The State and Market – “a Theoretical Perspective”
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The State and Market – “a Theoretical Perspective”
THE STATE AND MARKET – A THEORETICAL PERSPECTIVE
A. Introduction
The 1960s marked an evolution of change in world politics where the concept of global diplomacy had become increasingly relevant. It seemed that the Euro-dollar system was the answer to many problems. The system constituted a great improvement on the international monetary mechanism, and for this reason alone it was Âin keeping with the basic trendÂ. It represented a most important step in the progress towards overcoming national barriers that divide the international financial system into separate compartments. Thanks to the new device, those compartments were now much less isolated than they had over been before. What was strange was not that it arose and developed, but that it had not come into being many years earlier. The Euro-dollar system had become familiar and popular among Central Banks and Treasury officials, bankers, merchants, and investors all over the world and most of them were very keen on maintaining it. It led to an Âinternational money market with a structure of international interest rates. The difficulty had been to establish the system. Once it had come into existence, and had become a going concern, no extraordinary influences were needed for its maintenance in existence .
It can be reported that the international financial markets had borne witness to the largest concentration of economic resources in the world. The Euro-dollar market represents a modern world system where the prime candidates (the economic actors) are independent forces whose actors transcend the nation state. The Euro-dollar market being independent of specific national capital markets, is held together by a web of supra-national institutions and conventions (such as the IMF, BIS, inter-bank market discipline). As, since the market is not nationally based, no national regulators have been able to impose the same restrictions on off-shore operations, that they do on operations on home soil. Partly due to the fact that such action would only serve to shrink the market, and thus seriously harm international trade and payments. However, instead of disappearing, it had been going from strength to strength, throughout the 1960s. In fact, there was much more to the system than was assumed, especially by those who regarded it as being a purely temporary outcome of fortuitous circumstances. What they failed to realise is that it fulfils very important requirements, and that its development is in keeping with the trends of the market system. The international integration of the money markets, the elimination or reduction of rigidities in deposit rates and loan rates, the circumvention of artificial obstacles, the freeing of competition between lenders, and the improvement of the automatic functioning of market-mechanism, had long been overdue.
The relationship between Âthe state and Âthe market is fundamental to any understanding of the issues involved in economic and political change and the ordering of human relationships. The changes of the state in globalism brought with it a mix of values (wealth, freedom, and justice) within a market-authority relationship that affected the structures of power in the world economy. The purpose of this paper is to explore these very central concerns highlighting the impact of the world economy on the relations of states, and the ways in which states had sought to influence market forces for their own advantage. The theoretical theme of this thesis is that, traditional political science approaches to the economic policy of the Ânation-state are not enough in explaining the development of contemporary capitalism, and that, each state exists only as a political actor in the global flow of capital. In that sense the world market constitutes the existence of the reproduction of capital.
This paper will assess the nation-state and the concept of economic policy making in a globalised economy by using three theories, Liberalism, Marxism, and the Theory of Hegemonic Stability, which will analyse the nature of the state and market. The Marxism framework will be the chosen theoretical framework and will be referred upon throughout the thesis. However, all of the three theories investigate firstly, the economic interests of actors/groups and the ideas they espouse and secondly, the relationship between the political and economic domains in contemporary international society. Using this framework, this paper will have explored, whether the state was Âcaptured by particular interests, by examining the role of the state, by using the following argument:
The concept of the state and market – Who makes the rules for the market? Could it be that, it is industry itself, which makes the rules and the state that, legitimises the rules?
B. International Economic System
Realist theories of international relations start from the assumption that states are the fundamental units of the international political system, in which, states possess a Ânational interest in maximising power, wealth or both. Taking this analysis into account, realist theorists are able to develop rigorous systemic explanations of how the international political system is ordered. Kenneth Waltz has used analytical tools grounded in neo-classical microeconomics to explore the underlying characteristics of the state system. Taking states as the functional equivalent of firms, Waltz develops a variety of insights about how, the number of states in the system affects the very configuration of their interaction – much as an oligopolistic market behaves differently than a perfectly competitive one.
One of the more provocative outgrowths of this Realist theorising is called the ÂTheory of Hegemonic StabilityÂ. Reviewing specifically the international economic system, scholars such as Stephen Krasner and Robert Keohane , analyse the formation of stable economic relations among states as a classic collective-action problem. They conclude that international economic stability is best provided for in a system dominated by one actor capable of managing the system more or less unilaterally. Such generalisations are solidified by analysing the Pre-World War One ÂPax-Britannica and the Post-World War Two ÂPax-AmericanaÂ, as exercises in the stabilising nature of hegemonic leadership. It is often argued that such hegemonic systems will tend towards liberalisation of trade and capital flows. However, even though Realists have clarified and illustrated many issues in international relations, one very serious problem arises in attempting to apply their insights to the analysis of the real world. If the states are the crucial actors in the system, then it is of fundamental importance, to understand the goals that they pursue  just as micro-economic analysis must understand the goals of all players in the market. Some realists simply assume state interests, usually as some variant of survival or power maximisation. Others believe state interests are derived from the relative position of the state in the international system: hegemonic states have one set of interests, weak states another.
For realists then, state interests are essentially static and exogenous, given by the very nature of the international system. Yet, even the most rigorous of Realists realise that this is only part of the story. Kenneth Waltz claims that, Âeach state arrives at policies and decides on actions according to its own internal processes, but its decisions are shaped by the very presence of other states as well as interactions with themÂ. Robert Gilpin, is even more explicit about domestic pressures on foreign policies. ÂThe state  may be conceived as a coalition of coalitions whose objectives and interests result from the powers and bargaining among the several coalitions composing the larger society and political elite  The objectives and foreign policies of states are determined primarily by the interests of their dominant members or ruling coalitions .
Another piece of work involves CoxÂs study of critical analysis, which develops the understanding of stateÂs rational choice, and the decision-making process, in international and domestic affairs. The state emerges as the political focus for the process of adjustment and change. That, by understanding the state, by what it is, what it does, and where it fits in Robert CoxÂs state-society complex, lies the theoretical issue. The notion of the state and market, is an important step to understand the broader context of thinking about order, addressing the basic underlying concern of the ways through which Âgovernance without government  can be achieved in order to avoid undesirable outcomes in international and transnational relations.
One conclusion is that, financial market deregulation and re-regulation, in their various disguises, have come to constitute a major developmental trend, not only in the world economy, but also in world politics. Processes of regulatory arbitrage, market expansion and the development of the competition-state in a more open world have led to a range of structural changes which seems to be identifiable as an Âintegrated, 24-hour global financial market-placeÂ. A series of changes has not only had an uneven impact upon different states (and different kinds of state and market structures), but has also constrained the actions of policy makers everywhere. In the context of political economy, much literature on international macro-economic questions has been built, around the Âtheory of hegemonic stabilityÂ. In the broadest terms, the theory of hegemony stability suggests that a necessary condition for international economic stability and fruitful international economic cooperation, especially in matters of money and finance, is the existence of a hegemonic state. The hegemon is able and willing to lead others in the system and to act, for example, as an international lender of last resort, and a lender of cooperation in the event of a financial crisis or panic.
The leadership of the hegemony is based on a general belief in its legitimacy at the same time that it is constrained by the need to maintain it; other states accept the rule of the hegemon because of its prestige and status in the international political system. A considerable degree of ideological consensus, or what Marxists following Antonio Gramsci would call Âideological hegemonyÂ, is required if the hegemon is to have the necessary support of other states. If other states begin to regard the actions of the hegemon as self-serving and contrary to their own political and economic interests, the hegemonic system will be greatly weakened. It will deteriorate if the citizenry of the hegemonic power believes that other states are cheating, or if the costs of leadership begin to exceed the perceived benefits. In such situations, powerful groups become less and less willing to subordinate their interests to the continuation of the systems.
A number of realist ideas about power and liberal ideas about the advantages of the market co-exist, in the theory of hegemony. As it is a theory of international politics, based on a number of key realist assumptions, relating to the emergence of a liberal economy, to the configurations of power in international politics. The idea that a hegemon might provide some of the political re-conditions for a liberal economic order was originally put forward by Charles Kindleberger. Much of the literature on hegemonic stability has taken inspiration from the writings of Charles Kindleberger, and in particular his arguments that the great depression of the 1930s was in large part due to the absence of hegemonic leadership on the part of the United States . In the absence of leadership or hegemon, the liberal international economic order and its associated monetary arrangements may disintegrate, unless other leading capitalist nations are willing to share more of the burdens of its management and leadership.
Thus, after, US hegemony there may be more conflict and disorder in the international political economy. Robert Keohane , states that if there is a solution, to the problem, it lies in the flexible strengthening and extension of international collective goods, regimes and institutions. Regimes can provide a more favorable environment for cooperation through enhancing communication and altering perceived pay-off structures for different actors, and making them consider the longer-term repercussions of their actions by extending Âthe shadow of the futureÂ. In this context, there has been a growth in the use of game theory as a means of understanding the conditions that best promote rational self-interested cooperation and a lengthening of political time horizons.
Present work by a range of scholars from different perspectives , indicates that hegemony defined in realist terms, as the Âprevalent power of one state over others in the systemÂ, is merely one variable in complex historical situations. A range of socio-historical forces need to be taken into account in any explanation.
However, to understand how states manage the constraints of the domestic and international domains, it is important to understand the politics of the individual state itself, situated as it is between domestic and international society. If the state is a prime decision-maker, this requires some notion of how the economic interests involved in the global market economy became articulated in the politics of the state. Nevertheless, the theory of hegemonic stability fails to comprehend the theoretical relationship between the political and economic domains. As it is important to understand the relationship of those with significant resources in the (domestic and international) market economy to political power. The hegemonic stability approach points to a political framework for the market provided by the hegemon. As in the liberal case, the market is a Ânatural institution fundamental to human interaction.
The market is an institution, representing political and economic advantages for some social groups and economic actors, and relative costs to others. This is not always evident in the case of markets; their apparently self-regulating nature obscures the role of politics in their emergence and development. What is important is the interaction of domestic and international factors mediated through the politics of the state in an international system characterized by both anarchy and a global market economy. To understand international politics it is important to theorize these connections between markets and politics, domestic and international, through our understanding of the state. Interdependence emerges as a central feature of international politics.
C. Political Liberalism
The underlying assumption of political liberalism is the intrinsic value of individuals as the primary actors in the liberal system. Liberalism is thus embodied with a concern for enhancing the freedom and welfare of individuals. It proposes that human-kind can employ better reason to develop a sense of harmony of interest among individuals and groups within the wider community, domestic or international. Thus liberalism has, as a goal the harmonisation of conceptions of self-interest Âthrough political actionÂ. Progress towards this goal is Âseen in terms of possibility rather than certainty .
In the international sphere, these goals are realised through the promotion of liberal democracy, through international co-operation, law and institutions, and through social integration and technological development. It is fairly easy to see how the economic variant fits in the general picture. The maximisation of individual economic welfare is a very important aspect of the enhancement of individual freedoms. States can direct their policies towards this goal through co-operation to realise mutually beneficial economic gains for their peoples. However, how successful is the liberal approach at addressing the central theoretical question?
Firstly, the separation of markets from politics, from their political and institutional settings is confusing. This is to misunderstand what a market actually is. It is not a phenomenon resulting from spontaneous interactions among individuals; it is instead a complex political institution for producing and distributing material and political resources. As such, it is relatively advantageous for some, and rather bad news for others, depending on the historical circumstances of individuals in their socio-economic context. In addition, if markets are properly understood as political institutions, the assumption that they are automatic or Âself-regulating breaks down  it becomes clear that markets, like any other political arrangements, are contestable and open to manipulation by those who have the power to do so.
Secondly, it is difficult to understand the behaviour of economic agents, whether individuals or firms, outside their socio-political context. Economic agents do not just react to a series of market incentives: markets differ from sector to sector, or country to country. Socio-cultural institutions and political conflict shape the pattern of market institutions, and vice-versa; and economic issues are intimately interconnected with other aspects of human existence. In general, it is essentially a motto to assert that economic agents interact as members of a social whole that is greater than the sum of its parts.
The third point involves the limitation of the liberal perspective itself, (the separation of markets from politics leads to this). There have always been markets in the sense of local exchanges of goods and services, but the market system or economy is a relatively recent development . Liberalism therefore fails to account for the history of political conflict that has altered the institutions of the market over time. The institutions of nineteenth-century laissez-faire contrast greatly with those of the post war mixed economy, and since the 1970s rapid changes have been under way. The changing patterns of market institutions have altered the distribution of gains and losses, the pattern of political resources, and the political preferences Âof players in the gameÂ.
Fourthly, the liberal perspective is an economic reductionist approach. Regarding this, the focus is that liberals ultimately focus on a feature of economic structure, the pattern of comparative advantage among economic agents, as a source of explanation. The complexity and political content of international economic relations are reduced to a reflection of the international division of labour, or market structure, as utility maximisers interact within its confines. Hence, by separating the understanding of the state from that of the economy, and of the individual from society, there can be no successful theory of politics or of the state.
However, it is precisely a political theory of the market that is required. In the absence of a theory of political conflict and the state, it is difficult to understand how the market structure might change over time. LiberalismÂs basic assumptions, concerning the existence of rational economic actors, or a competitive market, are unrealistic. The structure of comparative advantage certainly does shape and constrain the interactions among actors, but the emergence and transformation of comparative advantage, the structure itself requires explanation. Change is an open-ended political process that takes place within a particular structural setting, but with the potential to alter structure itself.
To conclude, the main critiques that arises signify that, economics artificially separates the economy from other aspects of society, and accepts the existing socio-political framework as a ÂgivenÂ, including: the distribution of power and property rights; the resource and endowments of individuals, groups, and national societies; and the framework of social, political, and cultural institutions. The liberal world is viewed as one of homogeneous, rational, and equal individuals living in a world free from political boundaries and social constraints. Its Âlaws prescribe a set of maximising rules for economic actors regardless of where and with what they start; yet in real life, oneÂs starting point, most frequently determines where one finishes .
Liberalism is also limited by its assumption that exchange is always free and occurs in a competitive market between equals who possess full information, and are thus enabled to gain mutually if they choose to exchange one value to another. However, exchange is seldom free and equal. Instead, the terms of an exchange can be profoundly affected by coercion, differences in bargaining power (monopoly), and other essentially political factors. In effect, because it neglects both the effects of non-economic factors on exchange and the effects of exchange on politics, liberalism lacks a true Âpolitical economyÂ.
Hence to conclude, the liberal perspective is committed to free markets and minimal state intervention, that trade and economic intercourse are a source of peaceful relations among nations, because the mutual benefits of trade and expanding interdependence among national economies will tend to foster co-operative relations. Whereas politics tends to divide, economics tends to unite peoples. A liberal international economy will have a moderating influence on international politics, as it creates bonds of mutual interests and a commitment to the Âstatus quoÂ. However, it is important to emphasise that, although everyone will, or at least can, be better off in Âabsolute terms under free exchange, the Ârelative gains will differ. It is precisely this issue of relative gains and the distribution of wealth generated by the market system that has given rise to economic nationalism and Marxism as rival doctrines.
D. Marxism
MarxÂs claimed that, Âthe abstraction of the state as such belongs only to modern times. The abstraction of the political state is a modern product . The emergence of the capitalist state form was neither an automatic response to the development of the free world, nor a matter of the transfer of power from one class to another. The historic change in the form of the state occurred gradually as political revolutions overthrew sovereign power, and fundamental social struggles, which were both prompted by and were expressions of, changing social relations of production, Âsince they were all manifestations of the separation of the people from the community . However, the Âclass character of the capitalist state, was not determined by a dominance of capitalists or the primacy of the economy. Rather it is the separation of the state from civil society and thus the political regulation of class antagonism upon which the class character of the state rests.
However, from my readings from the theories introduced there seems to be a conflict of termination, surrounding the public use of the term ÂcapitalismÂ, almost that it is faced by those who would defend capitalist institutions. When challenged, the terminology seemed to follow variations in economic performance. In periods of social stability and economic growth the limits of the possible under capitalism are rarely evident or tested, and few people need to use the term. It will be the argument of this thesis that the development of this Âcapitalist economy requires a look at the writings of Karl Marx. The British governmentÂs use of the Euro-dollar market in order to achieve its policy objectives flowed from its recognition that the world it faced in the 1960s was capitalist, in the sense that Marx used the term; and therefore in order to understand the world as it is today, it is essential to begin by discussing MarxÂs characterisation of 19-Century capitalism.
The theory of the Modern World System (MWS) was strongly influenced by Marx, where the Âworld market is essentially a mechanism for the economic exploitation of the less developed countries by the advanced capitalist economies. This Modern World System position is based upon the classical Marxist analysis that, both the nation-state of the nationalists and the market of the liberals are derivative from underlying and more fundamental social and economic forces. Rather than being independent actors or variables, they are consequences of a peculiar juncture of ideas, institutions, and material capabilities. The state and market are the products of a Âhistorical epochÂ, and are firmly embedded in a larger social matrix. The central argument that the Âworld market contains a dominant core periphery and a dependent periphery that interact and function as an integrated whole. It is clear that the historical content of the MWS position is crucial to the insight of the state and market. As noted, the market system and the nation state are both products of modern society and of profound changes in human consciousness, productivity, and social forces. Using the analysis of the MWS theory, nation-states and the conflict among them are the foremost manifestation of manÂs nature as a Âpolitical animalÂ. Taking the notion, that far from being mere creatures of economic and historical forces, states are independent actors in economic and political affairs. It should also be noted that the market and Âeconomic man have achieved an independent reality. Once having come into existence, the modern market cannot be reduced to sociological forces. The market, like the modern state, has come to exercise a powerful influence over historical developments.
Another factor worth noting is that, since Marxists hold that the state action can only be understood in terms of historical trends, any analysis must focus on the origins and basic motivations for state action over time. Another common element in all Marxist theories, which distinguishes them from all other theories, is the subservience of the state to the interests of capital. To Marx, capital meant a social process, which can include the hiring of labour, the construction of machinery, the exchange of products for money, and the re-investment of that money into another round of the profit-generating process. Capitalism is the all embracing term that includes each of these mechanisms. The British State viewed as a whole, can best be understood, according to Marxists, as defender of the capitalist system. It is argued that British live in a class society where the basic divisions are drawn according to ownership and control of the means of production. A minority capitalist class owns the means of production and exploits a wage-earning class. The stateÂs action in maintaining capitalism is an expression of the power of the dominant class. However, this does not imply that a tiny capitalist elite manipulates the state Âbehind the scenesÂ.
The principal strength of the Marxist analysis, and most other radical approaches to international politics is that they focus precisely on the connection between the social and economic structures of the capitalist economic system, and the exercise of political power in the international system, on the other. In the domestic political system, the capitalist system of production entrenches the dominance of one class over another: the state is the capitalist state. As the economy becomes internationalised, this class dominance projects itself into international politics. The political organisation of the international system reflects the power relations of the global market economy. This manifests itself both in competition among states in the international system, and in the co-operative processes represented by international economic regimes. In the perspective of some traditional Marxists, the spread of capitalism touches off a process of economic and political development in less developed parts of the globe as capitalist firms, often supported by their home states, seek profitable opportunities for investment abroad.
Dependency theorists saw the flaw of this approach and pointed instead to the likelihood of core and periphery areas of the global economy remaining distinct despite incorporation into the capitalist world economy. Johann Galtung developed a structural theory of imperialism, proposing that the mutually beneficial political and economic relationships between elites in core and periphery countries world maintain the structural pattern of dependency in the global economy.
It is however difficult to generalise about these diverse theories, but most do share some essential characteristics. The approaches tend to be based on analysis of the socio-political effects of economic structure. In this sense, most are reductionist like the liberal approach. This is not surprising; Marx regarded his work as a critique of the classical liberal political economists, and thus he focused on a similar set of intellectual problems. Politics in the domestic and international domains tends to be reduced to a function of the capitalist production structure and the division of society into classes, which is in turn a result of the individualÂs relationship to the means of production.
However, the theories are weak in explaining just how this relationship between political power and economic structure is expressed. There is an essential, missing ingredient  a theory of how structures themselves originate, change, work, and reproduce themselves. Antonio Gramsci, (and other theorists who used the Gramscian method in international relations, such as Robert Cox , and Stephen Gill ), attempted to develop a more political explanation of the relationship between economic structure and political processes at domestic and international levels of analysis. They sought to avoid the problem of economic reductionism referred to above, drawing on Gramsci himself as well as Karl Polanyi , Fernand Braudel , and other social theorists, and in the process overcame many of the limitations of liberalism, Marxism and realism .
E. Theoretical Comparisons
Using the Euro-dollar market as an example, the market system has become a major factor in shaping modern society; market competition and the responsiveness of economic actors to relative price changes. These issues propel society in the direction of increased specialisation, greater efficiency, and (if liberal and Marxist predictions ultimately prove correct) the eventual economic unification of the globe. Marx observed that the market, or capitalist system, was a revolutionary departure in world history and also argued that traditional culture and political boundaries would crumble in its path as it moved inexorably toward the full development and integration of the globeÂs productive capabilities .
Although, the market system is driven largely by its own internal dynamics, the pace and direction of its forward movement are profoundly affected by external factors. The interaction of the market and environmental conditions account for much of the economic and political history of the modern world. Among the so-called exogenous variables that affect the operation of markets are the structure of society, the political framework at the domestic and the international levels, and the existing state of scientific theory and technological development, all of which constitute constraints or opportunities affecting the functioning of economic actors. However, the market itself affects and transforms external factors in important ways: it dissolves social structures, alters political relations, and stimulates both scientific and technological advance. An understanding of the ways in which market forces and external factors affect one another is essential to comprehension of the dynamics of the international political economy.
On a general level, the Âstate covers a heterogeneous group of institutions engaged in an active process of regulating and directing society. It is these institutions in which Âstate power lies. The state also serves to give society some unity, integration and coherence. However, when one asks what the role of the state is, or what it should be, one if faced with a number of sharply contrasting views or theories.
As, for the market, historically, markets have always existed in one form or another as economic exchange relationships (such as trade) among individuals, enterprises or communities. The market system, has been characterised by industrial capitalists, and Marx, where owners of capital, workers, and intermediaries are all linked in social relationships via a complex pattern of political and market institutions. These facilitate the circulation of money for the production and purchase of commodities, services, land and labour. In the post-World War Two economic order, a market has been a political device used to achieve certain outcomes, conferring relative benefits on some, and costs on others in both political and economic terms. It is in essence, a political institution that plays a crucial role in structuring society and international politics. The changing market structure gives rise to new patterns of economic and political forces.
The Euro-dollar market was focused and developed in London at the initiative of the US-based banking industry. This development reflected the combination of the effects of former Eastern European bloc countries moving their US dollar balances out of the United States to Western Europe (mainly to London) during the beginning of the middle 1960s, and of Regulation Q, which put a ceiling on the interest rates that US banks could pay on deposits. It was also worth noting that while the effects of Regulation Q probably had the greatest effects, other countries through the 1960s (Canada, the Netherlands and Germany being the exceptions) had ceilings on both borrowing and lending rates. These controls distorted credit flows as well as well as the allocation process, which was determined not by the market mechanisms, but by bureaucratic hierarchies. Also, the industrial activities of multinational corporations increased demand for international banking services. At the same time, international banking was dominated by US based institutions that further stimulated the Euro-dollar market. Moreover, the Euro-dollar market was not subject to regulatory constraints on interest rates. This characteristics gave US banks an opportunity to Âshort-circuit Regulation Q and institutions from other countries to undertake activities in London, which they were prohibited from undertaking in their indigenous markets.
However, each view will be found to rest on rather different assumptions about the nature of human beings and their interests. In the liberal view, a personÂs interest is simply what a person says it is. To a reformist however, this is not realistic. People need help in identifying and articulating their interests. Also, liberalism, which emerged from the Enlightenment in the writings of Adam Smith and others, was a reaction to mercantilism and has become embodied in orthodox economics. It assumes that politics and economics exist, at least ideally, in separate spheres. It argues that markets, in the interest of efficiency, growth, and consumer choice, should be free from political interference.
The Marxist view is rather more complex, but argues what a person thinks – including how he perceives his interest, is determined by the particular society in which he lives. If the structure of the society works against a personÂs real interest, then what he thinks is in his best interest may not be so after all. Also, Marxism holds that economics drives politics. Political conflict arises from struggle among classes over the distribution of wealth. Therefore, political conflict arises will cease with the elimination of the market and of society of classes.
The underlying assertion is that no state had a Âgrand plan to reform the market, as for much of the period under consideration, states had provided the Âregulatory needs demanded by the industry. That, from time to time when there was sufficient autonomy between the state and the industry, the state could be seen to be acting contrary to the short-term interests of the industry and its long-term interests. However, the needs of the bureaucrats and elected officials were also a factor in the character of the policy implemented. In these latter situations it is argued that the state and its officials were acting in their own interests. That, they behaved in this fashion in order to preserve the indigenous financial regime and the positive economic externalities that go along with a rich financial infrastructure. Ignoring the global financial developments would risk erosion of the indigenous financial system and the loss of the positive economic externalities of this activity. It is this process that gave rise to the competitive deregulatory developments that was experienced in the development of the Euro-dollar market in London, and the industrial democracies.
This argument is the significant Âbase of the thesis, as while some actors might have benefited from the tight restrictions of the US in the 1960s (such as Regulation Q, and the Interest Equalisation Tax), non-state actors had tended to argue for a relatively unregulated or liberal policy conditions, which allows a clear advantage to their market power. International finance, has been a major force in integrating the modern world economy, nourishing the international economy in the form of loans and portfolio investment (stock and bonds). In the contemporary period, foreign direct investment by multinational corporations has augmented these traditional means of capital flow.
Governments and non-state actors have become important sources of capital through the making of loans and the giving of official aid, particularly to less developed countries. Also, in the perspective of liberal economics, the primary function of international finance is to transfer accumulated capital to the location where its marginal rate of return is highest, and where it can therefore be employed most efficiently. The flow of capital internationally is a powerful Âdriving force in the world economy, and the transfer of capital from regions with capital surplus, where the rate of return is relatively low, to potentially more productive regions is a major factor in the dynamics and expansion of the world system.
As international finance has significant political consequences theoretically, as it can also be the weakest link in the international economy: speculative and volatile flows of capital can be a major source of global economic instability. In the words of Charles Kindleberger , the international financial system is inherently prone to Âmanias, panics and crashesÂ. It is subject to periodic debt crises and destabilising international flows of investment, speculative, and flight capital in search of higher rates of return or safe havens.
In a world divided among competitive states, international finance and the exercise of influence by the hegemonic power over international economic and political affairs are closely related. The hegemon is both the manager and a primary beneficiary of the financial system. It is the primary source of capital for developing economies, and its currency is the basis of global financial relations. If a financial crisis occurs, the hegemon is the only actor that can play the role of what Charles Kindleberger has called the Âlender of last resortÂ, and can take the necessary action to moderate the threat to the system. Finally, the questions are important as it investigates the Âdoctrine of political conflict, over who gets what, where and when. Robert Cox has gone as far as the idea that: ÂTheory is always for someone, and always for some purpose .
F. Conclusion  Ânational states, capitalism and the global economyÂ
One question that arises from this theoretical paper is; what is the relevance of all this, to the situation that was faced by the British government in the 1960s? As there is no way in which ÂCapital can be taken as a total and unambiguous guide to the detail of social and political life a century after its publication. Whatever the status of Capital is, it proves to be useful to the specification of the relationship between theory and practice. After all, MarxÂs writings contain a number of very serious errors; not least his underestimation of the degree of political stability which capitalism in Western Europe and the United States would experience through the incorporation of the working class into the ruling political structures. That, is the critical legacy with which present Marxists have come to terms, a legacy that Marx certainly did not expect and to whose prevention his whole life work was dedicated. Nor did he anticipate that a revolution would be made in his name in the most backward of the major capitalist nations in 1917, and that in its isolation, that revolution would degenerate into a political dictatorship which would use his writings to justify the consolidation of the very system of wage labour to whose transcendence he was so dedicated. Today, both within and beyond the Marxist tradition, unresolved debates continue on the status and adequacy of the labour theory of value, on the problem of translating MarxÂs analysis of value formation under capitalism into an adequate theory of price determination, on the propensity of the rate of profit to fall, and on the epistemological status of MarxÂs categories and their susceptibility to empirical refutation .
However, this Âcelebrated failure of Marxism is a failure not of economic theory but rather of the social and political expectations based on it. In modern Western Europe, it was conventional among the vast majority of practising economists (outside the Communist parties), to dismiss MarxÂs economic writings as anachronistic, rendering redundant at the level of micro-economics by the rise of marginalism, and at the level of the national economy by the writings of John Maynard Keynes. Also, these very developments, in the field of economic theory seemed to be matched by the very dynamism of capitalism to which Marx attached such importance.
One argument that had been identified in this paper in response towards the theory of the relationship between states and the global economy, is that the state form is a product of the struggles which eventually secured the dominance of capitalist social relations. Through history, capitalist states had developed on the basis of the principle of territoriality of jurisdiction. The fragmentation of the Âpolitical into national states, which from their very roots comprise an international system, had developed alongside the internationalisation of capital. The transition from the personal sovereign to a sovereignty of public authorities over a defined territory was a key element in the development of the capitalist international system, as it provided a multi-purpose framework which permitted and facilitated the global circulation of commodities and capital.
The Euro-dollar market inherently being a new phenomenon proved some uncertainty to the British Labour government during the mid-1960s, which had to approach the new market through an analysis of the world in which the Labour Party sought to govern. Such an analysis posed questions as to why particular institutions and processes posed such a set of problems for the individual Labour governments? Why did particular issues come to preoccupy political debate in one period only to dwindle in importance in the next? Why particular patterns of political and social cleavage prove so tenacious? With such questions, and a new market developing, the British Labour Government had to respond with a set agenda in order to control specified targets including the sequence of booms and slumps, the differing strengths of the national economy, the rise and significance of multinational corporations, the role of international financial agencies, and the changing role of the government in economic and social life. Such a task seems a formidable one, but one that was not considered impossible. What holds the analysis together is the recognition that the world during the 1960s was Âcapitalist to the sense that Marx used the term. The law of value still operated throughout the major economic and social processes. Due to this reason, the preceding outline of MarxÂs analysis remains relevant, as it provides the means by which the true nature of the British governmentÂs dilemmas can be explained and understood.
ENDNOTE
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20. Yaffe D, The Marxian theory of crisis, capital and the state, Economy and Society, 2(2), May 1973, pp203-213.
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