Sir: Bully for Andrew Marr (19 October)! He is quite right not to be blown off the course of his reflections on state power by Martin Wolfe, or even the Treasury Chief Secretary - All Souls notwithstanding.
If we agree that it is economic power we are discussing and we define it as the power of a state (any state) to shape its macroeconomic policy autonomously, then there has been a diminution of the power of the state. The key difference has been the mobility of capital - both portfolio capital and direct investment - since the late 1970s. Keynes knew perfectly well that capital mobility would wreck his scheme. This is why the Bretton Woods arrangements restricted capital movements.
Once capital can be mobile, governments can no longer pursue policies that alarm the markets. It is no good arguing with the markets that some sort of co-operative game will benefit everyone rather better than selfish behaviour. Keynes relied on that, but bound the hands of capitalists and bondholders so that they were willing to accept the class compromise whereby full employment and high wages coexisted with a high and stable level of profits.
What broke this equilibrium was the erosion of profit rate when real wages started rising faster than productivity, and neither inflation nor incomes policies could act as a solvent. At the same time, technological progress in transport and communication had made it possible for factories to be relocated from the centre to the periphery.
The state remains powerful but not autonomous in macroeconomic affairs. Rivalling the state in power is the global corporation. We have been used, for too long, to think of the world as being constituted by nation states; after all the economic statistics are arranged by countries. But it will be more useful, in my view, to think of the world as constituted by the 200 or so global corporations. Their internal trade becomes international trade; their treasurers' decisions to shift the petty cash - an odd billion dollars or so - can cause an exchange rate crisis. Their production decisions bind countries together in an international division of labour.
A Brave New World is being created out there. Not, as one hoped, by one- world idealists or UN diplomacy, but by the global corporations for the simplest of all reasons - profits. The state can either play along with them or have delusions of grandeur. The cost of delusions will be severe and will be paid not by politicians but by the citizens.
Professor of Economics
London School of Economics
19 OctoberReuse content