The Origin of Government Intervention Part 1: National Security

The bailouts of General Motors and Wall Street banks stirred a hornets' nest. Advocates of limited government have decried these actions as the inevitable consequences of government interference in the economy. Proponents of active government, on the other hand, argue that the process of federal deregulation enabled GM and certain commercial banks to become 'too big to fail,' allowing those corporations to hold the economy hostage. The question is: who's right?

Well, as I argued in my previous article [1], a constructive answer requires us to ditch the ideological nonsense. And to that end, I wish to dedicate the content of this article to discussing an aspect of economics that seems to escape most mainstream debate in the US: the relationship between economic policy and national security. If we are to understand how ideas of government intervention entered into American political discourse, we must start by examining the international position of the US after the Revolution.

When the American colonies were thrust upon the world stage as independent states in 1783, the international system was—as it still is today—defined by anarchy (a lack of world government). This particular form of international relations has specific consequences for the internal composition of states, especially as it pertains to the relationship between government and the private sector.

With no recourse to an authority above themselves to settle disputes, an anarchic international order forces all states to provide for their own security. This requires the establishment of individual military institutions and the requisite means to support them. Support, in this context, entails a sustainable access to sufficient capital to fund the operations of military units, farms to feed them, factories to produce clothing and equipment, and raw materials to supply the factories. All of this, of course, is in addition to the needs of the domestic markets of each state.

Because power is not distributed equally among actors in a state of anarchy, all governments find themselves in a perpetual contest for strategic advantages. This competition creates what is known as the security dilemma: a situation in which any increase in the security of one state is a direct threat to the security of other states in the system. So if, for instance, nation A expands the size of its military forces or seizes territory rich in natural resources it lacks, nations B, C, and D are forced to counteract these potentially destabilizing moves. This is achieved by either forming an alliance against nation A or pursuing individual policies that bring each of them into parity with it. If equilibrium is not reached between these actors, the more powerful state (nation A) will be able to pursue its interests at the expense of the security of B, C, and D.

Separation from Great Britain left the US ill-prepared to compete in this cutthroat world of power politics. The American economy was largely agrarian, dependent upon factories and banks in Europe (mainly Great Britain) to supply them with manufactured goods and liquid capital. This arrangement was largely the product of the British approach to colonialism. In theory, the mother country and its colonies were bound together in a symbiotic relationship, each supplying the other with the materials it lacked. However, in practice the American colonies needed the mother country far more than it needed them.

North America was but one source among many from which the British government could obtain raw materials for its domestic market. American colonists, on the other hand, could only obtain manufactured goods and loans from Great Britain. While one reason for this relationship had to do with British laws that restricted trade outside the empire, the reality was that Britain had the world's premier industrialized economy.

Information on factory machinery was a closely guarded state secret and individuals with this specialized knowledge were prevented from traveling abroad. Furthermore, the British government had access to public credit through a national bank, enabling it to subsidize private institutions it deemed vital to its security. These measures, combined with exclusive access to raw materials from its colonies, gave the British Empire a virtual monopoly on industrial production which, in turn, made it a formidable military juggernaut.

It was with this picture of international relations in mind that Alexander Hamilton described the state of US security in his Report on Manufactures (1790). A constant and increasing demand on the part of American states, he writes,

for the commodities of Europe, and only a partial and occasional demand for their own, in return, could not but expose them to a state of impoverishment(...)the regulations of several countries, with which we have the most extensive intercourse, throw serious obstructions in the way of the principle staples of the United States. [2]

In other words, by striking out on their own, the United States were outside the government-supported industrial system which had made American society possible. As a result, "obstructions" to trade--such as tariffs and colonial monopolies--designed to maximize the economic security of Great Britain, were now undermining the American economy. This problem was compounded by the protectionist policies of other powerful European countries.

This brings us to the heart of this discussion. In an international system where powerful states can renege on agreements with impunity and take what they want by force, it is suicidal for a weaker state to place its economic security at the mercy of stronger ones. In the 18th and 19th centuries, the US was very weak indeed. Without sources of capital investment and industrial production which was free from foreign interference, Americans would be unable to field and maintain military forces comparable to those of Europe.

As a consequence, if the US ever ran afoul of its European competitors, the economic obstructions mentioned above and the military capabilities they afford would be used to bully the United States into subservience. In such a context, only a reasonable level of economic self-sufficiency could enable Americans to retain their sovereignty. In part 2 of this series, I will expand upon this logic by examining the relationship between the urgent need for industrialization in the US and early government intervention in the American economy
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Chasing Phantoms: a comment on ideology

Familiarity and habit, even in the worst social environments, bring with them an endearing level of predictability to human interaction (better the devil you know). As such, there is a tendency to view social or political change as an all or nothing endeavor--either "our" side prevails and the system is saved or "we" are defeated, ensuring the onset of a new Dark Age. When the latter is perceived to be the case, it is often blamed on weak-willed turncoats and sinister opponents with no regard for the sanctity of the established order.

Of course, the world, to say nothing of politics, would be infinitely easier to understand if it did indeed operate in this manner. But alas, it rarely does. Conspiracies are almost never vast and few dissenters live up to their "Dick Dastardly" caricatures. Moreover, although there will always be fools and knaves, partisan fervor tends to grossly overestimate their number and influence.

Which brings us to the heart of modern political conflict in the United States: an excessive reliance on ideology. To surrender the exercise of one's reason to the will of party or ideology is to commit oneself to an intellectually shallow concept of human motives. For the very aspect which makes ideological principles easy to grasp through talking points, cable news, and talk radio echo chambers, is also what prevents adherents from understanding the difficulties of turning generalities into specific policy initiatives. That is to say, avoidance of the details of governance can lead one to equate skepticism with disloyalty or to demonize the underlying motives of competing ideas

The educated in this country have, in recent decades, increasingly fallen victim to such misguided suspicion. The academic emphasis on critical thinking--even when it is focused on refining a particular idea for the better--can lead to cries of "America hater", "Nazi" or "socialist". Yet, disagreement over particular ideas does not automatically place one in the camp of radical opposition. Such knee-jerk aspersions are inconsistent with the basic tenants of rational debate and unbecoming of any individual who wishes to have his or her own ideas taken seriously.

It is folly to presume that the US has nothing to learn from other countries, political systems, or ideological perspectives. The taking of specific ideas from either of these sources does not entail a complete and irrevocable conversion. ALL existing governments, including the one outlined in the US Constitution, are syntheses of competing political ideas. You simply could not have the hybrid system known as federalism without the opposing views of Jefferson and Hamilton; nor could you have those giants of the Revolution without the competing philosophical influences of Hobbes and Rousseau, and so on.

As a consequence, to assume that political purity is a precondition for effective government is to embark upon a crusade for a world that never was, and never will be. Searching for evil phantoms and dupes to rationalize the failure of society to embrace a singular ideological perspective is equally quixotic. For in the final analysis, the devil is in the details; complex societies can only be understood within the context of equally complex explanations.
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A British perspective on federalism, Empire and the European Union.

Having read with great interest the articles here about the development of federalism in the United States of America, I thought that a comparison with the development of European federalism would complement these articles, comparing the development of the European Union with that of the American federation.

I will first declare my allegiance and political persuasion. I am an English Tory, who lives in Wales. I share the belief with the neo-federalists that power is too centralised. Not just within Europe but within the British Union as well (although there is some decentralisation with the Scottish Parliament and the assemblies in Wales and Northern Ireland, England has been left out of this entirely). The developments within the UK are for a different article though as they concern the devolution of power from a former unitary state and not the rebalancing of power between a central authority created by formerly independent entities, as is the case with the European Union and the American Union.

To successfully rebalance power, an understanding is needed as to the nature of the current power structure. What genuine power do each of the entities possess? I am not referring to the constitutional details here, but something more fundamental. The English County Councils could be abolished by an Act of Parliament and there is nothing the councillors could do about it. An incoming Conservative Government could probably legislate away the Welsh assembly without too many dire consequences for central government and its control of Wales. The abolition of the Northern Ireland assembly would provoke protests from the Republic of Ireland government and a return to sectarian violence. An attempt to abolish the Scottish Parliament might provoke a unilateral declaration of independence. Whether the Scottish people and the Scottish regiments of the British army would follow Hollyrood or Westminster in such an event is unclear. They would be probably more likely to follow Hollyrood. However, a unilateral declaration of independence by an SNP government without any provoking action from Westminster may produce a different result. To take this idea further, we should consider what may seem an absurd idea - whether the EU could abolish the British Parliament. If the British Government said no, there would be no way the EU could enforce such an action. The EU could not prevent a British breakaway from Europe by force but there is the issue of the economic consequences of a withdrawal – this needs to be analysed in depth and a simple conclusion for an introductory section is not possible. This power over Britain is still very real however. It is clear that we have a range of real power in the smaller units of government from the virtually powerless to a situation where there is real division of power.

The issue of where real power lies is deeply tied up with ideas of identity and legitimacy of government, economic power and military power. In both the American and European Unions, real power has shifted to the central authority, not merely the consensual sharing of decision making. In order to understand how it may be possible to reverse this process, it is necessary to analyse how this situation arose and the real power structure, including the strengths and weaknesses of the constituent bodies. It is easy to see how the English county councils have little power and likewise the Welsh assembly - both were created by statutes of the Westminster Parliament, but what about the transfer of power between formally sovereign bodies?
In this first article, the development of the European Union will be discussed.

Different perspectives on the European Federalism

It will of course be necessary to do this from two very different perspectives, British and Continental. Many people outside of the UK will not appreciate just how controversial what I have written in the first paragraph is. The EU aim of a federal European state is widely recognised on the continent, even if disliked by more people than the powers that be would like to admit. In this island, the federal aim is political dynamite and a massive factor in the fall of the last Conservative Government. Pro-Europeans will usually deny that a federal super-state is the objective and will dismiss Euro-sceptics warnings about a super state as paranoia. The “official” line touted by the current Government and that of John Major is that we haven’t given up sovereignty. It is of course an absurd notion and in the light of the recent European election results in which the United Kingdom Independence Party (UKIP) attained second place behind the Conservation, clearly not one believed by the British people.

The European Union is in many ways the Federal ideal turned upside down. There is indeed a division of power, but very different from that in the USA. The British army soldiers fighting in Afghanistan are not there under the orders of the EU. They were sent by the British Government and are fighting as part of NATO. On the other hand, the weights and measures used in my local supermarket and conditions under which I work are laid down by European regulation. A strange type of federation indeed.

So we have a situation where the government of one of the largest states in the Union denies that a federal state exists and an upside down federation where low level decisions about the minutiae of people’s lives are determined at the centre, but matters of war and peace are decided by the member states. It would be as if the Governor of Texas claimed that Texas had the same independence as it did before 1845 and as if New York state sent troops to fight abroad without consulting the Federal administration. How did this situation arise, what are consequences and what are the lessons to be learnt by neo-federalists from the current structure of the European Union?

Origins of the European Union

The origins of the EU lie, like those of the American Union, in war and the chaos it brings. Here the similarities end. The American colonies were dealing with the problems of a successful rebellion against a common enemy. The fledging EEC was formed from defeated nations who had been fighting each other. The core of the European Union is based on the Franco-German alliance, which stemmed from a determination not to repeat the mutually disastrous wars fought between those 2 countries in the first half of the 20th century. Two once proud imperial nations had been reduced to starvation and ruin, dependent for survival on the generosity of the USA.
In his first paper, “Octavian” states that the powers of the Federal Government in the USA were the result of an overreaction to the conditions of perceived anarchy after the war of independence. In the same way, the development of the EU can be seen as a reaction to the conditions in Europe after World War 2. The powers of the EU, the attitude of the continental states and the attitude of the British people towards Europe can all be traced from the 1939-1945 conflict. It is worth looking at the situation in more detail.

The European project began with the European Iron and Steel Community, established by the Treaty of Paris in 1951. The principal industries needed for the waging of war were thus to be jointly controlled by France and Germany. The aim was, in the words of Robert Schumann, the French Foreign Minister (later prime minister) who proposed the concept, “to make war not only unthinkable but materially impossible.” The next stage was the creation of EURATOM, the pooling of nuclear power resources. The European Economic Community was properly founded by the signing of the Treaty of Rome in 1957, with six member states (France, Germany, Italy, Belgium, Netherlands and Luxembourg). This introduced the freedom of movement of labour and capital and the common agricultural policy. The latter was aimed at making the EEC self-sufficient in food and was a reaction to the starvation in Europe during and immediately after the second world war. The EEC was further developed by the single market (1986), the Maastricht treaty (1992) and the treaty of Amsterdam. What started as economic cooperation has become a fully functioning federal state.

Great Britain and Europe

British attitudes towards Europe have always been ambivalent. Winston Churchill once famously said that if England had to choose between Europe and the open sea she would always choose the open sea (Europhiles who claim that Churchill favoured a “United States of Europe” fail to point out that he never considered that Britain should be part of it!). A very large number, probably the vast majority of the English, the Welsh and the Northern Irish protestants would agree with this sentiment (opinion in Scotland is generally more favourable towards Europe). How come then that the United Kingdom became involved in the European venture?

Once again we have to go back to the events of the second world war and in particular 1940-41. In this short period, British world power, weakened by economic decline, the financial disaster of world war 1 and the loss of a generation in the trenches of Flanders, finally collapsed. 1940 marked the end of Britain’s truly independent role in world affairs.

1940 for Britain is the most misunderstood of years. Britain was not as militarily unprepared as the popular imagination believes. After the fall of France, all that stood between Britain and invasion was the world’s most technologically advanced air force and the world’s largest battle fleet. Without for one moment wishing to take anything away from the bravery of the RAF pilots in the Battle of Britain, the odds against them have been exaggerated – the defences of Britain were certainly up to anything Nazi Germany could throw at them (with the exception of the U-boats and this is related more to the problems of supply and production than direct military assault). So where did the problem lie? It was simple. Britain was bankrupt. The economy simply couldn’t cope with the stress of war. It is no use having the best fighter planes if there is no fuel to power them or if your population is starving. In 1940, this economic weakness gave the British establishment a stark choice – become a client state of America or of Nazi Germany. Fortunately for humanity, they chose the former (although there were plenty in the top ranks of British society who would have preferred the latter – this issue and the related ones of the abdication crisis and the Hess flight to Britain in 1941 are fascinating subjects, but somewhat off topic).

How is this relevant to the development of the European Union? The legacy of World War 2 for Britain was a dangerous combination of strategic weakness, a dire economic plight and illusions. The British people believed they had won the war. They believed that growing British power had played a large part in the combined victory and that Britain, with its empire, was a world great power. In reality of course, the British armed forces which played a large role in the liberation of Europe were not a manifestation of British, but of American power. Even if more than half the troops landing on D-day were from the Empire, it was American finance and industry which equipped and supplied them.The problems that Britain faced in 1940 were not threats which could have been dealt with if we had properly prepared, they were the result of fundamental weaknesses of the British Empire. A large part of the British establishment and the British people would not accept reality.

The performance of the British economy however could not be ignored and the end of the British Empire was plain for all to see, especially after the debacle of Suez. Membership of the EEC was in many ways a most conservative solution to the problem. The British establishment saw joining an economically successful club as a straightforward way of solving Britain’s economic problems. The political role it saw was as a bridge between the USA and Europe. Britain’s entry into Europe was therefore fundamentally different from that of most of the early members. Its aim was to improve the economy and maintain our world standing (especially our relationship with America, which was favourable to British membership as it would be a counter to Gaullism in France), rather than with the view of the development of a Federal Europe.

It was the economic benefits which were sold to the British people in the referendum of 1975. We were effectively told we were joining a free trade association, albeit with a few extras thrown in such as the common agricultural policy. However, apart from the benefits of free trade and a small membership fee, there would be no surrender of sovereignty. It is a mantra that has been repeated down the years as more and more decision making has been transferred to Brussels. Every effort has been made to cover up the federalist intent of the EU, even to the extent that John Major sacrificed much of his bargaining position at the Maastricht treaty negotiations just to get the word “federal” removed from the treaty and replaced with the words “ever closer union”. Not much of a concession, but important if you are building a centralised state by stealth.
And stealth was used, gradually transferring power, but in a way that was never honest. A federal union has been built starting with iron, steel and agriculture, followed by competition policy, social legislation, industrial policy and then moving on to monetary union. Where stealth failed, bullying was used. The mantra that integration was “inevitable” was frequently used. Where countries voted against EU treaties, they had further referenda with minor changes, such as with Denmark in 1992. A strange and imbalanced union has developed as a result, with some of the most minor decisions for government made at the highest level. Just as the excessive power of the centre in the USA was the result of an overreaction to the problems of the immediate aftermath of independence, the power structure of the EU is the result of the need to create a union by stealth.



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