appealed to religious conservatives who previously had been divided on civil rights and on religious doctrine, and provided the basis for their unity even after the end of the Cold War eliminated anti-communism as a unifying issue. 11. The final amount was never determined, and Enron’s bankruptcy makes it impossible to determine how much of the total overpayments by California consumers and firms would have ended up in Enron’s coffers. The absence of a comprehensive public investigation of this scandal, either in California or at the Federal level, is itself an indication of the lack of state regulation or of a collective elite capacity to discipline rogue firms. 12. I have not been able to locate any research that compares over time U.S. unions’ capacities to mobilize members or other voters at election time for Democratic candidates. This would be a worthy topic of research for a social movements or labor scholar. 13. This chapter has nothing to say about the United States’ declining capacity to win wars or to impose its will on other nations through non-military forms of power. I leave for future analysis the question of the extent to which the factors identified in this chapter apply to the United States’ geopolitical as well as economic position.

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CONVERGENCE-2, OR THE FATE OF OTHER SUPERPOWER Georgi Derluguian ABSTRACT Past predictions of convergence between American capitalism and the Soviet planned economy optimistically assumed that advanced industrial society must also become democratic and pragmatic in its choice of economic policies. The Soviets had to become more capitalist. All such predictions proved only partially correct. Russia did become capitalist after a hugely destructive collapse, which obliterated the democratic demands of the 1960s in deindustrialization and enormous inequalities. Only ideological prejudices, reinforced in 1989, prevent most observers from seeing that America and Russia did in fact converge in a similar pattern of socioeconomic crisis. The outcomes of their crisis sequences could seem different in 2012, but these might not be the final outcomes. Keywords: USSR; communism; convergence; superpower; revolution; 1968

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Before 1989 the coming convergence between American market capitalism and the planned economy of Soviet communism was virtually conventional wisdom, broadly shared by enlightened elites on both sides of Cold War divide.1 Among Western thinkers who advanced various convergence theories we find public intellectuals of a heft and stature which we can hardly imagine in our present epoch that lacks the power of conviction and elevated structural platforms for the likes of John Kenneth Galbraith, Jan Tinbergen, Raymond Aron, Pitirim Sorokin, or C. Wright Mills. On the Soviet side the idea of convergence enjoyed unofficial acceptance, akin to the Ancien Re´gime free thinking among the higher clergy and aristocracy: the insider bon ton of the cardinals and courtiers who had long become atheists at heart. A good example was the head of the USSR State Committee for Science and Technology, and at the same time member of the Club of Rome, Academician Dzermen Gvishiani. Emblematically, he also happened to be a son of Stalin’s secret police commissar and son-inlaw of the Soviet reformist Prime-Minister Alexei Kosygin. Convergence was evidently the guiding belief of the last General Secretary Mikhail Gorbachev himself. After 1989 any talk of convergence abruptly disappears. The new focal points of public political discourse were expressed in the best-selling titles of Fukuyama’s liberal optimistic End of History (1992) and Huntington’s darker prediction of the eternal Clash of Civilizations (1996). The supply of definitions for the post-Cold War period, however, did not end there. In the following two decades we would be intermittently alerted to the brave new knowledge economy, risk society and network society, new imperialism or multipolarity, the age of terror, and the many versions of postmodernity and globalization. The multiplication of short-lived and intellectually infertile fashions could itself serve an indicator of the lack of anything substantially new arriving after the premature end of the twentieth century in 1989. The defining condition of the early twenty-first century seems more negative than positive; it is the subtraction of previously defining structures rather than the addition of anything completely novel. The key disappearances registered in the realms of politics and ideology: the communist bloc or the erstwhile “Second World,” but also the concomitant social democratic reformism in the West and nationalist developmentalism in the Third World. The collapse of political limitations to capitalism resulted in a huge concentration of all forms of power economic, ideological, military, and state in the hands of western elites. The prize for subaltern elites in the “emergent market economies,” i.e., the countries that had abandoned their

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noncapitalist ideologies and political practices, were the vast loot of privatized wealth, although that came at the price of severely damaged political prestige and military strength. Let us follow in this chapter the analytical approach of Richard Lachmann (2000) and try to explain how communist elites become capitalists in spite of themselves. It is not a particularly encouraging story. Its central puzzle is the failure of the elites to act in a self-disciplined and collectively rational fashion that in the Soviet Union (though not in China) produced more collapse than transformation. Our analysis will proceed in two stages. We first revisit the pre-1989 arguments regarding the projected futures of communism. Next we shall see which predictions better corresponded to what we now know about the outcomes of the communist episode in twentieth-century history. This is far from a pedantic exercise. The astonishing turn of Soviet affairs from superpower to a failed state gives us an analytical mirror for seeing more clearly America’s own brush with the crisis in the 1970s and how American elites managed their own escape. Moreover the Soviet trajectory contains in its end phase an important lesson alerting us to the possibility of collectively destructive panics among elites blinded by their own ideology and scrambling to protect their assets in the face of complex historical choices.

PREDICTIONS AND MISPREDICTIONS Convergence theories in their Cold War heyday came in several distinctly political varieties. The nonMarxist American leftists such C. Wright Mills (1958) critically equated the United States and Soviet Union as oppressive bureaucratic powers driven by the interests of their military-industrial complexes. This angry double rejection would animate the anti-war radicalism in the following decade. The mainstream anti-communists like W. W. Rostow (1960), Raymond Aron (1969), and Daniel Bell (1973) tended to balance their ideological rejections of the “totalitarian” USSR with admissions that the Soviets could not avoid the rationalizing imperatives of modernization. Therefore, a judicious containment of communism would soften the Soviet bloc, making it in the longer run less hostile and more like the West in the pursuit of modern values and lifestyle. The unprincipled anticommunist Richard Nixon, facing his own imperatives of political survival, in the early 1970s turned this ambiguous attitude toward the Soviet bloc

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into the policy of superpower de´tente. The leading liberal reformers John Kenneth Galbraith (1958) and the Dutch laureate of the first Nobel prize in economics Jan Tinbergen (1964) were by far the most optimistic. They saw the erstwhile extremes of American free markets and the Soviet central planning gradually shifting toward the golden mean where the shared rationality of advanced scientific knowledge would bring peace and prosperity for all. The works of Galbraith and Tinbergen were translated into Russian and eagerly discussed with only pro forma Marxist-Leninist caveats and criticisms. All three varieties of convergence theories, advanced by the highly intelligent men living amidst the intense atomic fears and big hopes of their times, certainly reflected facets of reality. Yet each interpretation singled out for its purposes a different faction of Soviet elite therefore ignoring the complexity of factional conflicts among the top brass of military industrial complex, the Stalinist ideological custodians, and technocratic modernizers. These one-sided analyses led to unabashedly partisan hopeful or alarmist extrapolations of the kind that the social science methodologist Arthur Stinchcombe (1982) angrily branded the “softheadedness on the future.” The same fully applies to the ultimately correct but entirely ideological prophecies of the end of Soviet Union proffered from the far right or the far left. Their source was not a reasoned theory but rather the moral conviction that the wicked Soviet system must perish. There also existed, of course, the Cold War expertise of professional Sovietologists whose craft was essentially in deciphering the minute indications of factionalism in and around the Kremlin. The Sovietologists, however, were torn by the conflicting pressures of supplying reasonably realistic estimates to their governments and at the same time conforming to the increasingly formalistic methodological criteria of social science disciplines that were rapidly expanding and professionalizing during the post-1945 decades. The earlier Sovietological interpretations guided by the profound intuitions and the extraordinary personal experience of the wartime generation of scholars and e´migre´s carried many striking insights (as well as a load of ideological sentiments). Some of the most embarrassing mispredictions in Soviet studies came from the later, more abstract analyses imitating the contemporary intellectual fashions in American political science. There existed important exceptions, above all the pathbreaking, forceful and clear statements made in the articles of Valerie Bunce (1985, 1993). But they remained generally overlooked evidently because the field of Soviet studies was considered a form of political punditry, and perhaps also because the pundits were imagined as old males.

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Macrohistorical sociologists, a small elite minority in their own discipline, proved among the best equipped to argue in a consistently theoretical manner about the nature and limits of the Soviet historical experiment. Their names are well known in social sciences though mostly for the works unrelated to Russia: the Hungarians, Iva´n Szele´nyi and George Konra´d (1979); the Americans, Immanuel Wallerstein (1973, 1974); Arrighi, Hopkins, and Wallerstein (1992) and Randall Collins (1978, 1995); and the French historical demographer, Emmanuel Todd (1979). Revisiting their arguments seems especially important now because three of those scholars (Collins, 1993; Todd, 2006; Wallerstein, 2003) later also theorized the limits to American power and capitalism itself. Emmanuel Todd cited the worsening demographic indicators to show that Soviet developmentalism had exhausted itself and entered a period of stagnation. In the 1970s Soviet demographic and economic trends began worrying Western as well as the top Soviet experts, including those writing confidential assessments for the Politburo. Emmanuel Todd, however, expressed these worries in trenchant prose supported by an impressive trove of empirical data. Moscow’s growing awareness of “stagnation” was surely a major political factor prompting Gorbachev’s perestroika. Randall Collins formulated a very different prediction of Soviet collapse derived from his mathematical model of the Weberian theory of state geopolitics. The model suggested that the Soviet imperial overexpansion since the mid-twentieth century had been delivering to Moscow diminishing returns and escalating costs. This dynamic pointed to the likelihood of the USSR’s sudden disintegration in two potentially meshing ways: a “showdown” war against its American rival coming after a protracted tense confrontation and multiple rebellions among the non-Russian satellites fleeing away from their bankrupt imperial center. This analysis ran against the contemporary pessimism regarding the economic and superpower prospects of America, while the USSR still appeared to many a robust and mighty expansionist state. The predictions of Randall Collins sounded a lot like the much flashier earlier pamphlet of the Soviet dissident historian Andrei Amalrik (1970) Will the Soviet Union Survive until 1984? The claims of both Amalrik and Collins were dismissed by expert opinion as outlandish and dilettante. It did not help that Randall Collins could not responsibly attach any specific date to his prediction. He only vaguely estimated that the USSR would disappear from either war or internal ethnic separatism some time during the coming decades. Andrei Amalrik was more akin to the American scholarly dissidents Noam Chomsky and Chalmers Johnson rather than the East European

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remonstrating moralists such as Aleksander Solzhenitsyn or Va´clav Havel. Amalrik actually had an implicit materialist theory behind his extremely provocative title question. His angrily merry manifesto of revolutionary catastrophism, coming out a whole decade before Todd or Collins, in fact specified the causal chains running through the economic-demographic and geopolitical models of Soviet collapse. First, Amalrik argued that the militarized Soviet economy could no longer sustain the rates of growth achieved in the past. Meanwhile, Soviet citizens were no longer prepared to accept the wartime rationing of consumption. Spontaneous outbursts of economic, civic, and nationality protests were indeed spreading across the USSR during the 1960s, as courageously documented by Soviet dissidents including Amalrik himself at the risk of imprisonment. Amalrik then puts the totalitarian theory on its head by arguing that censorship and deeply ingrained ideological conformism were preventing the Soviet bureaucratic nomenklatura from getting the correct information and alternative policy ideas. Ironically, the Soviet elites were reduced to secretly consulting the dissident pamphlets. In this regard Amalrik cited his personal experience of interrogations by the surprisingly polite and curious, if also exasperated KGB (Committee of State Security, Komitet gosudarstvennoi bezopasnosti, in Russian) officers. Amalrik detailed his theoretical intuitions in a scenario where the Soviet leaders, faced with intractable socioeconomic problems, loss of legitimacy, and ideological blockages of their own making, gamble on using their military-technological advantage in a war against the less developed Maoist China. In this hypothetical war, China would have to rely on the asymmetrical strategy of accepting massive human losses and waging a patriotic guerrilla resistance against the technologically superior but less numerous invaders. In another historical irony, Maoist China would meet the Soviets with same kind of response that the Soviets at an earlier stage of development had used to defeat the Nazi armies. The West, for its own interests, would be supporting the Chinese just as America had supported Stalin against Hitler. The Soviet invasion thus turns into a quagmire paling the American error of judgment in Vietnam. In effect, Amalrik predicted the Soviet invasion of Afghanistan and even correctly guessed the year, 1979. Incidentally, Amalrik was also correct in sensing that Soviet Central Asia would continue with the communist pattern of rule long after its collapse in Moscow, just as Byzantium had continued its imperial pattern despite the fall of Rome. This ran against the bold claims of a particular school among the Western specialists on Central Asia, culminating in the political

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bestseller of the French conservative eminence He´le`ne Carre`re d’Encausse (1978), that the Soviets were directly endangered by the spread of Islamic revolution from Iran. This old controversy still has some analytical interest. In the 1990s Islamic insurgencies sprang up in the former Soviet Central Asia and the Caucasus, but these were the Sunni Salafists rather than the Shiites and their emergence was clearly the consequence, not the cause of Soviet collapse (Atkin, 1995). The Hungarian sociologists Iva´n Szele´nyi and George Konra´d, writing in the early 1970s from the underground, made a very original contribution by arguing that East European intellectuals could be in fact a conservative force on the verge of becoming systemic elite rather than the antisystemic rebels. In the wake of still recent New Left revolts sweeping across both the West and several East European countries, this prediction sounded almost scandalous. Yet it accurately captured the emergence of the trend transforming many formerly New Left activists into successful New Right careerists. Szele´nyi and Konra´d did not directly predict the collapse of Soviet bloc. Still they were among the few analysts to anticipate a major generational realignment in the ideological orientation and the personnel of the political and economic elites in the Soviet bloc on the eve of, and especially during, its collapse. The numerous writings of Immanuel Wallerstein contained perhaps the most fruitful set of predictions. He certainly agreed with much of what Todd and especially Szele´nyi and Konra´d were saying, though perhaps less with the catastrophic predictions of Collins and Amalrik. Wallerstein’s peculiarly neo-Marxist analysis of state socialism followed the same logic as his analysis of world capitalism. In both instances, he added historical depth, sophistication, and a good deal of realism to the iconoclast but largely polemical concepts of the non-conformist leftist theorists. The “dependency theory” postulating the inherently unequal relations between the capitalist core and periphery, as argued by Andre Gunder Frank (1966), added an important radical gradient to Wallerstein’s evolutionarygeographic interpretation of the capitalist world-system which he had built from the theoretical foundations of the far from radical Joseph Schumpeter, Karl Polanyi, and especially Fernand Braudel. Likewise Wallerstein agreed with the interpretation of the ruling communist parties as bureaucratic “New Class,” most famously stated by Milovan Djilas (1957), but fitted it into his own world-systems perspective to arrive at very different and quite sobering conclusions. “Bureaucratic degeneration,” one way or another affecting without exception all communist parties in power, evidently could not be blamed

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on incidentals such as bad national traditions or the moral fallacy of leaders. Wallerstein (2000) explained in a consistently materialist and historicist fashion the central features of communist regimes: their combination of obsessively modernistic enthusiasm with terror and despotic centralization. The precedents are surely found in the Jacobin and Bonapartist phases of the French revolution rather than in the abstract ideas of the Enlightenment or the writings of Karl Marx. Wallerstein saw the key to understanding the trajectories of all modern revolutions in their external world-systemic context, not their ideology or internal class struggle. Revolutions typically happened in countries facing defeat. The humiliating and costly failures on the external fronts discredited and disorganized the ruling class and then opened the way for the insurgents to seize power. The first generations of revolutionaries were animated by the passionate belief that they became the vanguard of world progress itself. Such beliefs exclude any compromises as the betrayal of the historical mission from which logically, if not inevitably followed the terror and the gulags. But very soon the revolutionaries would run into the hard realities of their country’s economy and world-systemic position. If the revolutionaries, whether Marxist or not, wanted to survive and become serious players on the world stage, they had to mobilize and supply big armies which, in turn, presupposed conscripting and dictatorially expropriating the populace. Hence the emergence of revolutionary emperors, be they Napoleon or Stalin, Mao, Tito, and Castro. Revolutions could have a certain effect in upgrading the country’s world-systemic position and inspiring new revolutions. They may compel the conservative elites of other countries into accepting some reforms and making concessions to protect the existing order. But revolutions could never change the overall functioning of the capitalist world-system as long as they happened just in one country or a group of countries. This is an unusual and politically difficult admission for a neo-Marxist scholar. Nevertheless, Wallerstein has long insisting on it with his usual stubborn calm. Even the Bolsheviks, arguably the most successful revolutionaries in modern history, in reality achieved only a stronger, more centralized state with an unusually big army, modern armaments industry, and an eccentric official ideology. At some point they had to get weary of constant sacrifices and lost their ideological steam. Wallerstein, however, saw no compelling reason for a catastrophic end to the Soviet experiment in a desperate war or another revolution. He rather followed the classic insight of Isaac Deutscher (1953) who had pointed a generation earlier to the true collective interest of Soviet

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bureaucratic elite: quietly shedding Marxist-Leninist ideology along with Cold War confrontationism for the sake of negotiating an economic partnership with the rich capitalist countries. Moreover the West, for its own rational reasons, would surely welcome and facilitate this last stage in the “degeneration” of its erstwhile communist nemesis. Analyzing the Soviet options, Wallerstein has unwittingly predicted China. What Wallerstein failed to predict seems no less interesting and important. Regarding the future of the USSR, he maintained to the end that abandoning such a powerful collective platform would be worse than naı¨ ve because the West would never offer beneficial terms to the much smaller and weaker political units like Ukraine or Moldova. Therefore, Wallerstein assumed the Soviets and their western European partners would follow their rational interest and peacefully split the Cold War Western camp and replace it with the new axis of Paris Berlin Moscow independent from Washington. Charles de Gaulle himself would have certainly approved of such reasoning. But history has turned out less rational than theory.

THE GEOPOLITICS OF RUSSIAN COMMUNISM The contemporaneous predictive analyses of the USSR were neither entirely wrong nor entirely correct, although some predictions certainly proved more accurate than the others. Let us now see retrospectively what was the Soviet trajectory and where the various past predictions fit into this historical reconstruction. The conservative critics of the Bolshevik revolution from the outset pointed to its peculiarly Russian origins, found in the messianic religiosity of the Russians (Berdyaev, 1931; Sorokin, 1967) or in their traditions of despotism (Pipes, 1974). Like the famous Weberian thesis regarding the Protestant origins of capitalism, these anti-Bolshevik claims presented in an idealistic and ideologically biased manner the effects of much more material forces and conflicts. The historical sequence leading to the emergence of communism was as Russian as the sequence leading to capitalism had to be West European. In fact, both sequences were fundamentally geopolitical (Collins, 1999). Communism had been haunting nineteenth-century Europe just as capitalism had been haunting the early modern Eurasia (Wallerstein, 2000). But the stronger western states swiftly and mercilessly suppressed revolutionary impulses, as befell the Commune of Paris in 1871

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and the Bavarian Soviet Republic in 1919, or defused and incorporated them in the liberal parliamentary politics as it happened in Britain and Wilhelmine Germany (Mann, 2003). The Russian empire, however, was rightly called a weak link among the imperial powers. It remained autocratic and riven by the typical socioeconomic contradictions of late developers transpiring in a gamut of class and ethnic conflicts. Its war-induced demise in 1917 was spectacularly rapid and shattering. Yet the continental-sized country offered an eminently defensible geopolitical platform for a successful revolution provided that the revolutionaries could mobilize to win in modern warfare. The Russians certainly had a history of great leaps forward in the military technology and organization. Their early acquisition of firearms in the sixteenth century ended the secular scourge of nomadic cavalries and secured vast lands in the Great Steppe and Siberia. The eighteenth-century Petrine absolutism resulted in the displacement of Sweden and Turkey as regional powers and the partition of Poland. Late in the nineteenth century, thanks to the beginnings of industrialization and personally Col. Sam Colt (Bradley, 1990), Russia still remained one of the European imperialist powers advancing into Central Asia and the Far East. This tradition of recurrent geopolitical success has indeed made Russia exceptional among the agrarian empires outside the capitalist core. Suffice it to compare the maps of world geopolitics in 1613 and 1913. In the first map the biggest and longest war was not in the West but rather in the Middle East fought between the Shiite Safavis of Iran and the Sunni Turkish Ottomans. The Mughals in 1613 seemed on their way to finally incorporate the whole of India; the Ming had long accomplished this in China; and in the West the Spanish Hapsburgs, despite a few earlier setbacks, were credibly threatening to finish off the Protestant rebellions and incorporate Europe under the single Catholic empire. Japan and Russia in 1613 were the two outliers struggling to reemerge from long periods of bloody internal strife. In 1913, Japan and Russia were the important second-tier powers, while Spain, Turkey, let alone Persia, India, and China had become the biggest losers. The upstart Russia and Japan, perennially scared and fascinated by the technologically superior foreigners, kept on upgrading their military potential mainly by state-directed emulation. In both instances this was achieved through the tremendous revolutions from above, such as during the reign of Tsar Peter the Great (1696 1725) and Japan’s Meiji Restoration (1868 1912) when both states were actively reinventing their terroristic traditions of centralized developmentalist despotism. In sum, state coercion in

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Russia and Japan was less an emanation of national spirit than a successful strategy of state-making and war-making (Tilly, 1992), recurrently deployed as their “advantages of backwardness” (Gerschenkron, 1962) in compensation for the dearth of native capital and technology. Coercion was massively applied to the expropriation of peasants who had to bear the huge costs of state projects. But the elites were also subjected to terror, along with “messianic” exhortations and the promise of tangible rewards, in order to put the elites with their resources and their very lives at the service of the state. The Bolsheviks had to play Peter the Great on industrial scale if they wanted to strengthen and defend the state power that they had seized amidst the 1917 collapse. They violently undid the erstwhile elites while recruiting, educating, and rapidly promoting their own “service nobility” of the Party nomenklatura. After a short internal truce in the 1920s, the Bolsheviks forced collectivization on the peasantry in a self-consciously coercive solution to the demographic and economic dilemmas of industrialization in the still predominantly agrarian country (Allen, 2003; Turchin & Nefedov, 2009). The vindication of this assault-like leap forward came in the Second World War. The Soviets, as we all know, suffered unprecedented human losses. But the mountains of dead bodies and the harsh Russian climate could have never stopped the also unprecedented war machine of Nazi Germany. From Moscow and Stalingrad all the way back to Berlin, it took an even bigger war machine, from the production lines to the fighting crews, which the Soviets had built almost from scratch in merely a decade. This points us to the true origins of Soviet communism in the modernistic industrialized violence of the two world wars. The particular traditions of developmental despotism and messianism could be Russian, yet the Bolshevik policies were distinctly contemporary (Holquist, 2003). These were mainly the diabolical inventions of European colonialism and especially the First World War (Steinmetz, 2007). The German wartime economic planning, mass mobilization and assembly-line production, rationing, state propaganda, and police surveillance had infinitely more influence on the Bolshevik practice than the abstract Hegelian eschatology of Marxism. Forged in the enormously cruel civil war and the hard-pressed preparations for the next huge war, the Soviets outdid Germany itself in building one of the earliest and most highly militarized totalitarian states of the twentieth century. Let us be clear regarding totalitarianism. The Cold War anti-communist ideologues presented totalitarianism as the radically alien other of western

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liberalism. This is another example of undue spiritualization of the more material forces and geopolitical dynamics. Seen more analytically, the totalitarian practices of the interwar period were rather a continuum of political forms stretching from the far left to the far right. The contemporary liberal states stayed short of full-blown totalitarian statism mainly because this endangered the existing capitalist elites. Still, even the ideologically most liberal of western governments would resort to planning and quite totalitarian repressions and propaganda when they felt hard-pressed by internal class conflicts, external wars, or nationalist rebellions in colonies. In late 1941 it took the Roosevelt administration only a surge of xenophobic paranoia and a few weeks to build the concentration camps and intern the ethnic Japanese. True, American camps were not the Soviet Gulag. But American society was nowhere as mauled as had been the Russian society as a result of world war, revolution, and civil war. Totalitarian vectors emerged to a variable extent in all twentieth-century states because of the wars, revolutions, and economic catastrophes they encountered, and because of the historical rise in state bureaucratic capacities that allowed them to achieve such concentrations of powers (Scott, 1998). Fortunately, totalitarianism also proved unsustainable.

BUREAUCRATIC OLIGARCHY In a consequential irony, Stalin himself began rolling back his totalitarianism right after reaching its peak in the early 1940s. The super-centralized and pervasively policed economy and army, despite their huge sizes, were failing to perform to their potential in the face of Nazi invasion. In the near-disastrous first year of war, Stalin entered a circumstantial geopolitical alliance with Britain and America, replaced revolutionary rhetoric with the symbols of popular patriotism and religion, and, most importantly, he devolved much of decision-making to the military commanders and industrial managers. From here logically flowed the post-war peaceful co-existence with the West and the 1950s de-stalinization in the Soviet bloc. In another bitter historical irony, essentially the same conditions doomed all efforts to reform the Soviet state from above. The supreme political power never returned to the summit of Soviet state. Nor would it ever pass to a democratic system. Instead, the power dissipated somewhere in the higher echelons of nomenklatura. With Stalin dead in 1953 and

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condemned in 1956, the Soviet elites obtained bureaucratic paradise with life-long tenure and the oligarchic division of controls. The command economy without a supreme commander gradually sank into a stagnant bureaucratic inertia. The numerous veto points vested in the powerful industrial ministries, the military, and the ideological apparatus prevented the dismantling of the wartime command economy. The Cold War played in this a profoundly conservative role (Zubok, 2007). Unlike a real war, it actually lessened the urgency of mobilizing for another great leap forward. The static and soon pretty ritualized confrontation with the capitalist West benefitted the Soviet ideological and organizational stalwarts. Unlike the ferocious but also more agile Bolshevik revolutionaries of the earlier period, the stolid Brezhnev-era bureaucrats regarded any admission of market dynamism as much an abomination as their western adversaries would regard any form of public property and state regulation. In theory, two possibilities could open at this juncture: social democratization or another round of authoritarian developmentalism. The former would have joined the USSR into the postwar welfare corporatism of Western Europe; the latter might more closely resemble post-Maoist China. Both possibilities (or their possible hybrids) would have resulted in the return of Russia to capitalism, though with different patterns of political power and social inequality. These possibilities remained theoretical, but not for want of trying. In fact, they were pursued intermittently by Soviet leaders intent on doing something to bolster the international prestige, economic performance, and internal legitimacy of their state. The authoritarian pragmatists were the former chiefs of secret police Lavrenty Beria in 1953 and Yuri Andropov in 1983 1984 (Knight, 1993; Lewin, 1991). The romantics of “true Leninist democracy” were the populistic believers Nikita Khrushchev in the late 1950s and Mikhail Gorbachev in the 1980s. The authoritarian and democratizing reformism both crashed at least twice against the anxious intransigence of the nomenklatura. The oligarchic bureaucracy emerging from the Stalinist industrialization might have lost direction but it still enjoyed a lot of stopping power. The American political scientist Valerie Bunce pithily characterized the situation: Major reform was as necessary as it was politically impossible. This is where the western convergence theorists of all stripes got it wrong. Their predictions assumed that the Soviets (who were, after all, so rambunctious in previous decades) must be moving somewhere in the direction of western ideological hopes or fears. In the meantime the majority of bureaucratic nomenklatura grew extremely averse toward big gambles and risks of any kind, be it another great war, totalitarian purge, or economic

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reform. The USSR simply got stuck in a long and quite comfortable postwar decompression.

CONVERGENCE IN CRISIS And then the final irony. America and the Soviet Union did look to be converging, at least for a while, during the 1970s and the 1980s. The convergence, however, was not at the golden mean of mixed economy but rather in the sequencing of superpower crises. The crises in both cases struck suddenly after the decades of unprecedented placid prosperity. Both countries after 1945 found their political ideologies vindicated by the tremendous victory over the forces of fascism. With the traditional European powers of France, Britain, Austria, and Germany drastically diminished, after 1945 global hegemony passed to the outliers America and Russia. Their trials and troubles of the 1930s, although certainly of very different magnitude and nature, appeared left behind in the comfortably forgotten history. The science and technology of atomic age confidently promised plenty and good health to all (Spufford, 2010). Space now seemed the ultimate frontier. The American and Soviet societies grew more peaceful, optimistic, and loyally patriotic. The US Soviet superpower summits, after the initial tensions of the 1950s, grew almost cordial and fraternizing. Of course, the political leaders of both countries readily claimed all these achievements as legitimately theirs. Both superpowers felt messianic and eager to benevolently spread their examples across the Third World. America became the first to carelessly get trapped in what initially looked like an easy victory for the superpower in a brief expedition to rescue a bumbling local follower. The Soviets eventually obtained their own Vietnam in the invasion of Afghanistan. The quagmire wars sapped both superpowers’ legitimacy and resources beyond anybody’s worst fears. The European satellites and Third World clients began distancing themselves from the troubled superpower masters. Counteracting this trend heftily added to the diplomatic and economic costs of superpower hegemony. The biggest political and economic costs were still domestic. Maintaining the post-1945 exceptionally high rates of public investment and rising popular consumption had to be balanced now against foreign commitments and military expenditures. Facing these choices, both superpowers tacitly tried to scale down their grandiose domestic and foreign pledges, but this proved politically very difficult.

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The deepening military, fiscal, and moral dilemmas split the ruling elites into hardliners, enlightened reformers, and compromisers in the vanishing middle. Following the logic of political polarization, the competing elite factions would soon seek to recruit activist supporters from outside the usual policy circuits by providing them with encouragement, publishing venues, and more tangible resources for movement mobilizing. The response was phenomenal. Contentious movements sprang out from all sectors of society fed by the high expectations of previous decades, the realization of suddenly opening opportunities, but also the anxiety of being left out at the moment when the elites might listen to one rather than the other set of demands. The demands themselves came in several intersecting and conflicting streams from politically mobilized ethnic and racial groups, liberal intellectuals seeking to institutionalize their prestige in politics, various groups of workers hoping for economic concessions, and, on the other side, conservative populists reasserting their previously privileged nationalist, gender, and class identities. The splits at the top and the eruptions of political energies from below led to the very tumultuous times that America experienced between 1964 and 1980, and Russia between 1985 and 2000. Here we shall focus on the Soviet pattern though it might tell us something important about the present American outcomes, too. The ultimate question is about the outcomes: Why did the USSR collapse while America could reemerge into its second hegemony? Or how different is Putin’s Russia from the present-day America? Democratization trends emerged in the Soviet and other developmental dictatorships from three distinct sources (Evans, 1995). Workers discover in periods of economic growth that they are in a good position to demand better conditions by either organizing strikes or just quietly disrupting the production processes through individual slackening. The power of workers in the Soviet economy grew apace with the demographic exhaustion of the peasantry and the massive employment of women, which resulted in a dramatic lowering of birthrates. This is what Emmanuel Todd (1979) has emphasized very dramatically. In the 1970s Moscow tried to compensate for rising labor costs by recruiting immigrants in rural Central Asia and as far as Vietnam but this ran into problems with the levels of modern culture and skills. The Russian workers became irreplaceable and could therefore bargain for much better material terms. After a series of spontaneous strikes and bloody confrontations in the early 1960s, Moscow shifted to the pre-emptive satisfaction of workers’ material demands lest they come up with political demands, as actually happened in Poland. Russian proletarians have reasons to feel nostalgic for the 1970s.

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The second pressure for democratization came from state-employed professionals. Primarily the engineers, doctors, and educators sought to translate their numerical and functional importance in running the new industrial economy into more autonomy from bureaucratic regimentation (Arrighi, Hopkins, & Wallerstein, 1992). These hopes and demands encompassed everything from choices in education, self-employment, consumption, and foreign travel to competitive elections of managers and political personnel. Here, we find an enthusiastic ascendant elite of specialists who seemed on their way to becoming the meritocracy of an advanced industrial society. The ageing party nomenklatura, itself officially committed to scientific progress, could stall but not stop this ascendancy. This is what is captured in the contemporary prediction of Iva´n Szele´nyi and George Konra´d (1979). The youthful leftist rebellions of 1968 were crashed in Czechoslovakia and suppressed across the Soviet bloc, nevertheless the new lifestyle and cultural expectations could not be extinguished with tanks. Culture and the creative intelligentsia carried in the Soviet bloc extraordinary importance. The official ideology of building a better and rationally scientific communist society (and in which all national cultures would equally thrive) was deeply invested in its founding enlightenment commitments. The political regime built on the stolidly bureaucratic controls of ideology and cultural production was very vulnerable to various forms of counterculture. This is why the cultural fields of Eastern Europe were so lively and creatively contentious. Yet this also explains why the intelligentsia has collapsed along with the detested communist rule. But wait, wasn’t the Soviet Union totalitarian? Not any longer, and the communist ruling elite was itself the reason. The economic and managerial elites got weary of their wartime inhuman workloads and the arbitrary unpredictability of Stalinism. They desired legal guarantees for their life and property, which is, of course, a major historical precondition of democratization (Tilly, 1992). The Soviet nomenklatura achieved the first goal after the death of Stalin, but they could never achieve the second goal as long as the USSR lasted. What haunted Moscow was the traumatic experience of the 1956 revolt in Hungary, of 1968 in Czechoslovakia, and Poland’s Solidarnocz of 1980. The nomenklatura feared re-empowering the secret police almost as much as they feared allowing freer expression to the intelligentsia and professionals. Unwilling for their own sake to use repression, the Soviet political leaders had to play the game of unofficial class alliances in the triangle of nomenklatura, intelligentsia, and workers.

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The nomenklatura’s key tactic from the 1960s to the early 1980s was strikingly similar to the domestic politics of corporate America (Domhoff, 2010). The main goal of both ruling elites was to prevent the formation of a Liberal-Labor coalition between the intelligentsia with their political demands and the workers with their numbers and disruptive potential. The defensive majority of nomenklatura pursued this goal by the means of essentially conservative populism. The dissident intelligentsia was portrayed as unpatriotic, predominantly Jewish, self-serving, rotten Bohemians and just deviants (“abstractionists and faggots,” in Nikita Krushchev’s infamous remark). The workers in the meantime were tamed with better wages, enterprise-related perks, and also the tacit toleration of lower productivity. This is why the quality of Soviet-made consumer products becomes so shoddy. The shopfloor managers knew that their superiors would consider a much graver failure provoking a strike than rolling out a few sub-standard cars. Such trade-offs might look familiar to their American counterparts in auto industry. The tactical domestic compromises, however, were damaging the strategic goals of maintaining the superpower’s international competitiveness. Moscow increasingly felt the need to acquire new technologies and boost productivity and prestige in the face of the ongoing arms race with the West and the troubles in Afghanistan or Poland. The memoirs of former Soviet executives and previously secret archives show that they knew about the negative demographic and productivity trends, the need to replace the obsolete factories of 1930s vintage, the popular disillusionment and the culture of biting political jokes, and the bureaucratic pathologies of their sprawling apparatus. It was, however, a classical problem of the elites who had enough power to repress the alternatives yet unable to mobilize for collective action themselves (Slater, 2010). The nomenklatura’s failure to change course in a more rational direction was only indirectly related to the totalitarian legacies of Stalinist statebuilding. The main cause was the institutional complexity of the USSR and the lack of mechanisms for negotiating the common interests of its elites. The Stalinist industrialization had created and the Second World War consolidated and legitimated the organizational pattern of huge central ministries with conflicting parochial interests and numerous veto points. And that was not all. The Bolsheviks back in 1918 1921 won the civil war and re-conquered much of the erstwhile imperial realm by turning it into the Soviet Union: a federation of fifteen national republics and numerous provinces. Their powerful governors, called First Secretaries in a Soviet variety of affirmative action, were selected from the titular nationality of

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each republic (Martin, 2001). Though all in principle were replaceable by Moscow, in actual practice during the post-Stalin decades the First Secretaries gained life-long tenure and secured it by building closed patronage networks inside their territories (Urban, 1989). Moreover, the Soviet national republics developed their own creative intelligentsias who had, in turn, developed nationality-bound aspirations and corporative interests (Derluguian, 2005). The peculiar complexity of the historically inherited Soviet institutions matters crucially in explaining the impasse and ultimate disintegration of the USSR. In effect, the ostensibly totalitarian dictatorship later in its life became insufficiently dictatorial and too decentralized to make the next leap to market economy and democracy. The often-invoked comparisons to the gradual economic reforms in China are misplaced. China in the 1980s still was a predominantly agrarian country with a surprisingly minuscule central bureaucracy of industrial ministries and planning agencies, very little by way of national autonomy even in Tibet or Inner Mongolia, not to mention the absence of Chinese equivalents to the Soviet bloc and the prestige requirements of superpower parity with America. In short, People’s Republic of China was a far simpler state compared to the USSR (Padgett, 2012). In 1985, the new Soviet leader Mikhail Gorbachev tried to break the logjam essentially by opening all the floodgates. This meant a dramatic shift in class alliances. Gorbachev’s reformist minority among the nomenklatura intended primarily to lead the middle-class of professionals and intelligentsia against the reticent nomenklatura majority. He had little to offer to workers except placating them with the vague promises of a better life and consumption in the future reformed economy. Gorbachev’s major hopes were vested in external alliances with the political and business elites of Western countries. He urgently needed to end the Cold War in order to extricate Moscow from its superpower burdens, downsize the military establishment, and reap a peace dividend. Moreover, Moscow needed western capital and technology to renovate its industries, provide consumer goods, and, not in the least, energize or replace the Soviet industrial managers. But while Gorbachev and his advisers were desperately looking for the mechanisms to break up the ministerial monopolies and replace the older industrial bosses with younger technocratic careerists, western firms could find few entry points in the still bureaucratically closed Soviet economy. In the end, Gorbachev’s improvisations messed up the existing structures of command and control in the Soviet polity and economy but failed to install the new controls. It is not at all clear that, given the institutional hurdles, anyone could have done much better in his position.

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Gorbachev was a reformer but, contrary to the common perceptions of those heady days, he was neither pacifist nor democrat. The admission of competitive democracy would have diminished Gorbachev’s extraordinary powers as General Secretary and could have downright unseated him. Like the earlier Bolsheviks, Gorbachev derived his charismatic energies from the belief in his historical mission to renovate socialism. Perhaps he could concede power in the future, but sharing it in the moment of historical transition with the enemies of change or the senseless “adventurers” was tantamount to betraying the mission. Gorbachev carefully avoided using the military and secret police not because of an idealistic aversion to violence but due to the pragmatic fear of these powerful, devious, and lethal institutions that he, as a career Party political cadre with the background in agriculture, could never hope to fully control. But notice, Gorbachev’s glasnost relied on a typically totalitarian combination of insider intrigues, purges, and propagandistic campaigns directed against the other elite patrons and their factions but called it democratization. This was a dangerous race against time, because the embattled opponents eventually had to counter-react while the prospective supporters eager to benefit from the rotation of elites could become too impatient and launch their own maverick campaigns. And this is exactly what happened in Moscow and the capitals of the Soviet republics in 1989 when the gathering revolutionary situation exploded from several sides. The specter of an insurgent Liberal-Labor coalition did finally materialize, though less in the class alliances of intelligentsia and workers (Crowley, 1997) and much more as the nationalist “civil societies” led by the intelligentsias of Soviet bloc countries and the non-Russian republics. These mobilizations proved explosive, tumultuous, and short-lived. The scared top nomenklatura reacted to the best of their abilities by activating their insider patronage networks. This quite traditional defensive strategy of nomenklatura was unwittingly legitimated and reinforced by the ideological demands of their liberal intelligentsia opponents: competitive elections, national sovereignty, privatization. The nomenklatura of national republics, at first cautiously and after 1991 hurriedly, pursued sovereignty from Moscow. This served to insulate the existing leaders from Gorbachev’s ongoing purges and at the same time boosted their local and international credentials. Competitive elections gave the now former nomenklatura a chance to preempt the still organizing “civil societies” and transform their patronage networks into what Americans call political machines. Privatizations then allowed the holders of political levers to grab and redistribute state assets among themselves and their clients.

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FRAGMENTATION THAN TRANSFORMATION The revolutionary situation emerging at the end of Soviet historical trajectory has simply failed to translate into any revolutionary outcomes. The Soviet state and its industries were simply taken apart, mostly by their former governors and managers or by audacious interlopers, few of whom, however, have survived for very long. Behind the fac¸ade of imitational democracies the real centers of power were the various crony “clans” locked in factional rivalries that periodically flare up as either Putin-style authoritarianism or Ukrainian-style oligarchic “colored” revolutions (Hale, 2005). The intelligentsia and workers lost out in this partition. Their political and ideological demands, whether nationalist or liberal, were sort of fulfilled and hugely discredited at the same time. The spontaneous deindustrialization and trade commodification of post-Soviet economies rendered the strikes and other forms of collective protests mostly senseless. Individual participation in the new electoral politics required submission to the patronage of one or another “clan” controlling the resources and access to the media. In a cruel sense, the collapse of Soviet Union solved virtually all dilemmas previously constraining the ruling elites. Those of them who survived the collapse and the ensuing scrambles, found themselves fabulously wealthy, free to travel in style and acquire properties in the most expensive locales on planet, delivered from the demands of workers and critical intellectuals, and sheltered from geopolitical concerns, of course, as long as they followed the line of “international community,” i.e., the West. Almost the sole but overwhelming and constant preoccupation of post-Soviet elites became defending their wealth and the very lives from “raiding” by the private mafias or state prosecution directed by rival oligarchic clans. In the final irony, the post-communist political capitalists gained their fantastic fortunes at the expense of wasting the major achievements of their nomenklatura predecessors: collectively, the prestige of superpower; individually, the security of life and office tenure. The Soviet Union was a revolutionary state built in war and for the purposes of a great war. It was a successful inheritor of a multiethnic empire. And, of course, its official ideology and daily practice was anti-capitalist. Nevertheless the erstwhile convergence theories had a valid point in highlighting the modernist organization and social composition of the Soviet Union or even acknowledging with a joking respect the USSR, Inc., analogously to Japan, Inc. The similarities in the sequence of crises that suddenly struck both America and the Soviets at the apex of their superpower

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trajectories from messianic self-confidence to quagmire war, fiscal strains, political deligitimation, elite factionalism, and the explosion of social movement demands indicate that the biggest political-economic organizations of the twentieth century might have indeed shared in common the contradictions of advanced industrial society presided over by a corporate-bureaucratic elite. The American way out of the crisis of the 1970s seems very different from the outcomes of Soviet collapse. Capitalist financial institutions and the existence of electoral politics surely made a difference. Even more surely, it matters whether one’s satellites are the wealthy Japan and West Germany or Mongolia, Cuba, and Poland. Still it is striking how big a role in solving the crises of both superpowers was played by the deindustrialization of their economies, the enormous increase in inequality, the escape of elites into the global realm of offshore finance, the resulting political apathy and demobilization or even demoralization of their popular classes. One cannot help feeling that this negative convergence pattern in the post-crisis period might not continue much longer. But dare we predict how it will end?

NOTE 1. The expression “conventional wisdom” was itself coined by J. K. Galbraith (1958).

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