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Booming, Borrowing, and Consuming

The U.S. Economy in 1999

Doug Henwood, editor of Left Business Observer, is the author of WallStreet:How It Works And For Whom (Verso,1997),and A New Economy?, forthcoming from Verso in the spring of 2000.

As we take our first steps across what Bill Clinton likes to call the bridge to the twenty-first century, we’re hearing a lot of praise for the state of the U.S. economy. The word “boom” is frequently used, as is the phrase “the best economy in a generation.” Wall Street economist Larry Kudlow, one of the most exuberant of his breed, calls it “the only adult economy in the world.” The United States, we’re told, is a natural to succeed in this post-industrial era—fast, flexible, polyglot, and decentered.

Thomas Friedman of the New York Times seems to be emerging as the pop theoretician of the era, just as George Gilder was for the 1980s. In a piece illustrated by an upraised fist painted red, white, and blue, Friedman wrote:

In the cold war we reached for the hot line between the White House and the Kremlin—a symbol that we were all divided but at least someone, the two superpowers, were in charge. In the era of globalization we reach for the Internet—a symbol that we are all connected but nobody is in charge.

This is a favorite theme, a theme of democratization through the universalization of the market, of the replacement of hierarchy by the network. Market freedom is implicitly equated with freedom itself, and free competition among monads given an egalitarian spin.

But don’t confuse the end of the Cold War or the abolition of hiearchy with the arrival of peace. As Friedman explained in the article, an excerpt from his book, The Lexus and the Olive Tree, Adam Smith’s invisible hand needed a little updating:

The hidden hand of the market will never work without a hidden fist—McDonald’s cannot flourish without McDonnell Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley’s technologies is called the United States Army, Air Force, Navy and Marine Corps…Without America on duty, there will be no America Online.1

This was published just as Friedman was warming up to his new role as head cheerleader for the bombing of Yugoslavia: “You want 1950? We can do 1950. You want 1389? We can do 1389 too.”2

Friedman helpfully joins the twin themes of the late 1990s, an unchallenged U.S. imperialism and and extraordinary financial boom with few historical precedents. Twenty years after Paul Volcker took over the Federal Reserve, drove interest rates past 20 percent, and created a near-depression that broke domestic labor and third world nationalism, U.S. economic and political power looks awesome. That it is horribly smug, brutal, philistine, and heavily financed by foreign lenders doesn’t seem to worry the elites who are celebrating it at all.

What Boom?

It’s a bit of a stretch to call U.S. economic performance in the 1990s a boom, much less treat it as a model for the world. Some basic statistics can quickly make this point. Table 1 shows the averages of several important economic indicators for the post-World War II business cycle expansions. The only less-than-conventional measure shown is the growth in real hourly wages; most bourgeois analysts pay that figure little mind, unless it’s growing too rapidly for their class comfort. Everything else is as hard-headed an economic measure as they come.

By the most fetishized measure of all, real GDP growth, the 1990s expansion is the slowest of the last nine, and by a considerable margin. The burst of growth since 1995 hasn’t been enough to offset the weakness of the early 1990s, the period of slow recovery from the late 1980s/early 1990s torpor. Though by official measures the formal recession was short—running from July 1990 through March 1991—the U.S. economy was virtually flat from 1989 through 1992, and even the early recovery years of 1993 and 1994 were weak by normal historical standards. Earlier recoveries were typically launched in torrid growth spurts, with rates of 8–10% not uncommon from the 1950s through the 1980s. Not so this time; growth averaged under 3 percent from 1992 through 1994, only about half historical expansion averages.3 Even the zippier growth that has prevailed since 1995—an average of 3.7 percent through the first quarter of 1999—would stack up poorly against historical averages.

Nor is U.S. growth quite in the world class league that is often claimed. When doing international growth comparisons, it’s important to remember that U.S. population growth (around 1 percent a year) is four times Japan’s and nine times the European Union’s. So while aggregate growth figures may be flattering to the United States, the per capita figures tell a different story. As table 2 shows, the U.S. outperformance of its major rivals is only a recent phenomenon. Japan outgrew the United States in aggregate terms well into the early 1990s. In per capita terms, the EU outgrew the United States in the 1980s and early 1990s, and is within a hair of U.S. performance since 1993. And even including their 1997–1998 collapse, the senior Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) leave the metropoles in the dust.

Of course per capita GDP growth is a highly imperfect measure of material welfare; it says nothing about income distribution or the quality of life. Still, it’s a good measure of relative economic performance, and does provide some kind of upper bound for the growth in real incomes over the long term. And, in a phrase, U.S. performance is really not all that dazzling, even by this most conventional of measures.

Back to more homely U.S. indicators. Some of them admittedly look a bit better than bottom-of-the-barrel. Most prominently, there has been some real wage growth, a reversal of the decline that prevailed from 1973 through 1995. Table 3 shows manufacturing wages, because average hourly wage figures for all private sector workers (including services) begin only in 1964. The performance of that broader measure is a bit better, up 5.6 percent as of April 1999 from its May 1995 low. But since real wages had been declining for more than 20 years, that gain marked a return to 1987’s level, which itself was below 1967’s.

An important reason for the real wage gain is that the unemployment rate has been below 5 percent since July 1997. Of course, the official jobless rate is highly imperfect; it counts people who are barely working as employed, and ignores people who’ve given up the job search as hopeless. But it is a reasonably decent measure of trends in labor market tightness, and it’s a basic fact of economic life that the tighter the labor market, the better off the working class. That relative tightness combined with two increases in the minimum wage have had the predictable effect of both raising the average wage and wages of the lower third of the distribution. In more normal times, this might have caused alarm at the Federal Reserve, but because of the Asian financial crisis and policymakers’ fears of a deflationary implosion of the entire world economy, they’ve held back from tightening.

And Now the Bad News

That’s about the end of the good news. Official pundits love to celebrate the Clinton boom as particularly virtuous, led by investment rather than consumption. Investment is important for long-term growth prospects, so evaluating these claims is important if we’re to look beyond the euphorias of the moment. The bragging is usually supported by reference to sharp growth in real business investment, specifically what the national income accountants call producers durable equipment (PDE)—things like lathes and pizza ovens, computers and fiber optic networks. (As table 3 shows, most other categories of investment are quite underwhelming.) A major reason for that growth, though, is the fall in computer prices. Today’s two thousand dollar computer is a lot better than last year’s two thousand dollar computer, and could do more than a roomful of 1970s computers could. Normally, “real” growth is less than nominal growth because prices typically rise over time. But in the case of computers and similar electronic gadgetry, with prices falling, flat nominal spending becomes an increase translated into real terms, and a moderate increase becomes a boom. Nominal spending on PDE is in line with the expansions of the 1970s and 1980s.

Who’s doing the investing? The national income accounts don’t tell us, but there’s a plenitude of anecdotal reports about how lots of the snazziest new computers, along with the best programmers, are being deployed on Wall Street, and not in real production.

That certainly seems to be the case, as the figures in table 3 show. From the 1950s through the 1970s, financial firms were responsible for under 10 percent of real capital expenditures, an amount equal to 1 percent or less of GDP. Since the 1980s, however, financial firms have accounted for a growing share of total real investment—more than 20 percent of it in 1998. Fixed investment by nonfinancial firms in the 1990s is lower than in any modern decades.

Historically, Marxian economics has treated the financial sector as parasitical—redistributing value produced in the real world of production while contributing none of its own. Mainstream economists dispute this furiously, but this is one case where the Marxian view has a lot in common with the sense of ordinary folks unschooled in the higher mystifications of bourgeois economics. It is very hard to see how capital invested in trading floors, web brokerages, and mutual fund telemarketing centers seriously increases human welfare over the long term. And it suggests that a lot of the “real” investment occurring in the late 1990s is actually in the service of a great financial bubble (of which more in a moment).

So this isn’t really the investment-driven expansion it’s said to be (a favorite line of Business Week, by the way). Quite the contrary, in fact: it’s the most consumption-intensive expansion in U.S. history since the 1930s Depression, as measured by consumption’s share of GDP.4 Between 1991 and 1998, U.S. households consumed 108 percent of their increase in aftertax income over the period, compared with an average of just over 90 percent in earlier expansions. How can people do this? By drawing down savings, if they have any, and borrowing more.

That hyper-consumption is what’s behind the much-bemoaned decline in the U.S. savings rate. In fact, during the first quarter of 1999, U.S. households recorded their first negative savings rate since the early 1930s, spending 100.5 percent of their income after taxes.5 (Preliminary figures for April 1999 show an even more strenuous 100.7 percent.) But there are many stories hidden behind that average, from the wealthy spending their stock market gains, to middle- and lower-income households running up their MasterCards (some buying groceries, others no doubt buying stocks).

Complaints about low U.S. savings rates, usually injected with a heavy dose of Calvinist moralizing, rarely confront one of the more profound contradictions of the economic scene today: the U.S. economy is powered by people regularly living beyond their means, and the rest of the world has come to depend on this alleged profligacy.6 While it’s compellingly tempting to say this can’t go on forever—and it obviously can’t—it has gone on for a very long time, far longer than anyone could ever have predicted. How or when it might end is anyone’s guess, but it probably won’t be accompanied by the riotous celebrations of The American Way that are so fashionable today.

How can an economy live beyond its means? Domestically, the rich lend to those below them on the economic ladder. That’s the fundamental mechanism behind the institutional complexities of credit cards and home mortgages. Over the long term, that contributes to the rich getting richer, as debtors devote an ever-larger share of their income to servicing their debts. The international aspects of what Mike Davis called overconsumptionism have earned less attention. But here too, despite all the institutional complexities, the fundamental mechanisms are fairly simple. Every year, the United States consumes more than it produces, the difference being our infamous trade deficit. To finance that gap, the United States borrows abroad, mainly from Japan and Western Europe. Consequently, the United States gets deeper into international hock with each passing year—about 1.9 trillion dollars in net debt at the end of 1998, to put a number on that assertion.7

But the 1990s have seen capital flowing into the United States far in excess of those mere financing needs. Rounding a bit, the U.S. current account deficit has totaled about a trillion dollars in this decade.8 But its increase in foreign debt has been almost a third higher. It’s that inflow that has allowed the United States both to live beyond its means to enjoy one of the greatest bull markets in the history of finance.

One reason for that inflow is that capital is fleeing troubled parts of the world like Latin America, Asia, and Europe.9 The U.S. economy and financial markets have thrived on the distress of others. A good bit of that distress can be laid to the trade and financial liberalization policies the United States has urged on the rest of the world through the International Monetary Fund (IMF)—which celebrity MIT economist Rudiger Dornbusch described as “a toy of the United States to pursue its economic policy offshore”—and the World Trade Organization.10 In saying this, I don’t want to endorse the liberal–populist critique that implicitly holds that there was a virtuous past of localist, caring capitalism that must somehow be restored. But there’s no question that the U.S. state has used its imperial strength to promote policies that have been polarizing, volatile, and socially and ecologically destructive.

It’s become entirely routine to see whole countries and regions plunge into financial crisis and economic depression. At times, the more excitable among us think the whole system is about to cave in. But so far the authorities have gotten practiced at patching together remedies that insulate the first world financial system and assure that the costs of adjustment will be felt by the poor and the weak. It’s quite possible their luck will last. But it’s an appalling way to run a planet.

The Great Stock Market Mania

No survey of the U.S. economy at the cusp of a new millennium would be complete without a look at that great bull market. For the past few years, I’ve been pretty reticent to comment on it, for two reasons: because bull markets usually go on longer than anyone ever suspects, and because lefties have repeatedly embarrassed themselves by being the earliest and most alarmist bears. But it’s hard to stay quiet much longer. We are deep into what looks like the greatest speculative mania in U.S. history, which makes it one of the great manias of all time.

No matter how you slice it, it’s hard to see a precedent for the recent U.S. stock market. A couple of macro figures first to make this point. Placing the bull’s birthday is a matter of some controversy. Some analysts date it in late 1974, after the 48 percent decline from 1973’s peak; others date it to late 1990, after it became clear that the Gulf War was bullish.11 In the Left Business Observer, I have been taking the line that the bull was born in August 1982, when Paul Volcker finally loosened the interest rate reins, prompted by Mexico’s announcement that it couldn’t service its debts. (As Wall Street would later learn to say, bailouts are bullish.) Labor having been broken at home and nationalist development policies about to be broken abroad (in the name of managing the debt crisis), Wall Street began an immense celebration. The neoliberal era was underway.

With that came an enormous shift in money and political power towards capital. First World countries gained at the expense of Third, and within countries, owners prospered mightily while workers were lucky to stay in place. The profitability of capital, especially U.S. capital, recovered from its 1970s depths. These are the fundamental reasons for the bull market. Those fundamental gains have been compounded many times over by rulingclass giddiness over their triumphs.

A lot of exuberance is capitalized into 1999’s stock market, and here are some figures to show it. Between 1982 and 1998, profits of the blue-chip companies that make up the Standard & Poor’s 500 (S&P 500) stock index rose 175 percent—almost three times as much as earnings of the average worker, to choose a random metric, which were up just 66 percent. But stocks were up 800 percent. All these numbers are uncorrected for inflation of 69 percent over the same period—meaning, of course, that the real wage fell, real profits rose, and real stock prices exploded.

Extended, euphoric runs in the stock market are hardly new, but they’ve rarely extended their runs across two decades. Between August 1982 and April 1999, the S&P 500 rose 1,113 percent. (The 800 percent number above is from annual averages; this 1,113 percent figure, monthly.) That’s without dividends and without correcting for inflation. With dividends reinvested, and corrected for inflation, the S&P 500 rose 971 percent from 1982 to now. (Of course, thanks to taxes, fees, and bad judgment, it’s a rare investor who could match this theoretical benchmark. But it’s the best way to compare relative stock returns over time.) There’s no comparable period in the 128 years of good records we have. At 1965’s peak, seventeen-year stock returns (including dividends) were 765 percent; in 1929, a mere 208 percent.

This extended exuberance has brought stocks to unprecedented values when measured against the things stocks have traditionally been measured against. At thirty-five, price/earnings (P/E) ratios—the ratio of stock prices to underlying corporate profits—are at near-record levels, as measured by the S&P 500. This is twice the 1871–1999 median of fourteen. The only higher figure was in 1932, when profits had collapsed to nearly zero in the depression, and stock prices didn’t quite follow. Other measures—the ratio of market capitalization (the dollar value of all outstanding shares) to GDP, the ratio of the S&P 500 to the average hourly wage—are at extreme records.

The Internet stocks that have headlined the mania over the last year are without known precedent in U.S. financial history. At its highs in early April, the market capitalization of, which sells airline tickets on the web and has microscopic revenues, was twice that of United Airlines and just a hair under American’s. America Online was worth nearly as much as Disney and Time Warner combined, and more than GM and Ford combined. Yahoo was capitalized a third higher than Boeing, and eBay nearly as much as CBS. At its peak, AOL sported a P/E of 720, Yahoo! of 1468, and eBay, 9571. Most Internet firms have no earnings, so their P/Es are infinite.

Oh yes, enthusiasts respond, but these are bets on a grand future. But previous world-transformative events have never been capitalized like this. Thanks to research by Grant’s Interest Rate Observer we know that RCA peaked at a P/E of 73 in 1929. Xerox traded at a P/E of 123 in 1961. Apple maxed out at a P/E of 150 in 1980. And all these companies were pretty quick to turn a profit, and once they did, their growth rates were ripping. In the so-called Nifty Fifty era of the early 1970s, the half-hundred glamour stocks that led the market sported P/Es of forty to sixty, and the broad market, around eighteen. And those valuations were once legendary for their extravagance.12

Social Realities

I’ve deliberately focused almost entirely on very conventional indicators to take the pulse of the U.S. economy in 1999. By such softer measures as income inequality, poverty rates, incarceration rates, and environmental destruction, the United States still leads the first world; among industrial countries, broadly defined, only Russia, a nation in total collapse, outdoes the United States in negative social indicators. The great Clinton boom hasn’t changed that at all. For example, by the government’s flawed definition of poverty, 13.3 percent of Americans were poor in 1997, a larger share than in 1989, when 12.8 percent were.13

International measures put the United States in a disgraceful light. The best cross-border comparisons of income distribution come from the Luxembourg Income Study (LIS), which is both a worldwide collaborative research effort and a database of national statistics massaged into international comparability. The soundbite version of the LIS data is this: for a country this rich, we have a lot of poor people. (Though this fact can be turned into a celebration of the “flexibility” of the U.S. labor market!)

It’s a matter of some controversy whether income and poverty should be measured in relative terms or absolute ones—that is, compared to national averages, or compared to some fixed benchmark across time and space. The U.S. poverty line is an absolute measure—fixed in the early 1960s and simply adjusted for inflation since. Most academic researchers prefer a relative measure, typically 50 percent of average incomes. And most public opinion studies (or a moment’s introspection) show that people experience their station in life relative to their peers, not relative to some measure invented by statisticians.14 The nearby table does it both ways.

For a country that thinks itself universally middle class, the United States has the second-smallest middle class of the nineteen countries for which good LIS data exist.15 The reasons are clear—weak unions and a weak welfare state. The social democratic states—the ones that interfere most with market incomes—have the largest. The U.S. poverty rate is nearly twice the average of the other eighteen. The only country with worse numbers is Russia, a country in near-total collapse.

But, Rush Limbaugh and Harvard professors alike might complain, U.S. incomes are the world’s highest, so our poor may be pretty well off by foreign standards. But even on absolute measures, U.S. performance is embarrassing. LIS researcher Lane Kenworthy estimated poverty rates for fifteen countries using the U.S. poverty line as the benchmark; results for thirteen of them are shown in the table. Though the United States has the highest average income, it’s far from having the lowest poverty rate. The countries with absolute poverty rates higher than the United States, Britain, and Italy, have average incomes well below American ones.

If forced to concede on all these points, the final defense of apologists of the American way is an appeal to our legendary mobility. But in reality, people generally don’t move far from the income class they were born into, and there’s little difference between U.S. and European mobility patterns. In fact, the United States has the largest share of what the OECD called “low-wage” workers, and the poorest performance on the emergence from the wage cellar of any country it studied.16

But enough of this talk of inequality and poverty (though people talk about it a lot less now, when there’s a Democrat in the White House, than in the 1980s, when it was Republicans). As I said, I’ve emphasized the conventional measures because I wanted to contest official propaganda on its own terms, not those more congenial to socialists. And by those conventional measures, the United States is hardly the model for the world that its publicists claim it is. In fact, for a normal country, the combination of massive foreign debts, a chronic current account deficit, and wackily overvalued financial markets, would be symptoms of an economy on the verge of crisis, like Mexico in 1994 or Thailand in 1997. But of course the United States isn’t a normal country. And so it goes on, running up debts and bombing troublesome countries at will. One wonders what might happen should the foreign creditors start demanding some of their money back.

At this point, I should invoke signs of resistance, some appropriately millennial evidence of transformative contradictions. Certainly there are some encouraging signs. What is no longer the “new” leadership at the AFL-CIO has given organized labor a psychological and image boost, and brought some fine new people into the union movement. College students organize around sweatshops, and academics are not merely linking up with organized labor, but organizing themselves into unions. But despite the impression of vigor, real organizing gains are slim, union internal structures remain sclerotically undemocratic, and, despite a few endorsements of the Labor Party, U.S. unions remain fatally attached to the Democrats.

There are signs of life outside organized labor too. Activists and thinkers that readers of this magazine might think of as identity politicians are thinking about how their particular interests articulate with class and economic power. A lively movement has grown up critical of official trade and development policy; for the first time I know of, there are organizations concerned about the institutional underpinnings of the world economic hierarchy like the IMF and World Bank.

But the overall impression of the state of U.S. politics is one of massive popular atomization and demobilization. Prevailing thought seems deeply marketized and individualistic; if unemployed, people blame themselves or their resumés, not the systemic allocation of scarcity. Surveys show people expect little from government, political parties, unions, or any collective action; they think that success or failure is largely a function of their own actions. For all the signs of life I just mentioned, it’s clear there’s a lot of work to be done.



Thomas Friedman, “A Manifesto for the Fast World,” New York Times Magazine, March 28, 1999.


Thomas Friedman, “Stop the Music,” New York Times, April 23, 1999.


A note on business cycle terminology: people are sometimes sloppy about using the word “recovery” to apply to an entire expansionary period. Strictly speaking, the recovery period is when real GDP is regaining ground lost during its recession decline; the expansion phase proper begins when the old high in real GDP is exceeded and, as growth continues, every subsequent quarter then becomes a record-breaker.


In the Great Depression, investment collapsed, falling by 93 percent in nominal terms, while consumption was off “just” 37 percent. That greatly expanded consumption’s share of (a much shrunken) GDP.


This may seem to contradict the figures in the previous paragraph. But the 108 percent figure refers to the share of growth in income between 1991 and 1998 that was spent (the marginal propensity to consume, in economic jargon). The 100.5 percent figure refers to the absolute level of spending relative to saving during the first three months of 1999 (the average propensity to consume, in economese).


Treasury Secretary-designate Lawrence Summers reportedly told a group of businesspeople in an off-the-record briefing that the world economy depends on the U.S. economy, the U.S. economy depends on consumer spending, consumer spending depends on consumer confidence, consumer confidence depends on the stock market, and the stock market depends on about fifty leading stocks. Whether his analysis is true or not, it suggests more official worry about the state of things than the headlines let on.


The net indebtedness figure is the net credit market debt position from the Fed’s flow of funds accounts, rest of world tables, which are also the source of the capital inflow figures in the next paragraph.


The current account balance is a broader concept than the more familiar merchandise trade balance. The current account balance adds to the trade balance trade in services as well as the balance on investment income. The United States used to run a substantial surplus on international investment income, since U.S. capitalists and financiers had far more in foreign real and paper assets than foreigners have in U.S. assets. As the United States sank into debt, however, the balance on investment has also slipped into the red.


Africa is ravaged, but there’s little resident capital that can flee the continent, except South Africa. The weakness of the rand and the move of several South African multinationals to listing their stocks in London instead of Johannesburg (and, in some cases, literally moving HQ), suggests serious flight.


Quoted in “World Central Bank,” unsigned editorial, Journal of Commerce, January 7, 1999.


These measures, and all subsequent ones, are based on Standard & Poor’s 500 index, an average of five hundred blue-chip stocks. Data for it, and its predecessor, the Cowles Commission Index, go back to 1871, providing the best long-term measure of the U.S. stock market—though, of course, no one index can ever tell the whole story.


As of late May, it appeared that the Internet mania was over; many stocks were well off their highs, though it seems too mild to be a true bubble-bursting.


The major flaw of the U.S. poverty measure is that it is an absolute, not a relative, measure. The poverty line was set in the early 1960s and has simply been adjusted for inflation ever since. Conceptually, then, the poverty level in the late 1990s represents the same purchasing power it did almost forty years earlier, despite the growth in average incomes and changes in consumption patterns. Since most people perceive their well-being relative to prevailing norms rather than ancient figures devised by statisticians, a more realistic poverty measure would be defined relative to average incomes. Were such a measure computed today, it would be over 20 percent.


Marx’s notion that wages were set relative to the custom of a country is a relative measure.


This is a very colloquial definition of class, of course. “Middle class” is too blunt and obfuscating a term for serious social analysis; it says nothing about property ownership or social power, and blurs beauticians, vice principals, and assistant vice presidents into a single homogenized entity.


Doug Henwood, “Up and down the ladder,” Left Business Observer, no. 84, July 1998. References on income mobility used in preparing that article are at

Anna Karenina

The word “capitalism” is typically applied to a very wide and diverse range of cases—from the United States to Japan, Russia, Brazil, or South Africa. We use the word in this way on the premise that, for all their diversities, all these cases have in common certain basic social forms and economic laws of motion, including a common tendency to crisis. And we talk about “global” capitalism on the premise that national capitalist economies are interconnected, that they are integrated in a global system driven by the same capitalist laws of motion, and that economic crises and prolonged downturns like the current one are not national in origin but are rooted in the general dynamics that drive the whole global economy and in the relations that bind all capitalist economies together.

Capitalism, then, is a system with certain general laws of motion that operate irrespective of national diversities, and it’s also a system that is uniquely expansionary and international, a system that has been tendentially “global” since the beginning and is now more globally integrated than ever. So how can we justify a discussion of contemporary capitalism, like the one in this special issue, organized as a series of national and regional case studies? Shouldn’t we, instead, have organized the issue around global institutions and processes—processes like “globalization,” international capital flows, currency movements, and financial speculation, and institutions like transnational companies, or agencies of capital like the International Monetary Fund (IMF) and the World Bank?

All of these transnational institutions and processes will, of course, figure very prominently in the articles that follow. But any analysis of global capitalism has to strike a difficult balance between two equally essential facts: on the one hand, every capitalist economy exists only in relation to others; on the other hand, there is no “global economy” abstracted from the particular local, national, and regional economies that constitute it, or from the relations among them.

All the articles in this issue, those that focus on specific national cases no less than those that deal with whole regions or continents, are about more than specific cases. They are about the dynamics of global capitalism. Each one illustrates the operation of global ecnomic forces as they manifest themselves in specific national and regional forms. But at the same time, all the articles in their various ways show how persistently those global dynamics continue to be driven by forces within, and relations among, national economies and nation-states. They illustrate—from the inside out, so to speak—how global capitalism operates through the medium of various relations among national economies and states.

In what follows, I want to explore, in general terms, some of the connections between capitalism and the nation-state and to sketch out their development from the beginning until now. To understand the current relations between capitalism and the nation-state, we need to know something about their earlier connections. The emergence of capitalism was closely tied to the rise of the nation-state, and that close link shaped the development and expansion of capitalism thereafter. So I’ll begin by taking readers on a short historical excursion, before considering where we are today.

My purpose is not to deny the “global” nature of contemporary capitalism. On the contrary, I want to bring the notion of a “global economy” down to earth, by acknowledging its concrete forms in diverse inter-national relations (I use the hyphen here to emphasize that we’re talking about relations among national entities), from relations among major capitalist powers to those between imperialist powers and subaltern states.

Joined at Birth?

It is not at all uncommon to insist on the connections between the emergence of capitalism and the rise of the nation-state, or even to define capitalism as a system of nation-states. Typically, the connections are seen through the prism of one or another theory of “modernity” or “rationalization,” according to which certain “modern” or “rational” economic, political, and cultural forms have developed more or less in tandem.1 A more nuanced explanation suggests that the European nation-state, in sharp contrast, say, to Asian empires, laid the foundations for capitalism because Europe was organized into multiple polities, instead of one overarching empire. This permitted the development of a trade-based division of labor, without the burden of massive appropriation by an imperial state which would syphon off surpluses that could otherwise be invested.2

Let me propose a somewhat different account of the relation between the rise of capitalism and the nation-state. This account will be based on certain presuppositions which can only be stated here baldly, without elaboration, but which have been discussed at greater length elsewhere.3 The main presuppositions are these: that capitalism was not simply the natural outcome of certain transhistorical processes like technological progress, urbanization, or the expansion of trade; that its emergence required more than the removal of obstacles to increased trade and growing markets or to the exercise of “bourgeois” rationality; that while certain European, or Western European, conditions, not least the insertion of Europe in a larger and non-European network of international trade, were necessary to its emergence, those same conditions produced diverse effects in various European, and even Western European, cases; and that the necessary conditions for the “spontaneous” or indigenous development of a capitalist system, with mutually reinforcing agricultural and industrial sectors, existed only in England.

How, then, do these presuppositions apply to the relation between the rise of capitalism and the nation-state? We can certainly accept that capitalism emerged in the distinctive context of the early modern European nation-state. But not all European, or even Western European, nation-states developed in the same way. The French absolutist state, for instance, had an economic logic quite distinct from capitalist forms of exploitation or capitalist laws of motion. Notwithstanding France’s “bourgeois revolution,” we can’t (as I’ve argued elsewhere) take for granted its “spontaneous” evolution into capitalism, in the absence of external pressures from an already existing English capitalism.

The rise of capitalism and the nation-state were intertwined in England as nowhere else. But to insist on the particularity of this English relationship is not at all to deny the close connection between capitalism and the nation-state in general. On the contrary, the particular nature of the English relationship only serves to emphasize that close connection. The point is not only that England gave rise to capitalism but also that England produced a distinctively unified and sovereign nation-state. In other words, the social transformations that brought about capitalism were the same ones that brought the nation-state to maturity.

As Marx pointed out long ago, pre-capitalist modes of production were characterized by a kind of unity of economic and political power, specifically in the sense that exploitation was carried out by “extra-economic” means—that is, by means of political, judicial, and/or military power. This unity existed in a very wide variety of forms. For instance, many ancient empires employed state power to collect tribute from subject peoples, including their own peasants, and imperial office was the principal means of acquiring great wealth.

What was notable about pre-capitalist forms in Europe was the emergence of a fragmented state power, the “parcellized sovereignty” of Western feudalism, which created a distinctive kind of “extra-economic” power, the power of feudal lordship. The fragmented military, political, and judicial powers of the state became the means by which individual lords extracted surpluses from peasants. At the same time, political parcellization was matched by economic fragmentation. Internal trade, for example, was less like modern capitalist forms of trade in an integrated competitive market than like traditional forms of international commerce, a series of separate local markets joined together by a carrying trade conducted by merchants “buying cheap” in one market and “selling dear” in another.

The feudal ruling class was eventually compelled to consolidate its fragmented political power, in the face of peasant resistance, and parcellized sovereignty gave way to more centralized monarchies in some parts of Europe. One effect was to reproduce the unity of political and economic power at the level of the central state, while never completely overcoming the parcellization of feudalism. The most notable example is the absolutist state in France, regarded by many as the prototype of the emerging “modern” nation-state. Formed in a process of state centralization that elevated one among many feudal powers to a position of monarchical dominance, French absolutism remained in many ways rooted in its feudal past.4

On the one hand, the bureaucracy that is supposed to be the mark of the French state’s modernity represented a structure of offices used by office-holders as a kind of private property, a means of appropriating peasant-produced surpluses, what has been called a kind of centralized feudal rent, in the form of taxation. This was a mode of appropriation very different, in its means and in its laws of motion, from capitalist exploitation—depending, for example, on direct coercion to squeeze more surpluses out of the direct producers, instead of on intensifying exploitation by enhancing labor productivity.

On the other hand, the absolutist state never completely displaced other forms of “politically constituted property.” It always lived side by side, and in tension, with other, more fragmented forms, the remnants of feudal parcellized sovereignty. Aristocrats, the church, and municipalities clung to their old autonomous powers, military, political, or judicial. Competing for the same peasant-produced surpluses, the central state typically co-opted many potential competitors by giving them state office, exchanging one kind of politically constituted property for another. But the remnants of aristocratic privilege and municipal jurisdiction, together with the tensions among various forms of politically constituted property, remained to the end just as much a part of French absolutism as was the centralizing monarchy.

These fragmented forms of politically constituted property, like the centralized version, were antithetical to capitalist appropriation. They were inimical to capitalism in yet another sense, too: they fragmented not only the state but the economy. Instead of a national market, there was a series of municipal markets (not to mention internal trade barriers) characterized not by capitalist competition but by the old forms of carrying trade, not the appropriation of surplus value created in production but commercial profit-taking in the sphere of circulation. To put it another way, the parcellization of sovereignty and the parcellization of markets were two sides of the same coin, rooted in the same property relations.

The fragmentation of both economy and polity was overcome first and most completely in England. From the outset—certainly from the Norman Conquest—the English state (the emphasis here is on England, not on other parts of what would become the “United Kingdom”) was more unified than others in Europe, without the same “parcellized sovereignty.” For instance, when France still had its regional “estates,” England had a unitary national parliament, and when France (even up until the Revolution) had some 360 local law codes, England had one dominant legal system in its common law. But this unity was not simply a matter of political or legal unification. Its corollary was a degree of economic unification unlike any other in history, something like a national economy—an integrated, and increasingly competitive, national market—already in the seventeenth century.

Both political and economic unity can be traced to the same source. The centralization of the state in England was not based on a feudal unity of economic and political power. The state did not represent a private resource for office-holders in the way and on the scale that it did in France, nor did the state on the whole have to compete with other forms of politically constituted property. Instead, state formation took the form of a kind of division of labor between political and economic power, between the monarchical state and the aristocratic ruling class, between a central political power that enjoyed a virtual monopoly of coercive force much earlier than others in Europe (the English aristocracy, for instance, was demilitarized before any other in Europe), and an economic power based on private property in land far more concentrated than elsewhere in Europe (in France, for instance, by far the most land continued to be held by peasants).

English landlords, then, increasingly depended on purely “economic” forms of exploitation, while the state maintained order. Instead of enhancing their own coercive powers to squeeze more out of peasants, they relied on the coercive power of the state to sustain the whole system of property, while they exercised their purely economic power, their concentrated landholdings, to intensify the exploitation of labor by increasing its productivity. The weakness of politically constituted property in England, in other words, meant both the rise of capitalism and the evolution of a truly sovereign and unified national state.

Capitalism and Inter-National Relations

For those who regard capitalism as the consequence of commercial expansion when it reached a critical mass, there is something paradoxical about the development of English capitalism. England was certainly part of a vast trading network. But other European nation-states in the early modern period were also deeply involved in the system of international trade, and non-European civilizations in Asia and the Islamic world also had highly developed and extensive trading networks. What distinguished England—and what was specifically capitalist about it—was not, in the first instance, predominance as a trading nation or any peculiarity in its way of conducting foreign trade. England’s peculiarity was not its role in an outwardly expanding commercial system but, on the contrary, its inward development, the growth of a unique domestic economy.

What marked off England’s commercial system from others was a single large and integrated national market, increasingly uniting the country into one economic unit (which eventually embraced the British Isles as a whole), with a specialized division of labor among interdependent regions and a growing, and mutually reinforcing, interaction between agricultural and industrial sectors. This market was also distinctive in the extent to which it traded not just in luxury goods but in cheap everyday goods—the means of survival and self-reproduction—for a mass market.

So while England competed with others in an expanding system of international trade, a new kind of commercial system was emerging at home—which would soon give it an advantage on the international plane too. Unlike traditional commercial systems, this one did not just depend on profits derived from the carrying trade or an “infinite succession of arbitrage operations between separate, distinct, and discrete markets.”5 This system was unique in its dependence on intensive, as distinct from extensive, expansion, on the extraction of surplus value created in production as distinct from profit in the sphere of circulation, on economic growth based on increasing productivity and competition within a single market—in other words, on capitalism.

So capitalism, while it certainly developed within—and could not have developed without—an international system of trade, was a domestic product. But it was not in the nature of capitalism to remain at home for long. Its need for endless accumulation, on which its very survival depended, produced new and distinctive imperatives of expansion. These imperatives operated at various levels. The most obvious was, of course, the imperialist drive. There was, to be sure, nothing new about colonialism, and Britain’s major European rivals were just as much involved in the subjugation of colonial territories, in the oppression of colonial peoples, and in the slave trade. But here again, capitalism had a transformative effect. The new requirements of capitalism created new imperialist needs, and it was British capitalism that produced an imperialism answering to the specific requirements of capitalist accumulation, its particular need for resources, labor, and markets.

Capitalism also expanded out from Britain in another and more complicated sense. The unique productivity engendered by capitalism, especially in its industrial form, gave Britain new advantages not only in its old commercial rivalries with other European states but also in their military conflicts. So, from the late eighteenth century and especially in the nineteenth, Britain’s major European rivals were under pressure to develop their economies in ways that could meet this new challenge. The state itself became a major player. This was true most notably in Germany, with its state-led industrialization, which at first was undoubtedly driven more by older geopolitical and military considerations than by capitalist motivations.

In these cases, the drive for capitalist development did not come from internal property relations like those that had impelled the development of capitalism in England from within. Where, as in France and Germany, there was an adequate concentration of productive forces, capitalism could develop in response to external pressures emanating from an already existing capitalist system elsewhere. States still following a pre-capitalist logic could become effective agents of capitalist development. The point here, though, is not simply that in these later developing capitalisms, as in many others after them, the state played a primary role. What is even more striking is the way in which the traditional, pre-capitalist state system, together with the old commercial network, became a transmission belt for capitalist imperatives.

The European state system, then, was a conduit for the first outward movement of capitalism. From then on, capitalism spread outward from Europe both by means of imperialism and increasingly also by means of “market” imperatives. The role of the state in imperial ventures is obvious, but even in the operation of purely economic laws of motion, the state continued to be an unavoidable medium.

Capitalism had emerged first in one country. After that, it could never emerge twice in the same way. Every extension of its laws of motion changed the conditions of development thereafter, and every local context shaped the processes of change. But having once begun in a single nation-state, and having been followed by other nationally organized processes of economic development, capitalism has spread not by erasing national boundaries but by reproducing its national organization, creating an increasing number of national economies and nation-states. The inevitably uneven development of separate, if inter-related, national entities has virtually guaranteed the persistence of national forms.

Today’s Universal Capitalism

Today, capitalism is all but universal. Capitalist laws of motion, the logic of capitalism, has penetrated ever deeper into the societies of advanced capitalism and spatially throughout the world. Every human practice, every social relationship, and the natural environment are subject to the requirements of profit-maximization, capital accumulation, the constant self-expansion of capital. At one extreme, in advanced capitalist countries, this means the penetration of capitalist principles into those social, institutional, and cultural spaces that even a few decades ago they hadn’t yet reached. At the other extreme, it means the marginalization and increasing impoverishment of whole regions outside the advanced capitalist countries (an effect vividly described by John Saul and Colin Leys in this issue in the article on sub-Saharan Africa). In a sense the class polarizations of capitalism are being reproduced in the North-South divide, not to mention the impoverishment of so-called “underclasses” within advanced capitalist countries.

But to say that capitalism is universal is not to say that all, or even most, capital is transnational. The measure of universalization isn’t whether, or to what degree, capital has escaped the confines of the nation-state. We still have national economies, national states, nationally based capital, even nationally based transnationals. It hardly needs to be added that international agencies of capital, like the IMF or the World Bank, are above all agents of specific national capitals, and derive whatever powers of enforcement they have from nation-states—both the imperial states that command them and the subordinate states that carry out their orders.

It isn’t just that nation-states have stubbornly held on through the universalization of capitalism. If anything, the universalization of capitalism has also meant, or at least been accompanied by, the universalization of the nation-state. Global capitalism is more than ever a global system of national states, and the universalization of capitalism is presided over by nation-states, especially one hegemonic superpower.

This is a point worth emphasizing. The conventional view of “globalization” seems to be based on the assumption that the natural tendency of capitalist development, and specifically its internationalization, is to submerge the nation-state, even if the process is admittedly still far from over. The internationalization of capital, in other words, is apparently in an inverse relation to the development of the nation-state: the more internationalization, the less nation-state. But the historical record suggests something different. The internationalization of capital has been accompanied by the proliferation of capital’s original political form. When capitalism was born, the world was very far from being a world of nation-states. Today, it is just that. And while new multinational institutions have certainly emerged, they have not so much displaced the nation-state as given it new roles —in fact, in some cases, new instruments and powers.

What, then, of the decline of national sovereignty that people associate with globalization? Of course the global economy is highly integrated, and of course massive and rapid movements of capital across national boundaries, especially in the form of financial speculation, are a dominant feature of the world economy—as the articles that follow here will testify. But those same articles will show how every transnational process is not only shaped by specifically local conditions but also how the state is their indispensable instrument. If “globalization” means the decline of national capitalist classes and the nation-state, the transfer of sovereignty from the state to the organs of some kind of unified transnational capital, it certainly hasn’t happened yet and seems unlikely ever to happen. It is hard to foresee the day when capital will stop being organized on national principles,

In fact, globalization itself is a phenomenon of national economies and national states. It is impossible to make sense of it without taking account of competition among national economies, and national states carrying out policies to promote international “competitiveness,” to maintain or restore profitability to domestic capital, to promote the free movement of capital while confining labor within national boundaries and subjecting it to disciplines enforced by the state, to create and sustain global markets—not to mention national policies deliberately designed to forfeit national sovereignty. It needs to be added, too, that globalization has in large part taken the form of regionalization (a point emphasized by Greg Albo and Alan Zuege in their discussion of Europe), creating blocs of unevenly developed and hierarchically organized national economies and nation-states.

To say all this is certainly not to deny that the relations between capital and nation-state take many different forms. The relations among advanced capitalist economies and among their national states are obviously very different from the relations between them and weaker national entities. And the room for national maneuver varies accordingly. But it is not an insignificant fact that all these various relations are, in one way or another, inter-national relations.

It is not insignificant (for instance, in its consequences for oppositional struggles, such as those described by James Petras and Henry Veltmeyer in their article on Latin America in this issue) that imperialism today is no longer a matter of direct colonial domination but a relationship between national entities. In a sense, the new forms of imperial domination by means of debt and financial manipulation, or even foreign direct investment, are what they are precisely because they provide a means of penetrating national boundaries, barriers that hardly existed for older forms of colonial domination by direct military means. And, of course, this kind of imperial power, no less than earlier forms, is exercised by nation-states, whether directly or through international agencies.

The other side of the new imperialism is a new kind of militarism. This one doesn’t generally have territorial ambitions, and generally leaves nation-states in place. Its objective is not hegemony over specific colonies with identifiable geographic boundaries but boundless hegemony over the global economy. So instead of absorbing or annexing territory, this imperialist militarism typically uses massive displays of violence to assert the dominance of global capital—which really means exercising the military power of specific nation-states to assert the dominance of capital based in a few nation-states, or one in particular, the United States, enforcing its freedom to navigate the global economy without hindrance.

There is very little, then, that can be said about the global economy without reference to its national constituent parts, and very little that can be said about global economic processes without reference to relations among national economies and states. What can we say about globalization without invoking the relations between the United States and Japan, or between both and the European Union, or each of them and various third world countries? What can we say about the European Union without acknowledging the complex and contradictory processes (explored by Albo and Zuege) generated by the uneven development of its various constituent economies, and the tensions between integration and competition among them, or between impulses toward integration and assertions of national sovereignty? What can we say about the dynamics of global capitalism in general without acknowledging the constant tension between international cooperation and struggles for dominance among national capitalisms—such as, say, the consistently contradictory relationship between the United States and Japan?

What implications, then, does all this have for our understanding of the prolonged crisis—or the long downturn—that is the hallmark of capitalism “at the end of the millennium”?

On the one hand, it’s certainly not just a Japanese or Latin American crisis, or the consequence of specific national strategies or policy failures. As the articles in this issue show, it is not a function of “crony capitalism,” nor of any other specific and defective form of capitalism. It is not exclusive to deficient capitalisms, such as the parasitic Russian form analyzed by Stanislav Menshikov, or to the victims of imperialism, such as those portrayed by Petras and Veltmeyer or by Prabhat Patnaik in his article on Asia. It is a consequence of capitalism pure and simple, and it manifests itself, as Doug Henwood demonstrates in his piece on the United States, even in the most ostensibly successful capitalism. Crisis is a consequence of systemic processes inherent in capitalism as such, which are playing themselves out in every capitalist economy and in the relations among them.

On the other hand, those systemic processes manifest themselves in different ways in different contexts. The global crisis is shaped by the specific national forms of its constituent parts, each with its own history and its own internal logic, and by the relations among those national entities. It is also shaped by the uneven development among the national components of global capitalism. All capitalist families today are unhappy, and all for the same fundamental reasons, but each is unhappy in its own way.

This is so not least because the principal economic actors and classes are still organized above all on a national basis. Each nation’s working class has its own class formations, practices, and traditions. And while no one would deny that capital is far more mobile and less place-rooted than labor (with consequences outlined in this issue, for instance, by Bill Tabb), we are still a very long way from the global capitalist class depicted by the “globalization thesis.” No one is likely to have much trouble distinguishing U.S. from Japanese capital, or either one from Russian or Brazilian. In fact, global integration itself, whatever else it may mean, has meant intensified competition among national capitals. It would be very hard to make sense of recent crises and the long downturn without acknowledging that fact.

To say, as Marx did, that capitalists have no nation is certainly to say that they have no national loyalties and will move wherever the imperatives of profit-maximization take them, but it certainly doesn’t mean that they have no roots in, or no need for, the state or for their own nation-state in particular. The need to maximize profit has always involved certain requirements of organization and enforcement (among other things, to keep the working class in place) which up to now have been, and in the foreseeable future still promise to be, fulfilled above all by nation-states.

The fact that capitalism is a global system organized nationally means two things, both of which are amply demonstrated in the articles that follow: on the one hand, its systemic weaknesses and contradictions, its endemic crises, are not national in origin. They are global, and they are inherent in the system, rooted in capitalism’s basic laws of motion. This means that no specific national policy caused them, nor can any specific national strategy resolve them. On the other hand, because global capitalism is nationally organized and irreducibly dependent on national states, national economies and national states can still be the primary terrain of anti-capitalist struggle. At the same time, really effective oppositional struggles can’t be directed at resolving the contradictions of capitalism, which aren’t national in origin, but must be aimed at detaching social life from the logic of capitalism altogether.


  1. I talk about this conception of modernity, as it relates to capitalism and the state, at greater length in The Pristine Culture of Capitalism: A Historical Essay on Old Regimes and Modern States (London: Verso, 1991).
  2. See Immanuel Wallerstein, The Modern World System (New York: Academic Press, 1974), and Historical Capitalism with Capitalist Civilization (London: Verso, 1995)
  3. Most recently, in The Origin of Capitalism (New York: Monthly Review Press, 1999).
  4. On the process of feudal centralization and the contrast of France and England, see Robert Brenner, in eds. T.H. Aston and C.H.E. Philpin, The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-Industrial Europe (Cambridge: Cambridge University Press, 1985), especially pp. 254-264.
  5. Eric Kerridge, Trade and Banking in Early Modern England (Manchester: Manchester University Press, 1988), p. 6.
1999, Volume 51, Issue 03 (July-August)
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