Paradox upon paradox: fractal states and their making

Editor’s introduction

Michael Kidron (1930-2003) was among the most insightful theorists of the International Socialist tradition and a former editor of this journal.1 His early work focused on an analysis of capitalism during its sustained expansion in the decades following the Second World War. A central element of this analysis was his theory of the “permanent arms economy”, which sought to explain the boom by emphasising the diversion of capitalist profits into “waste” areas, particularly arms expenditure, slowing the crisis tendencies of the system.2 This theory complemented the theory of bureaucratic state capitalism, developed by Kidron’s brother in law, Tony Cliff, which attempted to explain the nature of the Soviet Union.3

Kidron was an activist in the Socialist Review Group, which would later become the International Socialists and, eventually, the Socialist Workers Party, but gradually drifted away from the group following its adoption of a “democratic centralist” organisational model in 1968. Nonetheless, in 1977 he contributed to the 100th issue of the first series of International Socialism, producing a critique of the journal’s theory that did not spare his own past contributions. The thrust of his argument was that the world system was increasingly characterised by competing state-capitalisms, in both the West and the East, and that the degree of integration of capitalism with the state required a fundamental rethinking of Marxist categories. This was met with a rejoinder in the same issue by Chris Harman, which stressed the internationalisation of production alongside the tendency towards state capitalism.

At this stage, neither Harman nor Kidron could foresee the extent of the turn towards neoliberal policies that would soon come, scaling back national restrictions on flows of capital and subjecting economies to the discipline of global finance, along with the emergence of free-floating currencies after Richard Nixon broke the link between the dollar and gold in 1971.4 The edited excerpt published below goes some way to redressing these limitations. It is taken from a manuscript left unpublished at the time of Kidron’s death and shows the author grappling with precisely these problems.5 This leads to a reconsideration of the role of the state in different periods of history and Kidron’s new concept of a “fractal state”.6

Joseph Choonara

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Paradox upon paradox: fractal states and their making

Three phases

In the early, liberal, phase of the market system, the state provided the circumstances for the existence of business. After a middle (state capitalist and national economy) phase in which state and business were partners, the late—globalisation—phase sees business providing the circumstances for the existence of the state. The state attempts to release itself from its circumscribed role by moving towards a virtual world state, a fractal state, which heralds the end of conventional politics and a growing difficulty—and cost—of governance.

The state in market society

Until the emergence of market society, the state was a relatively tame affair. Arrangements for enforcing norms of public behaviour among foragers, shifting agriculturalists or nomadic pastoralists were, and still are, folded into other aspects of social living. Adults guide and restrain children, and each other, in everything they do. In agrarian society these arrangements, although more defined than in its predecessor societies, are not necessarily the business of a special institution. They may be attached to economic activity or property rights—the feudal lord controlled both the land and the power to coerce. Or they may be attached to religious observance—the church exercised power to exclude the wayward from society, in both the present and the hereafter.

In market society, the most complex yet, the state separates out as a sovereign authority. It ceases to be primarily an instrument for plunder; it becomes also a means of coordinating economic activities and harmonising social behaviour. It has grown accordingly. In 1870 public spending averaged 8 percent of gross domestic product in the industrial economies of the day, ranging from 4 percent in the United States to 13 percent in France. By 1980 its average slice of the core economies had leapt to 40.5 percent (31 percent in the US and over 60 percent in Sweden) and, despite strenuous attempts to roll it back, hit 44 percent in 1998. Altogether, states now spend 30 percent of gross world product and account for a third of gross fixed investment. The state now enjoys an unprecedented intimacy with society.

While the intimacy between the modern state and society spans a wide variety of relationships, most states fulfil three core functions. Firstly, there is a coercive function, divided into clearance (creating the social space for the new economy by destroying localism and sapping self-sufficiency) and deterrence (protecting each segment’s share of the system as a whole). Secondly, there is a provisioning function—supplying productive resources and securing the circumstances for their effective use. Thirdly, there is an arbitration function—settling disputes between the businesses operating in the state’s territory. The relative weights of these functions have changed as the system has evolved. So have the ways that they have been carried out.

The early phase

In the early liberal, entrepreneurial-capitalist phase (roughly from the mid-18th century to the outbreak of the First World War in 1914) the state, pre-eminently the British state, cleared away many of the arrangements preventing the new economic freedoms from flourishing: laws of succession and entail that inhibited the development of a market in land; privileges granted to monopolies and corporations; laws governing the recruitment of labour and wages; the regulation of production by craft guilds; trade protection measures; and the elaborate system designed to maintain a favourable balance of trade, restrict colonial commerce and stockpile bullion.

Clearance turned into grand clearance when the age of imperialism brought more than 72,000,000 square kilometres (over half the world’s land area) and more than 560 million people (a good third of the total at the time) under the rule of a handful of European states. Old hegemonies were deposed. British naval power enforced market access and financial contract where necessary—although in most cases it was not necessary. Even nominally independent states were happy to absorb British capital and technology and to adopt the rules and practices of the astonishingly productive liberal order.

The state helped create a new, unattached labour force—brute labour, not necessarily skilled, not particularly motivated; but docile, cheap to maintain, mobile enough to flow to the new industries and occupations when required and to be expelled when not. In Britain, it was made available by the Enclosure Acts, the Highland Clearances, the Poor Laws and the Combination Acts. In the US it was recruited from among the poor and disaffected of the “old world”. Later, in imperial times, it was created by means of poll taxes which forced cultivators into the money economy (in most of colonised Africa), press-ganging and enslavement (in the mines and plantations of the New World) and indenturing (notably in India and China for use there and abroad). Once assembled and equipped with skills, the new proletarians had to be persuaded to work in the new conditions—that is, for others—or starve. A new apparatus of coercion was erected to deal with those who could not or would not conform. A mobile police force came into being in Britain in 1829 under direct control of the Home Office, first in London, then in the rest of the country. A national network of prisons was set up in 1877.

The state bore down heavily on the idle poor, the vagrants, the layabouts, the work-shy, dropouts, misfits, refuseniks, conscientious objectors, premature hippies—the list is long and the air thick with invective, moral outrage, and with proposals for re-education, retraining, workfare, welfare to work, placement services. The new policy was enshrined in the 1834 Poor Law Report co-authored by Nassau Senior, one of Karl Marx’s pet hates, who believed strongly in “less eligibility”, the notion that the able-bodied idle should benefit less than those who worked. The poor were no longer to be regarded as innocent victims of fate, as they had been officially since 1601, but as responsible for their own plight.

The state has regulated and licensed “legitimate” work ever since. It has fought, often ferociously, anything that might dilute people’s appreciation of the need to work in prevailing circumstances—millenarianism, utopianism, socialism among the public expressions of low motivation and drug “abuse” for the private expression of low motivation today.

It took time—and the Gordon Riots in England (1780), the Paris insurrection of 1830, the revolutionary spasm of 1848 in much of western Europe—for the lesson to sink in that the more the system acquired constructed wealth, the more it became necessary to direct the aims and motivations of its workforce along determined, predictable paths, to go beyond imparting rudimentary skills and discipline. The state did this in two ways. The first was by acting directly on personal motivation. State education was established in England in order, as James Mill put it at the time, to “train the minds of the people to a virtuous attachment to their government”, and to the social, economic and political arrangements that this government upheld. Uncertainly, and with little finesse, the state invaded the intimate region of internal controls as well. It defined “madness”, and condemned the “mad” so defined to endless confinement and observation in special institutions until or unless they showed, or pretended, remorse. That is, until such time as they recognised and accepted the ambient norms.

The second—indirect—way in which the state tried to shape popular motivations was by providing the dispossessed with a personal stake, be it ever so small, in the new system. It sought to make bearable the loss of economic power and the growth of material disparities by extending civil rights: the right to personal liberty; the right to freedom of belief and expression; the right to follow the occupation of one’s choice in the place that one chooses, subject only to legitimate demands for preliminary technical training; the right to own property and conclude valid contracts; and the right to exercise all these rights on terms of equality with others and by due process of law.

Political rights followed hard on the consolidation of civil rights in Britain. A series of Acts of Parliament extended the franchise to ever-widening circles of men (middle class men in 1832; skilled workers in 1867; all men in 1884), and then to women. By 1928 everyone above the age of 21 had the right to vote in local and national elections in Britain, and in 1969 the right was extended to everyone aged 18 and above.

Social rights, the right to a modicum of economic welfare and social security, and the right to enjoy a civilised existence according to the standards of the time scarcely existed in this early phase. True there were exceptions. Otto von Bismarck’s social insurance measures, introduced in Prussia in the 1880s to dull the appeal of the socialism that had glowed so warmly in Paris in 1870, were one prophetic example. Joseph Chamberlain’s social welfare measures adopted in Birmingham in 1874-76, and then nationally (the first state pension came in 1908), were another. But these were unusual. In the early phase of market society, the state’s activity as motivator was weakly developed. It touched on rights, but partially. It welcomed a sense of attachment to the system. It did not greatly cultivate that sense. On the contrary, it allowed a counter-culture to emerge—an autonomous sphere in which bodies such as friendly societies, trade unions, co-operatives and working men’s clubs, and attitudes such as socialism, anarchism, free-thinking, Quakerism and much else, could thrive independently of, and often in opposition to, the hegemonic, state-sanctioned culture.

The early-phase state assumed a commanding role in creating and maintaining what was to become the enormous, integrated and complex national networks of roads, ports, railways, postal services and, later, telecoms and airports—physical infrastructure—that defined the market spatially. More than any other, the market system needs underpinning by universally recognised expectations, which bound others’ behaviour and shaped one’s own: laws and regulations, and the very idea of lawfulness; stable currencies and stable exchange rates; common values, beliefs, perceptions and ways of understanding, and even a common language or, at least, a handful of shared languages. However compromised it may be by local regulations and requirements, or corrupted by biases in enforcement in different places, this institutional uniformity lies at the heart of the state’s services to market society.

The early chapter in installing this soft infrastructure in Britain was essentially complete by the 1830s: internal customs and duties were abolished and trade barriers came down (although not in all things) with the Act of Union in 1707; the pound sterling became the sole legal tender at the same time, although the ghost of local currency can still be seen in the notes issued by the Bank of Scotland. In 1803 steps were taken to establish a national militia, and power began to drain significantly from local to central government after the Reform Act of 1832. As for the less tangible realm of values, beliefs and perceptions, it is arguable that conformity did not come to the British until after the Second World War, and perhaps not even then. Post-war immigration soon shattered whatever homogenisation had taken place.

Between 1870 and 1913, the 50 million or so Europeans who washed into the farthest corners of the earth sprouted similar institutional arrangements, laws, regulations and professional conventions. For most practical purposes, there was a single world currency, administered by the Bank of England. Long-term interest rates were uniform. Prices fluctuated—wildly—but in the same direction worldwide.

The myriad transactions that make up the market system could not take place without money. Not that every potential transaction is permitted: in normal circumstances people cannot be bought and sold, at least not today; the amount of personal injury that can be perpetrated legally is limited; rules exist to restrain the exercise of monopoly power; and to curb the possession of weapons for personal use; there are strictly defined limits to the unrequited payments that can be extorted, and strict rules governing the behaviour of licensed extortioners, such as revenue and recruiting officers. There is, in other words, a basic institution, even more fundamental than money, that defines what is a legitimate use of money. It is the law and quasi-law—the body of formal permissions and prohibitions—and their penumbra of regulations, assumptions and habits.

In market society individuals are mobile, autonomous in many of their dealings and relationships, in frequent contact with strangers and often in unfamiliar circumstances. Thus the law is necessarily codified as a set of rules governing social roles detached from personal identity and, usually, from place. It relates to what the members of society share rather than what sets them apart. And, since the law is distinct from the individuals who fill the roles to which it applies, it requires special bodies of lawmakers, law interpreters and law enforcers. These special bodies formed part of the state from the very early days. The state was generally defined as essentially a law-making and law-enforcing body. Liberals saw it as providing a system of power and coercive sanctions that contains people in all their disruptive partiality and ambition, operating “not but by coercion: coercion cannot be produced but by punishment” (Jeremy Bentham). Socialists saw it more starkly as “a machine for the oppression of one class by another” (Friedrich Engels), and as “special bodies of armed men” (Lenin). Anarchists defined it as “the domination of either one [dynasty] or one nation or one class over every other” (Mikhail Bakunin) or as an institution designed “to protect exploitation, speculation and private property” (Peter Kropotkin).

In the early phase of the market system all was at least tranquilised, if not tranquil—the state ensured that its writ ran in the territory it claimed, and the security of person and property, although never absolute, was relatively high and for the most part rising.

In general, the state had little direct economic involvement in the market system’s early phase. It provided a framework or context, but few financial resources. There were exceptions: foreign conquests drew on the state for investment in physical and some institutional infrastructure, and in the heartlands of the new society the late-comer states spent more public money on investing at home than did the pioneers. It remains true, however, that the system was by and large self-sufficient financially, and sought friendship from the state, not funding. It was a stern friendship. The state was far larger than even the largest business. Its decisions, however misguided they might be, were final. Its judgements between rival interests were absolute—there was nowhere else for business to go, no appellate authority.

The middle phase

The middle, state-capitalist/national-economy or corporatist, phase of the market system ran from the First World War to the end of the Cold War in 1989. In this phase, coercion took on a different character. Clearance—creating the social space for the new economy—dropped out of the state’s standard repertoire. Of course, there were occasions when it was used—Japan invaded Manchuria in 1931 and the rest of China in 1937, Italy overran Abyssinia in 1935-36 and China annexed Tibet in 1956-59—but the general movement was in the opposite direction. The imperialist big bang of 1878-1914 gave way to a big crunch after the Second World War. Many millions of people gained or were granted independence, and a patchwork of independent states and statelets formed.

Clearance did not disappear within this new situation. Some of the new states continued to attack the self-sufficiencies that block off some people from the market: dam-builders encoiled vast numbers in the money economy and forest rangers cleared tracts of “tribals”, reducing them to dependence. In India, half of the armed forces and central paramilitary forces were deployed in an unending annexationist war, primarily in Jammu and Kashmir and the north eastern states; in Brazil, barely a week went by without police action against squatters in some remote corner of a vast ranch beyond the reach of the market. Burma (now Myanmar) ran an elaborate system of compulsory labour in which children as young as ten were forced to carry munitions and military supplies. In China, Han colonisation of Tibet and the far west was accompanied by police and paramilitary action aided by a substantial road and rail programme.

Clearance continued in the system’s original heartlands too. In the guise of welfare it subverted the vestiges of self-supply and self-service, turning social interaction into formal transactions—in child-rearing, in healthcare, in social support. But it declined in importance.

By contrast deterrence came into its own. In the middle phase the state became integral to economic competition. This was obvious in the state capitalism of the Soviet Union, but also real enough in the richer national economies, where state and business became linked through outright state ownership, strict regulation by the state or its capture by private business. Inter-state relations turned into the struggle among these integrated entities for market share, and the state’s particular form of rivalry—armed confrontation—came to define the system.

This led to outrageously extravagant arms races, which reached a climax in the early Cold War years of the mid-20th century. Never before had the military placed such a burden on a society supposedly at peace. Between 1985 and 1990 $2 billion was spent worldwide every day on preventing major war (and pursuing minor ones)—$4.2 trillion in all (in dollars at 1990 value). The destructiveness of the wars that did not break out is unimaginable. At the height of the Cold War, military strategists, even when sober, were contemplating outcomes in which the overwhelming bulk of the world’s productive capacity would have been destroyed, some two billion people killed and most of the world rendered uninhabitable. The US alone spent $5.8 trillion on its nuclear forces up to the mid-1990s.

The wars that did break out were nightmares. The First World War claimed 8.6 million lives in battle, and countless millions of others in the epidemics that ravaged the debilitated populations, not to mention the millions who died in the revolutions, reactions and retributions that followed it. Depending on the definition of “direct” and on the value assigned to the moneys of the time, it cost directly between US$4.4 trillion and US$5.4 trillion (in 1995 values). The Second World War counted 24.5 million military deaths, perhaps 30.5 million collateral deaths (three to five times the estimated figure for the First World War); and mountains of wrecked bodies and minds. It cost between 10.2 and 11.2 trillion US dollars of 1995 value. Even the “little” wars, the so-called conventional, peripheral, local wars, defy ordinary imagination: Japan’s war against China in 1937-41 claimed one million lives in battle alone; the 1950-53 Korean War killed 1.5 million in combat and a like number on the edges of battle in a population of 30 million; the 30-year Vietnam War consumed nearly the same number. The Iran-Iraq War of 1980-88 chewed up between half a million and one million soldiers, spat out perhaps three million maimed and wounded and absorbed $200-400 billion in resources (depending on what is included in the costs). It also preoccupied thousands of the best and most creative minds on both sides, and it imprisoned tens of millions in the tight orthodoxies of religious and nationalist fundamentalism. These, and the many internecine wars, signalled a major decline in security throughout the system as a whole. However, within each fragment, particularly in the heartlands, order more or less prevailed.

The state’s role in supplying raw labour continued well into the system’s middle phase. Stalin’s Gulag, for example, housed a slave population of between five and six million at its peak in the early 1950s, and the Labour Reform Camps in China are thought to contain 16 to 20 million workers, who make (and export) anything from pharmaceutical and food products to electrical machinery and vehicles. Nevertheless, the state’s provisioning function changed decisively. It shifted its focus from muscle to mind.

The state’s involvement in shaping popular motivation deepened correspondingly. Old-style aversion-conditioning proved inadequate. Workers had become too valuable, and too many of them commanded monopoly or quasi-monopoly skills, for them to be cowed or compelled; they needed to be persuaded. When all is said and done, “employees who feel good about their company are better employees”. Social rights were added to the shambling, incomplete extension of civil and political rights. Most states came to subscribe to the notion that personal failings are not wholly responsible for social distress, and that impersonal economic processes should be accompanied by a safety net for all their citizens. Hardly a place existed in which the inhabitants were not, in general and with glaring exceptions, entitled to some form of state support, meagre as may be, in times of personal misfortune. Maternity benefit, healthcare, unemployment insurance, income support, pensions and disability payments became part of the fabric of normal life. While total government spending in the rich industrial countries grew 80-90 times in real terms in the last century, spending on social policy exploded—by 5,000-6,000 times. Underpinning social rights was a policy of creating the circumstances in which personal grumbles fall short of coalescing into public protest. Almost everywhere the state attempted to set the level of domestic economic activity by changing the level of state spending relative to all expenditure—so-called Keynesian demand management. Aimed at evening out the fluctuations in overall employment, and possessed of a huge and increasingly sophisticated panoply of concepts and analytical tools, Keynesian macroeconomics held universal sway in government policy-making in the system’s heartlands from the late 1930s to the late 1970s.

The state did not leave popular affirmation to chance. It undertook the business of creating it. The core of the educational effort inherited from the early phase of market society—absorption of the three Rs and obedience to authority—was supplemented to include a love of the Mother Country or Fatherland, and appreciation of the virtues of the democratic system, the party, the army or whichever institution was in power at the time. Flags, anthems, oaths of allegiance and effigies of the head of state became standard items in school furniture and curricula. Outside school, the state strode towards forming opinions. Whereas in the first phase of market society, it generally acted first and dealt with the consequences of its actions later, in the middle period it tried to pre-empt them. It exerted control over the media: in all countries, including the US, the modern press has been controlled from its inception, and to this day, most states subject their press to censorship of one sort or another. Magazines have been treated in similar fashion. Radio and television are tightly controlled in most countries through ownership, licensing or other means. The state became the biggest advertiser. As for the internet, which was cradled by the state, the struggle for its soul is unending.

The middle-phase state went farther than its predecessor in providing a physical infrastructure for the market. It came to dominate the so-called commodity inputs in industry such as steel, energy, water and other utilities. This happened not only in Eastern Europe, China and South East Asia, where Soviet-type state capitalism or near total nationalisation was adopted. It has occurred in Western Europe. State financing peaked in the mid-20th century when the state-capitalist countries were joined by the newly independent ex-colonial states and the national economies of the rich world. Only in the US and in post-Second World War Japan was the share of central government relatively unimportant. Most newly independent countries went further. They did not just embrace nationalisation of the classic infrastructural services and the broad spectrum of inputs into modern production, but also of the specific differentiated products that usually remained in private hands in the hub countries. To take some representative poor economies, as late as the late 1980s and early 1990s 37 percent of the modern sector in Zambia was run by the state, 21 percent in Morocco, 19 percent in India, 18 percent in Indonesia, 17 percent in Bolivia, 16 percent in Chile and South Africa, 15 percent in Ghana, 13 percent in Kenya and Zimbabwe, 12 percent in Ecuador and 9 percent percent in Brazil.

The state’s function as a neutral arbitrator between businesses fell into abeyance in this middle phase. Its intervention in the market was primarily as negotiator or bargainer with other national or state capitals, as protagonist and, in the final analysis, as war-maker.

The late phase

War is not what it was. At the limits of currently available technology it is unthinkable as an instrument of policy (although certainly possible as an alternative to it). The US and, still, Russia, can annihilate all life within a space 2,600 times the volume of the biosphere. Other biocide states (Britain, France, Spain, Italy, Brazil, India, Pakistan and China) can extinguish all life. No state could survive total war, and nor—probably—could humanity. Sub-total or limited war is another matter. Around 56 wars were being fought in an average year in the 1990s. Bloody, gruesome and horribly destructive as many of them were or are, they fell short of the “totality” which characterised or threatened to mark wars in the middle phase.

Yet even limited war is no longer an easy option. As it becomes more “productive” (measured in destructiveness or lethality per dollar spent on it), war paradoxically becomes more costly: states are now vulnerable to lethal attack from others whose firepower goes well beyond their productive and technological resources. For example, among the states known to have ballistic missiles are Algeria, Belarus, Egypt, India, Kazakhstan, Pakistan, North Korea, Ukraine and Saudi Arabia. Even some non-states have war-making powers as great or greater, as shown by the Al Qaeda organisation in Afghanistan in 2001. States can—and still do—wage war. As of 2000, they still spend $760 billion a year, six percent of Gross World Product, on the military. Deterrence is still a function of the state. But the symbiosis between war-making and the productive economy is less obvious now than at any time in the past 250 years.

Provisioning by the state has also become more complicated. In the early phase the state was primarily engaged in regulating the flow of raw labour between market society and its agrarian surroundings. In good times it recruited or press-ganged people to work within the system, and in lean times it shunted them back to the breeding grounds outside. To be sure, labour never flowed in and out without friction: the peasantry often proved unable to shelter all the fugitives from the new economy when required to do so, and there were periodic labour famines as well as labour feasts.

State management of this flow persisted far into the middle period. The state’s welcoming face predominated in the rich world during the long post-war boom. Almost everything was done to ease the passage of foreign labour into the heartlands—Caribbeans to Britain, North Africans to France, Turks to Germany, South Asians to Saudi Arabia, everybody to the US and even Vietnamese people to the Soviet Union, East Germany and so on. The state’s forbidding face was apparent in China from 1957 onwards and particularly after 1968. Around 50 to 80 million young Chinese urbanites were decanted into the agricultural communes in order to relieve the pressure on overstrained cities and change the values of, or “revolutionise”, the people transferred.

However, the thrust of the state’s activity as a supplier of labour shifted in the middle phase. Labour was now primarily a stock of skills and attitudes—literacy, “interpersonal skills” and cultural awareness. It came to be called “human capital”, and the prime function of the state became to conserve it, improve its quality and prevent it deteriorating.

Fulfilling that function nowadays is becoming ever more complicated, and the state is under constant and contradictory criticism as a result. The education it provides is too narrow. It is too broad. It ignores hard information (Britain). It neglects creativity (Japan). Its focus on the individual student is not appropriate for production in teams. It is wasteful: half of job-applicants in US manufacturing are rejected as unqualified and half of manufacturers spend at least 2 percent of payroll on training; more than one third of the 16-19 year olds in full-time education in England and Wales do not complete their courses or attain the intended qualifications. In poor countries the dropout rate, and the implied cost, are relatively higher. The state suffers from not having clear criteria of success, leading to complacency, doubts, comparisons and flurries of reorganisation, interspersed with periods of organisational stenosis, demoralisation and budgetary disorder.

The debate on education looks set to run and run. At its root is an insoluble conflict between socialisation and market performance. In an increasingly individualised society the state is forced to take on more and more socialising functions, however reluctant it is to do so and however much it makes a hash of them. Meanwhile business is increasingly impatient with any excess baggage attached to the narrow competences it requires.

Important as it is, education is not the only aspect of the state’s waning power to provide the labour needed. So fast are changes in economic activity, in its type and location, so rapid the tides of employment, with women and migrants washing in and out of the paid labour force—and part-time work, home-work, self-employment and networking surging and subsiding—that the state is losing sight of where people are and losing its ability to nail down the employed. The welfare-statist bargain between the state and workers—to exchange basic necessities for loyalty or at least quiescence—is buckling. The strain of matching the unremitting rise in claims to stagnant or declining contributions is becoming insupportable. In a few parts of the US, private sector companies such as Lockheed Martin are taking over the whole welfare system and its entire budget, including benefit payments and the decision of who is eligible to receive them.

The weakening adhesive power of health and welfare services would matter less if the state were able to ensure a benign economic climate. But its ability to deliver growth and stability and to temper structural change has been compromised by the openness of the global economy. The interventions routinely made in the flush of Keynesianism are well beyond the contemporary state’s power. Governments find it difficult to increase spending in a recession and build up surpluses in times of boom. Sustaining a high level of demand when the rest of the world is stagnating leads to a collapse in exports. Combating inflation with an austerity that is out of sync with other major markets can plunge a country into recession. Pegging the value of a currency to that of another can lead to a haemorrhage of funds. Higher taxes can easily repel new investments. And so on. Economic interdependence has become an irremovable constraint on freedom of action in virtually every state.

The state’s enfeeblement as guarantor of economic security is compounded by weaknesses in other areas of positive motivation. The bonding effect of military service is evaporating as more and more states such as France, Germany, Italy, Spain and Russia are following the US and Britain in reducing or scrapping conscription. Instead states are favouring voluntary professional armies that contain a smaller and less representative proportion of the age group. The most effective (and cost-effective) way of attaching people to official purposes lies through public broadcasting. And it is here that the state is most obviously losing its hold. No state now has a monopoly of the air waves in its territory. Jamming and outlawing satellite dishes and video tapes can no longer prevent foreign broadcasters from penetrating the homes and minds of the population. There is always a CNN or an Al Jazeera current events channel to counter the most elaborate multinational police action.

Market society is no different from any other in that it rests on the energy, the skills and the commitment of its members. It differs only in the weight it accords to these supports. In its late phase, the increasing demands it makes on the energy of its members, both physical and mental, are only outpaced by its hunger for their skills and by its utter dependence on their commitment. Significantly the state in market society’s late phase is no longer as important as it was in making available and orchestrating those supports.

The state’s hegemony in providing hard infrastructure is weakening as the market system acquires new needs, and as new technologies develop to cater for them. Although still largely responsible for putting it into place and maintaining this infrastructure, the state’s contribution has declined in relative terms almost everywhere, and absolutely in some countries. In the middle phase, the state’s provision of soft, institutional infrastructure was complete: money and finance were national, law was national, and ideology—the sanctity of nationalism—was national. This is no longer true.

Consider the state’s role in protecting money—the primordial soup of the system, its symbol and cynosure, ideally recognised by all participants as representing their respective claims on its resources. The US suspended the dollar’s convertibility into gold into 1971, and all major currencies have become, for the first time ever, pure fiat currencies. This is not in temporary response to a crisis but a permanent system, expected to last. Since then the state has encountered increasing difficulty in controlling the quantity and the quality of money.

In the rich OECD countries money supply as conventionally defined increased three times as fast as GDP between 1980 and 1995. The conventional definitions themselves changed and changed again to keep up with the increasing slipperiness and notionality of money. Legally enforceable claims on society’s resources—the types of money—are multiplying. The number and variety of authorities, institutions and businesses producing these claims is growing all the time. Besides the many and proliferating state monetary authorities, there are banks and other traditional and non-traditional financial institutions, as well as stores and other businesses creating credit-money within, and sometimes outside, official guidelines.

One sign of the state’s loss of monetary control is the near permanence of inflation. For the world as a whole, prices have risen between 4.3 percent a year (in 1969) and 29.4 percent (in 1990). The rich industrial countries reached their lowest point (2 percent) in 1997, and their highest (13.4 percent) in 1974. Some inflations have been surreal: as the Argentinian peso progressed through the new peso (1970), the peso argentina (1983), the austral (1985) and the new new peso (1992) it declined in value to one ten-thousand-billionth of the original currency.

Another sign is the growing frequency and volume of currency surges when money flows from one country to another not in order to promote trade but as a wager against the state’s ability to maintain relative currency values. The $880 billion a day turnover on foreign exchanges in April 1992 (many times the value of purely trade-related transactions) led to all but two of the currencies in the European Monetary System being devalued. In 1997 and 1998 a torrent of money forced devaluations in Indonesia, Korea, Thailand and Taiwan, toppled the regime in Indonesia, forced Hong Kong to lose its free market virginity and pushed Malaysia out of the world financial market.

A further sign of the state’s declining ability to maintain the financial infrastructure is the growing number and size of international banking frauds. There are some 65 large financial groups that run themselves on global lines with management structures only coincidentally related to the legal ones under which they are incorporated. The regulatory institutions on the other hand are national in scope and authority and are compelled by law to look at legal entities rather than management realities.

Even more pervasive a threat to the regulatory powers of the state is the exuberant worldwide growth in so-called “financial derivatives”—complex, off-balance sheet arrangements such as swaps and options, which have become hugely profitable for banks and securities houses (except, occasionally, when they trade on their own account). These often operate outside the regulatory net that governs banking operations.

Even in a fully-fledged, harmonious, international regulatory regime it would be difficult to monitor, let alone control, a world dominated by private-to-private capital flows and the increasing use of financial derivatives. As the Asian financial crisis revealed so starkly in 1997-8, the huge amounts owed abroad by the affected countries, but not known about at the time, continued to soar as the crisis unfolded. Mountains of memos piled into the in-trays of financial regulators, suggesting remedies of one sort or another: that speculative capital flows be restrained by eliminating tax, regulatory and policy incentives, by taxing them according to the length of their maturity or by forcing lenders to bear more of the cost of their risky decisions. “The case for early and complete freedom for international capital flows has, unquestionably, been damaged,” rued the Financial Times early in the crisis. Four years later ministers of finance and central bank governors were still assessing that damage and discussing what to do about it.

Now inspect the deeper layers of the system’s soft infrastructure. The ability of any state to make law applicable to the system as a whole, to adapt it to constantly changing circumstances and then to enforce it is being undermined by the globalisation of business on the one hand and by the proliferation of states each claiming sovereignty on the other. Not even the mightiest finds it easy to apply its law on the territory of others—even the weakest amongst them, as the US found when it tried to neutralise the Al Qaeda group and its Taliban protectors in Afghanistan after the terrorist attacks on 11 September 2001. A gigantic international police operation “against terrorism” failed miserably as national interests in the international coalition asserted themselves, and popular indifference in the US and Britain allowed their governments to sink into confusion.

In the market system’s late phase, security is generally deteriorating. The world was living against a background of around 50 to 60 wars between and within states in the 1990s. In many places the state cannot protect life and property over the whole of the territory it claims. On the contrary, it constitutes a direct source of the mayhem. “Every day”, ran a report to the UN Human Rights Commission in 1992, a year after the Gulf War, “Iraqi citizens are in danger of losing their lives. Scarcely a day passes without executions or hangings… The number of victims…is certainly in the hundreds of thousands.” A tenth of direct investments in edge countries is lost to “non-conventional” risks—organised crime, bureaucratic delay, corruption and so on. “Encounter deaths”—stage-managed extermination of an individual or a group, often after torture—entered the official vocabulary in India in the late 1960s. Targeted assassination, at least of Palestinian leaders, is official policy in Israel.

A sign of the state’s decline as guarantor of personal security is the increase in private expenditure. The evidence is scrappy but abundant. It can be seen in the growth of the private security industry. According to an OECD report, in the early 2000s this sector had an estimated global turnover of at least US $100 billion. The lion’s share was in the US, but Germany’s private security industry was thought to be worth around $4 billion and France’s and Britain’s both around $3 billion. Growth rates for the industry are outpacing economic growth rates by a significant margin. Evidence can also be seen in billowing insurance against kidnap and ransom, which rose 70 percent over the eight years between 1993 and 2001 to something like $130 million (and 1750 foreign victims—not only media figures and billionaires, but all types of business people). There was also a big growth in the profits of the businesses that sell such services. More evidence comes from the burgeoning sales of security systems, which rose in Britain by two-thirds in nine years to 1999. Private security can be seen, literally, in concrete: in the walled city compounds and enclaves of the rich, patrolled by private guards, topped by razor wire, throughout the world and more subtly in the spread of modern siege architecture, where the desire for personal and commercial safety is fed into the design brief.

The economic power of states is declining steadily in the market’s late phase. Between the late 1970s and the early 1990s their share of gross domestic investment fell by a quarter (from 8.3 to 6.2 percent) in ten core countries and by well over a third (from 28.8 to 17.9 percent) in 55 rim countries. More of the same is on its way as privatisation gathers impetus, for even the currently most reluctant—China, Brazil, India—acknowledge that survival in a global market depends on the competitiveness of business being unencumbered by non-economic considerations, free to form and re-form relationships. States generally are ill-equipped for this.

Nor can they afford to invest. State debt is mounting in rich and poor countries alike: the total sum owed abroad increased from $610 billion in 1970 to $2.7 trillion in 1997. Thirty-two poor states owed as much as, or more than, they produced (in 1996)—despite debt “relief”, “rescheduling”, “forgiveness”, “adjustment”, “discounting” and other euphemisms. A growing number are bankrupt in all but name, even though in 1970 there was only one—Mali. The sum they owe internally has grown even more lustily so that total debt in the mid-1990s was 34 times what it had been in the late 1960s and early 1970s.

The state’s share of national income is generally declining. The black or underground or unofficial or unrecorded or informal or parallel economy is growing—in fact as well as in designation, and in step with the burden of taxation. Estimates vary, but they all agree that the figures have jumped upwards since the mid-1970s.

The state as arbitrator has rebounded from the decline it suffered in the middle phase, but it is still well short of what it was. Business is larger than before, both absolutely and relative to the size of states. It is also more mobile and can transplant itself more easily if its special interests are overridden. State arbitration still exists and is important for the huge transnational corporations, both domestic and foreign, that operate on its territory. Nevertheless, the state is constrained by its small size relative to the market and by its stolidity in an ever more volatile world.

The world is still predominantly a world of national economies and (residual) state capitals. Economists still create, and pore over, elaborate indices of “national competitiveness”; statesmen or, at least, politicians, keep watch over trade balances and current accounts; labour leaders harrumph loudly about the seepage of jobs abroad; intellectuals and travel agents discern indelible national characteristics embedded in the sameness everywhere. But since the 1960s and particularly since the mid-1970s this world has been giving way—slowly, reluctantly, fitfully, but inexorably—to a new phase in the course of market society, the late, global phase, in which the state neither arranges the context of the market nor constitutes a full participant in it, but itself becomes a part of that market, necessary but specialised. In this new phase it can no longer fulfil many of its previous functions. Compared with the power and privileges it enjoyed in the middle phase and its even greater relative power in the early phase, the late phase state is a reduced creature: constrained where not obstructed and typically a junior partner in a business-state partnership.

Globalisation and the “globals”: mass

In 1998, there were 60,000 companies operating in more than one country, through more than half a million subsidiaries and affiliates. They accounted for two thirds of world trade, and eight percent of world sales. The revenue they derived outside their countries of origin totalled $11.4 trillion compared with gross world product of $44 trillion. They controlled $14.6 trillion of productive assets, a third of the world’s private sector total. Indeed, they exercised even more widespread influence than these numbers suggest through technology agreements, franchising, licensing and so on.

The largest hundred—the true globals whose foreign assets, sales and employment constitute 15, 22 and 19 percent respectively of the total are highly concentrated: seventy-nine of them come from five countries: the US (27), Japan (17), France (13), Germany and Britain (11 each).

As of 2001, only 24 of the 183 member countries of the International Monetary Fund can claim a GDP larger than the sales of the largest corporation, Exxon Mobil. Only 33 have a GDP larger than the sales of the tenth largest, Toyota Motors. There would be fewer still were we to subtract the sales revenues of these firms from the national totals. The number of governments with revenue greater than the top companies is even more meager—no more than eight (Finland, France, Germany, Italy, Japan, Turkey, Britain and the US) receive more than Exxon, and another four (Brazil, China, Spain and Syria) receive less than Exxon but more than Toyota.

These colossuses completely dominate some markets. Japanese companies, led by Kyocera, supply 90 percent of the ceramic packages for chips used in some US weapons systems and some 60 percent used in commercial semiconductor products. Five globals supply over half the market in aerospace, electricity equipment, electronic components, computer software, soft drinks, tobacco and beverages; two share more than half the market in fast food. Some of them belong to common houses: there are six Mitsubishi Group companies in the world’s top 500 corporations as listed in Fortune magazine (the “Fortune Global 500”), with a combined annual revenue of $247 billion in 2001, sharing administrative, pricing, marketing and output policies, as well as unified economic and political intelligence. There are also five Sumitomo companies in the Fortune Global 500.

These huge companies form intricate networks with independent or ­semi-independent suppliers of materials, of services (such as keying-in data for their mainframes) and, increasingly, of components and even marketable concepts. These networks amount to integration without ownership. More surprising, given their fierce mutual rivalries, is their web of unstable, ever-changing, often fleeting alliances through cross-licensing of new technologies, joint ventures and collaborative research. These international corporate alliances between global market leaders are distinct from those of states.

The motor industry, an arena of the most ferocious competition among some of the largest companies in the world, has been crisscrossed with alliances since the 1980s. The computer industry is, if anything, more incestuous. There is hardly a firm of any size without a technology or strategic alliance, an equity or joint-venture partnership (or a lawsuit) with other companies in the field, with which they compete fiercely most of the time.

The globals’ growth has been remarkable. In the early 1990s, there were 36,600 transnational corporations as defined by the UN, with 175,000 affiliates. Their sales have grown consistently faster than gross world product: 12 percent faster in 1962-67, 5 percent faster in 1967-72, 8 percent in 1972-77, 27 percent faster in 1977-82, and no less than 38 percent faster in 1982-95 (including an astonishing 115 percent in 1992-95). In the 1990s their investments abroad grew three times faster than world exports.

Equally impressive has been their geographical spread. Between 1971 and 1980 the share of foreign affiliates in the globals’ total sales rose from 30 to 40 percent, and their share in total employment from 34 to 40 percent. Foreign direct investment, which had been stable relative to gross world product for 20 years, grew by a quarter in the 1980s, and is now growing twice as fast as the ratio of world trade to gross world product. Their globality, as measured by an “integration index”, rose from 25 in 1977 to 32 in 1989.

Size and spread have lent the globals unprecedented immunity to outside surveillance and control. More than a third of international physical trade takes place in-house and a large part of the rest takes place between the globals themselves.

Their growing immunity in trade is matched by their autonomy in other areas—finance, technology, communications. Around 45 percent of investment in the globals’ subsidiaries is raised from local banks, equity markets and other sources around the world.

Globalisation and the “globals”: mobility

Large relative size and geographical spread are not new to business. The European trading companies founded early in the 17th century were huge for their times and very far-flung. In 1805 the British East India Company ran an army of 154,500 men, sent around 20 sailings a year and had trading and staging posts in places as far apart as Cape Town and Calcutta. It had a turnover of £2 million and profits of £500,000 (£160 million and £40 million at today’s prices) and accounted for “above half the trade of the nation”. This was at a time when the largest commercial establishments in the home country employed over 1,000 people (but usually no more than 150) in one or two plants—and even these were, in the words of Maurice W Kirby in his chapter in Business Enterprise in Modern Britain From the Eighteenth to the Twentieth Century, “islands of giantism within a generally disintegrated business structure”.

The Dutch East India Company and the French East India Company (“Compagnie Française pour le Commerce des Indes Orientales”) were not far behind, and they outstripped their compatriot firms even more dramatically. Later there were plantation companies and mining companies that were also extravagantly large for their time.

The heirs and successors to these resource and trading giants are still among the biggest. Three of the 20 largest corporations according to Fortune are oil producers and refiners. Six are the general trading companies known as “sogo shosha”—Mitsui, Itochu, Marubeni, Mitsubishi, Nissho Iwai and Sumitomo, Japan’s biggest companies. They have combined sales just short of 12 percent of Japan’s nominal GNP in 1998 (a singularly bad year for them). Their equivalents elsewhere—the multi-commodity traders in Europe and the US—are less diversified and smaller, but still gigantic. Cargill, the world’s largest family-owned firm, based in Minneapolis, notched up sales of $38 billion in 1997. If it were listed, it would rank tenth among the top US industrial and service corporations. Gazprom, the Russian oil colossus was 245th in the 1999 Fortune Global 500 (the sole Russian entrant) is their equal in size, with annual revenues of $16 billion.

Huge as they are, these companies are significantly different from their forebears. This is one respect particularly: they depend much less on any one place or even region for their income. In another respect too they are different from their forebears. In the eighteenth century the big resource-based traders had no serious rivals for power, prestige and profit. Today only the sogo shosha and the oil majors are at the very summit of the business hierarchy. As a group, resource-based and trade-based companies form a small contingent in the commercial gianthood, outnumbered and outclassed in size. Of the Fortune Global 500 only 54 fall into the category. The rest—the body of the commercial giants—have largely escaped the constraints that still apply to resource-based firms. Their technology is applicable everywhere. There might be social or political limits to their locational freedom, but there are virtually no physical ones. In principle, they are fully mobile; they can get up and go.

Of course they need not. In the real world there are strong inhibitions on relocation. Existing operations might have created a body of skills and experience that would be costly to recreate elsewhere. Good relations with the administration and influence on government policy might not be easily reproduced, if at all. The cash costs of exit—redundancy payments, for example—can be greater than the benefits expected. Exit might upset a delicate balance with major competitors on a regional or even global scale. Otherwise it might compromise a potentially favourable competitive position in a changing, expanding local market.

It is foolhardy to generalise about the behaviour of so diverse a body whose individual members are themselves so diversified, but it does seem that the globals are far less mobile than they might be, although far more mobile than they have been. Less than a fistful of Fortune’s current Global 500 industrial companies have ever changed their headquarter country.

Where closure has been threatened, as it has repeatedly at Ford’s vast Dagenham site in England, the threat proved to be just that: a negotiating ploy in bargaining with local unions, local suppliers or the government. Where the threat has been carried out, as famously it was by Coca Cola or IBM in India in 1977 and 1978, the move proved temporary. Less than twenty years later the companies were back.

Yet evidence of increasing mobility does exist. It is stronger with regard to the “activity cycle” than to the “installation cycle”, stronger for the “installation cycle” than the “site cycle” or the “subsidiary cycle” and stronger for them all than for the “firm cycle”. Take the “activity cycle”: US-owned corporations increased their overseas spending on research and development by 33 percent between 1986 and 1987, compared with a 6 percent increase in the US. Or consider the “site cycle”: taking only international movements, foreign-owned firms accounted for only 5 percent of American manufacturing output and 3 percent of manufacturing employment in 1977; by 1990 foreigners owned more than 13 percent of American manufacturing assets and employed more than 8 percent of workers in the sector.

Increasing mobility can also be sensed from the course of foreign direct investment by business, mainly globals. It is growing faster than almost every other major economic category, faster than world trade and faster than gross world product. It more than doubled between 1990 and 1997, from $193 billion to $394 billion. It discovers “emergent markets” one after another. Singapore was the hot favourite in 1980 taking in 23.6 percent of the $23.7 billion flowing into poor and middle-income countries. In 1997 China was the target country—with $44.2 billion, 27.5 percent of the total.

Mobility lends the power of blackmail to even the tiddlers of global business. The threat is real. Business can stampede out of a country as easily as it rushes in, as Mexico discovered to its cost in 1994, or the countries of East and South East Asia in 1997-8. Even worse, it can avoid one country and choose another, as has been demonstrated by firms as different as Levi Strauss (which withdrew from Myanmar in 1992 and China in 1993, ostensibly on human rights grounds) and Coca Cola (which withdrew from India in 1978 in protest at tight bureaucratic swaddling) and the beer companies Heineken and Carlsberg (which pulled out of Myanmar in 1996 over human rights).

It would be surprising if the globals’ autonomy and potential mobility did not affect the relationship between the state and business. In the case of classic Soviet-style state capitalism where the partners were more or less welded together, the hindrances placed on business’s movement ultimately proved fatal to the state. In the case of national economies where the connections are more flexible, the state has been forced to persuade rather than compel.

States are forced into mutual competition for investments as ferocious as business’s own competition for markets. For states it is adapt or die, and the closer they are to the heartlands of the market system, the greater the imperative. Most offer tax breaks of one sort or another. They attack each other’s subsidies to business, complain about unfair commercial practices to international bodies. They compete by sprucing up the national infrastructure in its widest sense, from roads to an appropriate public and private business climate.

Competing for the globals’ bounty does not guarantee success. Some states do not have the resources needed. They might not represent a significant market in themselves; they might be awkwardly placed for access to significant markets by reason of geography or commercial and political barriers; their administrative or general, popular culture might not be tuned to the particular needs or caprices of this or that global, or indeed any of them.

Individually successful or not, the state as such is not faring well compared to global business. Even in the most closely controlled state-orchestrated economies, capital flows more or less where it will and is cheerily indifferent to national policies. Despite public rows, including military manoeuvres, China and Taiwan are being stitched together ever more tightly as the economic entwining of the island and China’s Fujian province proves irresistible. On the mainland itself the state is ceding ground to the private sector, including foreign business. Its share of industrial output is falling (from 77 percent of the total to 55 percent between 1979 and 1989); its share of GDP to some 35 percent, not above the states’ share in several European countries; its share of savings 30 percent.

The picture is similar worldwide, but not uniform: one quarter of France’s workforce works for the state, as against 13 percent in Germany or Britain.

In crude summary, states’ share of gross world output has been declining steadily—to 15 percent in 1997. At the same time, the globals’ share of gross world product has increased rapidly. According to the Global Policy Forum the combined sales of the world’s top 200 corporations are far greater than a quarter of the world’s economic activity. In 1982, the top 200 firms had sales that were the equivalent of 24.2 percent of the world’s GDP. In 2000, that figure has grown to 28.3 percent of world GDP. 

States and globals

In this late stage of the market system, the important economic agents, the globals, have to some extent shaken free of the state. Their structure within any one country is of less significance to them than their structure overall; their sales within and from a particular territory are less important than their sales overall; their behaviour within a territory, regulated by its state, is secondary to their behaviour overall. Of course, what happens in each country matters to them, and the bigger and richer the country the more it matters, but it is not all that matters. The ­central concern of the globals is the terms of overall competition and collaboration between them. It is what underlies their agenda and shapes their demands on the state. Above all, the globals want even-handedness in treatment within and between states. Evidence that the state is seriously committed to either is patchy. This is so despite the distortions represented by state capitalist “Communism”, a system designed to exclude outside business, having been mitigated—there are no longer any states committed to the complete fusion of state and economy.

Signs of mutual exasperation between states and globals are plentiful. Business accusations of public waste and inefficiency are ever more strident. Business paragons increasingly present themselves as alternatives to the political incumbency. Billionaire Ross Perot, former head of Electronic Data Systems and subsequently on the board of General Motors, ran for the presidency of the US in 1992 and 1996, promising to “get rid of the Internal Revenue Service and the tax code…and the intrusion of our government into our personal lives”. He vowed, in the name of his Reform Party, to make government more efficient than anyone in the traditional political class could. Billionaire Chung Ju-yung, founder of Hyundai, the second largest conglomerate in Korea, with a turnover equivalent to 17 percent of GNP, ran for president in 1992 in order to challenge the government’s tight control over business. Silvio Berlusconi, head of the enormous Gruppo Fininvest and owner of the biggest media empire in Italy, became prime minister for a few months in 1994 and then again in 2001. In Lebanon, Rafik Hariri, the billionaire tycoon who heads an international construction, banking and property empire, became prime minister in 1992 on a programme of replacing confessionalism as the basis of political allegiance with nationalism and reconstruction, serving until 1998 then again from 2000 to 2004.

Statism has lost its charms for big business. The amount of tax paid and the provision made for taxes by the globals is in decline, despite the growth in their number and economic importance. The corporation taxes that yielded one third of federal tax revenue in the US before the Second World War—more than income tax—account nowadays for less than an eighth of the total and barely a quarter as much as personal tax. In the European Union the average rate of tax on income from capital and self-employment fell from about half in 1981 to 35 percent in 1994. The tax burden is shifting inexorably from relatively footloose finance and business to the relatively anchored such as labour, unskilled labour in particular, as the globals shepherd their profits and even their new operations to low-tax countries.

Tensions between states and globals are unlikely to dissipate. The state remains dependent on business for its prosperity and the sufferance of its people. For its part, business relies on the state to ensure and protect its exclusive title to economic resources. The state is both constrained and sustained by the rootlessness of business, for rootlessness (also known as mobility) is the condition for business’s viability in the global market; business is constricted by the unbending territoriality of the state, but cannot do without it, for it guarantees business’s right to operate. The state wants production for the world market to be located within its borders, no matter who undertakes it; business wants production for the world market to be under its ultimate control no matter where it is located.

By the end of the millennium, the state’s virility, so evident during the early and middle phases, was declining fast amid disorientation, demoralisation and a pervasive sense of increasing debility and looming crisis.

The fractal state system

Difficult though it is, the state has no choice but to adjust. Almost everywhere it is concentrating on core functions, undertaking efficiency drives and selling off the vast accumulations of productive assets that came into its hands during the middle phase. It is concentrating on providing the framework within which private producers operate. Misleadingly called deregulation, this often results in tighter control, more efficient and inclusive regulation, greater centralisation, firmer guidance, than is the case when the state produces things in its own right. Attempts to rationalise the state’s activities and curb its appetite are not new. From the dawn of the market system business has excoriated the state for its profligacy; it was an abuse of public trust, a necessary evil at best, at worst an abomination to be exorcised. However, there has never been so sustained and general an effort on the part of the state itself to increase efficiency and to limit its share of social resources as in the last few years.

The effort has not been notably successful. For the world as a whole, central government’s share of GDP rose from 22.2 to 26.6 percent between 1980 and 1996. In the rich countries the states’ combined share of recorded income rose from 22.7 percent to 28.7 percent. In only two countries—Belgium and Germany—did it fall, and then only between 1980 and 1991. Measured in terms of budgetary deficits, state profligacy has shown few signs of abating—dropping by a quarter as a proportion of GDP for the world as a whole and a touch less than that for the rich countries.

In principle there is nothing here that states cannot achieve. They can, and do, privatise; they can, and do, commercialise their operations; outsource their services; improve efficiency and flexibility—they do all these things, and sometimes they even retrench. But none of it comes easily. Progress when made is usually half-hearted, slow and inadequate. Every move needs to be cleared with—or imposed on—an army of sullen functionaries entrenched in old routines.

Even without bureaucratic drag, satisfying the globals’ agenda would pose problems. No unilateral action can guarantee a desired result where national economies are as closely intercalated as they in fact are. The spillage effect of domestic policy in a typical OECD country amounts to anything between a quarter and a half of the total. What purely national adjustment can avoid the effects of another country’s pollution? Or the consequences of a Chernobyl-type nuclear disaster? There is no purely national solution for air traffic delays in Europe. Nor is there a national solution to cross-border computer crime or to the problem of adequately supervising investment or securities firms, or banks that operate internationally. Attempts to tax or fine business can be self-defeating when states compete for capital that is ever more mobile.

The fractal state adjusts its behaviour to that of other states, even harmonises its policies with other states, but does not cede its right to change its mind and, in particular, does not lose control over the resources it needs to implement its policies. It operates within a system of permanent inter-state negotiations, which is exemplified by an increasing intensity of summiteering—meetings of heads of state with each other. There is a swelling tide of direct telephone and other contact between states, as well as an explosion in indirect contacts through intermediaries such as foreign ministers, senior diplomats and ministers of trade and economic affairs.

The fractal state defines itself without regard to relative power. It is not a subsidiary part of an incipient world government—it retains an independent revenue base and a monopoly of law enforcement. That it is real is suggested by the convergence of existing states, including the most touchy such as China, India, Russia and Brazil, on a standard pattern of behaviour. The record is mixed of course, but states are developing a common approach to problems that are not generally held to be common problems.

Take the supply of usable labour. States’ aspirations might be more similar than their achievements, and there are still profound differences in the availability, capabilities, attitudes and motivations of workers in different countries. But the differences are less than they were and are steadily lessening as more and more states adopt the codes of labour and management practices evolved by international agencies such as the International Labour Office and the United Nations Development Programme. Labour law is settling in a middle ground, becoming more restrictive in the traditionally liberal regimes such as Britain and the US, and more liberal in the former Communist world.

The International Commission of Jurists acts as a lobby for the rule of law internationally and monitors its progress. Education policy is also converging on some sort of implicit norm, at least in the heartland countries, as school curricula steer towards developing marketable skills, avoiding doctrinal and elitist systems of education. The highly centralised systems such as exist in France and Japan are adopting a more decentralised mode, and the decentralised systems, for example in Britain and the US, are tightening up into some form of national pattern.

Positive motivational practice also appears to be converging. Although state propaganda through whatever means stresses the uniqueness of each country, the means themselves are looking more alike. State-commandeered television is retreating in the face of an onslaught of cheap, difficult-to-control media such as satellite broadcasting, video cassettes, fax transmission and the internet. The consumer ethic is more in evidence than the work ethic; individual gratification more in evidence than social responsibility; family and sub-family units make up more of the social fabric than craft, neighbourhood or functional units. More and more it is assumed that people can be moved along the same or similar tracks by the same motivations.

Fractal states increasingly act like one another in matters of internal law and order. Today the British “bobby” is known as a “police officer”, is often armed and more likely than not to be on wheels and unsmiling, as in other countries. Local forces are increasingly part of national forces. National forces increasingly have paramilitary wings and specially trained civil riot squads. Crowd control techniques, riot control tactics, criminal surveillance and fraud detection are all converging on common standards, aided by a common technology, and evolved in part in common forums in an international network of similar colleges.

Convergence is pronounced in the provision of hard infrastructure. Where 90 years ago, travelling from Madrid to Moscow by train involved four transshipments or other adjustments as gauges changed, today it takes place on a single, seamless network. The same is true of air transport, mail and telecoms, which are overseen by, respectively, the International Air Transport Association, the Universal Postal Union and the International Telecommunications Union.

States find it more difficult to coordinate and harmonise their institutional practices, yet they have come a long way from the extreme distinctions of market society’s second phase. No fewer than 144 states operated freely convertible currencies in 1998, compared with just eight 40 years previously; many more, including the bastions of managed autarky in the former Communist Bloc, are pledged to reaching that goal. Steps have been taken to harmonise financial regulations for all international banks through conventions formulated by the Bank of International Settlement, which now relates to some 120 central banks and international financial institutions compared with seven when it was established in 1930.

Accountancy standards are following the same route, guided by the International Accounting Standards Committee. In 1995 the OECD announced with evident relief that it had forged an international consensus on the taxation of international business.

These and other convergences—in trade policy, monopoly regulation, anti-corruption legislation and even military tactics—are largely spontaneous. Each state has to deal with the same or increasingly similar economic, demographic, technological conditions, as well as the myriad of mutually determining linkages between them. However, such convergence occurs also because states systematically exchange experiences and assiduously track one another’s successes and failures. A major forum for the study of welfare policy is the World Bank. In addition there are specialist bodies such as the World Health Organisation in which existing practices are compared and harmonised. Labour legislation and practice is filtered through organisations such as the International Labour Office; educational systems are compared and contrasted in the United Nations Educational, Social and Cultural Organisation and the World Bank.

Although the fractal state has alleviated the problems of the market system in its late phase, it has not solved them. The world is still a honeycomb of more or less similar environments, not an undifferentiated single one; protectionism in one guise or another still impedes the free flow of resources—openly in the case of labour, covertly in that of goods and services. There is no market-wide common currency; no single body of law for governing transactions or the relations between state and citizen; no freedom of communication worldwide; no world police force (not even the US); no market-wide peace and no real power to limit the ambitions of aggressive states; no common law making body; no public forum for reviewing or commenting on international treaties; no mechanism for bringing citizens’ suits to a world court; and no commonly accepted codes of conduct, values and non-contractual assumptions (although a step was taken in this direction with the establishment of an International Criminal Court in 1998—against the votes of the US and Micronesia).

True, there is a rough sort of order in the current inter-state system, enforced by the compelling logic of competition that makes the behaviour of each a necessary element in the calculations of all. It is the only mechanism of coordination available to a system of dispersed and powerful sovereignties—overriding force, cooperation or conviction. However, it results in a system that is profoundly inefficient and burdened with difficulties. There is the sheer weight and tortuousness of negotiations. Not every agreement takes as long to arrive as the Chemical Weapons Convention, which was negotiated between 1968 to 1993 and only brought into force in 1997, or the “Uruguay Round” of trade negotiations, which began in 1986 and was concluded in 1993—nor do they all involve as many as the 117 states that the latter did. Yet some do approach these marathons.

Then there are the perverse effects of the agreements finally reached. Under pressure from threatened domestic producers, the US and the European Union compelled Japan to accept elaborate restrictions on exports, notably of cars and semi-conductors, which amounts to sanctioning, by negotiation, the cartels that, in other guises, they are pledged to remove. There is the voluntary nature of the agreements—each state can withdraw at any time. There is the problem of enforcement and compliance. No matter how committed states might be to the activities of bodies such as the International Maritime Organisation, compliance with the recommendations and enforcement of the regulations of such bodies are up to them, and some use their known laxity to gain competitive advantage. The result is often a competitive debasement of standards—a non-monetary Gresham’s Law.

In the final analysis, a world of fractal states harbours an inescapable paradox: the state attempts to preserve its sovereignty while denying itself, or being denied, many opportunities for exercising it. In practice, the principle constraint on each state’s free choice, and the main proximate compulsion to their convergence on mutually compatible behaviour, is the fear of financial capital fleeing at a moment’s notice.

There is a paradox behind the paradox. A world of fractal states, each jealously guarding its sovereignty, however threadbare that is in fact, is very close to being a world without a state, in which final authority does not exist, because it is shared in ever-changing proportions. It seems unlikely that such stateless capitalism can survive. The proliferating specialisation which creates the market and feeds its relentless expansion, and which results in the dispersal of decision-taking among ever-increasing numbers of individuals and corporate bodies, requires a steadying framework of rules and procedures and, ultimately, a common framework of attitudes, ethics and mutual expectations, if it is to avoid an infinity of cross-purposes purposively pursued, and preserve the conditions for the specialisation on which it all rests. There is nothing in the fractal state system that could create those attitudes consciously.

There is a yet deeper paradox. A single fractal state can sustain the illusion of sovereignty to the extent that it reacts quickly and sensitively to changes in its world-market environment. Yet its own existence rests on a national coalition of interests each of which resists change in its particular circumstances and which, together, place a formidable drag on any voluntary and, certainly, any speedy change. As the globals’ practical extra-territoriality blossoms and they get harder to tax, the state is forced to squeeze the minor stakeholders in the system—the globals’ vast armies of more sedentary employees and contractors. It is forced to make more and more concessions to this mass tax base—in political and welfare entitlements, in influence over state procedures. In this sense it hampers its manoeuvrability precisely when it needs to react nimbly to changes in the world economy.

The fractal system contains a final paradox: that of a restless, radical, irreverent market at odds with the states which allow it to exist, and therefore at odds with the conservatism of politics—all politics—focused on the state. The fractal state is a child of the global market. Ideally it faces outwards: its economy is export oriented. It is ecumenical: accommodating business, all business, and other states’ interests. It is shrewd rather than strong; consensus-seeking rather than dictatorial; inclined to soft coordination through mutual consultation rather than hard coordination through authoritative central decision-making. It is centralised in its policy-making but decentralised in implementation; intrusive and controlling of its citizens, permissive towards those who are not. It is a “post-foreign policy” state in the sense that its domestic and foreign agendas are closely intertwined, and in the further sense that significant international transactions that it is a party to do not depend on the existence of foreign ministries.

Its domestic arrangements are crucial in deciding whether it is, and can remain, part of the inter-state system. Gone are the days when an autocratic Russia and a liberal Britain or, later, a Stalinist Soviet Union and a democratic US could preserve their considerable differences while playing equal, and opposite, parts in a world system of states. A condition for membership of the fractal world system is a large measure of homogeneity.

The fractal state is newer in terminology than in substance. Like its predecessors, it wields or tries to wield a monopoly of coercive power in its territory. Like them, it uses that power to manage “the common affairs of the whole bourgeoisie”, as Marx put it (although the national bourgeoisie of his day is now a global class). Also like them, it seeks to arbitrate and adjudicate between the fragments of the whole (although its effectiveness here is declining with the growing mobility and practical extraterritoriality of the globals). It has a growing role in stabilising a society too complex and interdependent to be ruled by brute force, and provides many of the services—material and moral—used in common by the system’s inmates. What is new in the fractal state is the self-imposed limitation on its sovereignty in the face of the globals’ ascendency.

Notes