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CIAO DATE: 11/00

Global Money and the Decline of State Power

Geoffrey R.D. Underhill *

Chair of International Governance, Amsterdam, Netherlands

International Studies Association
41th Annual Convention
Los Angeles, CA.
March 14-18, 2000

I was never taught by Susan Strange at any stage of my career, nor by anyone who was a student of hers. My initial research projects were about industrial adjustment, not money and finance, and about the political economy of industrial adjustment in a single country, not international political economy as such. In this sense my work was anchored in comparative, not international, political economy. I was not a specialist in monetary and financial matters. I should have been a stranger to her core work on the monetary and financial system and to her concern with the international domain. I had been exposed to some of it as an undergraduate, but that was all. Yet her influence on scholarship was pervasive, even in the early 1980s when her published work was largely in the domain of international monetary relations. To a considerable extent because of her insights into the nature of the global economy and her insistence on integrating political and economic factors as part of the whole, there was already common ground.

She made her work difficult to avoid for a number of reasons. She argued that the world was changing, and something was happening to states. This in turn presented a challenge for theory. The economic dynamics of these developments were not part of some autonomous sphere of market forces, but were intimately related to the political dynamics, decisions and non-decisions, of states and the international system of states. Strange had more to say on this than most, because she had been among the first to recognise the importance of the changes which were taking place in the world political economy from the early 1960s onwards, particularly in the domain of financial markets (Strange 1976, ch 6). The world was not evolving as most scholars thought it was or should. Firstly, she was drawing attention to the rapid pace and underlying dynamics of these changes in the context of a political economy approach. Secondly, she was asking awkward questions about how we should think about these changes, about what they implied for our theoretical efforts. Thirdly, her emphasis on politics and political interaction in the emergence of the global integration process, as opposed to structural economic explanations and other forms of determinism, fit well with my own research findings as I delved into the industrial adjustment process. Yet she did not by any means forget the importance of structural constraints and power in political interaction. Fourthly, she recognised the division between the domestic and international domains as a heuristic convenience for enhancing our specialised knowledge of certain aspects of reality, but not as anything to do with the real world as such. More often than not, this distinction got in the way of our understanding. Far too often it had to do with academic empire building and the system of intellectual disciples which riddled many universities and corrupted the purpose of scholarly enquiry. The domestic/international politics divide contributed to erecting disciplinary boundaries which few dared to transgress for fear their own careers might be compromised. In this sense, and fifthly, she was one among those who reminded one repeatedly that most important for our understanding of the world around us was not the analysis of the pieces, though such specialised knowledge was an important precondition. What was crucial was the ways in which the pieces of the puzzle - international, domestic, local; state, finance, industry - and theory - fit together.

So she wrote widely, including work on trade and industrial adjustment processes which touched my own specialisation (Strange and Tooze 1981a, 1981b). The pragmatic purpose was to understand the world around us better so that we might do something about it. We might (she was always sceptical on this point) come to devise better solutions if we had a better understanding in the first place. Otherwise, we were almost certain to get it wrong and too often did.

Susan Strange made it relatively easy for myself, as one of an emerging generation of scholars, to make what seemed a natural progression from the study of the politics of either international or domestic economic issues, to political economy, international or otherwise. Much of what Strange advocated appeared if not self-evident, then at least a prima facie case for intellectual openness and scepticism about orthodoxies of various kinds. Most importantly, she forced one to think, indeed to rethink, all manner of things, by persistently asking the relevant and awkward questions which the majority of scholars conveniently left aside. Her work provided a solid and intellectually credible platform on which to stand and build upon. We are all political economists now.



I am not alone in this volume in emphasising the centrality of the global monetary and financial system to the work of Susan Strange (see Cohen, Verdun, among others, in this volume). It would be surprising if I were. Any analysis of her published work soon demonstrates the centrality of the international monetary system and the global financial order to her understanding of the intricacies of the international political economy. The insights she gained from years of empirical investigation into the system of credit creation and allocation, and international monetary order, underpinned her conception of international political economy as a field. For Strange, the monetary and financial order was the centerpiece of the global political economy, and what happened to the global monetary and financial system would have repercussions for the rest of the system. On this she was picking a fight with marxists, among others, who insisted on the centrality of the means of production.

But the focus of this chapter is different from others in this section on "Global Finance and State Power." Cohen has focused on the link between understanding power in international relations and the global monetary system. Verdun has focused on Strange's analysis of how the structure of the financial system implies a set of embedded power relations underpinning the international system of states. These power relations affect the relative roles of state and non-state actors in the constitution of the international political economy, and Strange's arguments furthermore imply the need to challenge state-centric conceptions of international political economy.

The focus of this chapter will be to carry forward the insights of Cohen and Verdun and to investigate how Strange's analysis of monetary and financial order, including the prominent role of non-state actors in the emergence of global financial markets, informed her understanding of the role of the state in an era of global economic integration. Strange saw changes in the monetary and financial order not just as important in themselves. She also saw them as integral to the transnationalisation of production, presaging an increased role for global firms and other non-state actors in international political economy (Stopford and Strange 1991). The rise of global markets and non-state actors is intimately associated in Strange's work with the consequent erosion of state power in the global system. The reaches of the state are retreating in the face of the advancing tide of the market, like some atoll facing submersion in the face of global warming. The chapter will go on to challenge Strange's "retreat of the state" thesis and to develop the theoretical implications of this challenge for our understanding of the global political economy and the state.

The central argument of the chapter can be summarised as follows. Strange has argued that structural changes in the global financial and monetary order have led to a wider pattern of changes in the global economic system, particularly market integration in the domain of production and trade. States and state policy (or lack thereof) have been integral to these developments, developments which have conferred increasing power on non-state actors, particularly firms and other market players but also on private networks and systems of governance related to the growth of international markets (Strange 1994a: 14-16). These developments represent a 'retreat of the state', and states have been full participants in this process.

However, while Strange provided considerable empirical evidence for these trends, she never fully developed or clarified this argument about the diffusion of state authority in conceptual terms. I would argue that the key to understanding this trend lies in the way in which we conceptualise states and markets. While Strange was a strong advocate of their essential interdependence, she never took the more radical step of considering the state and the market as part of the same essential ensemble of governance, or "state-market condominium" (Underhill 2000: 17). The public and private domains are much less distinct than the abstractions of much theorising admit and state decision-making was always heavily permeated by private interests (Underhill, forthcoming). In this sense there is no retreat of the state, but a changing balance of public and private authority within the state, hence a changing form of state embedded in structural market transformations, as opposed to a decline as such. I take this as an extrapolation, and not a refutation, of the arguments which Strange put forward throughout her long career. Despite Strange's persistent challenge to the discipline, there is a need to think yet more radically on this question of how we understand the role of the state in a global market context.


The Financial Structure And The Global Political Economy

As mentioned, Strange saw the system of credit creation and allocation, and the pattern of international monetary relations which that implied, as the most important underlying structural variable in the global political economy (Strange 1988: 90). This point was echoed in a systematic study by Germain (1997: 29, passim). In Sterling and British Policy (1971), Strange argued forcefully that the decline of the UK as a power was intimately bound up with the decline of Sterling as the central currency in the global monetary and financial system. The UK suffered from a "top currency syndrome" wherein policy-makers continuously anticipated a role in the global financial structure and monetary system which was no longer appropriate or plausible. The City of London as a constituency and the Treasury/Bank of England complex drove a policy unnecessarily concerned with accommodating a continuing international role for sterling and for the City as a financial centre.

The cost to the national economy was high in terms of managing reserves and the balance of payments as well as in terms of further problems with trade competitiveness (Strange 1971: 71, 328). British governments suffering from this ongoing "top currency syndrome" repeatedly underestimated the freedom which the decline of sterling in fact conferred upon them in making policy. They did not realise they no longer had special responsibilities for international monetary order (Ibid.: 336-7). There was no consequent need to hang onto overvalued exchange rates for the sake of the overall system and the Commonwealth remains of empire. Mistaken policy was inflicting great damage on any common sense assessment of the national interest.

The centrality of the financial order was also highlighted by Strange's second major work, International Monetary Relations (Strange 1976). The book was an account of the decline of the post-war fixed exchange rate system usually identified with the Bretton Woods agreements and was perhaps her greatest work of scholarship. While Strange covered all the usual causes of the 1971 collapse in terms of exchange rate and balance of payments management, chapter six of International Monetary Relations contains important foundations of her future arguments about the centrality of the financial order to international monetary relations and the wider pattern of global order. This was her analysis of the Eurodollar market.

The rise of unregulated off-shore capital markets introduced a growing element of short-term capital mobility to the global monetary system, which eventually overwhelmed the capacity of states to manage fixed exchange rates in relation to emerging balance of payments disequilibrium and differences in monetary policy objectives. The Euromarket had started as a good servant but soon transformed into a "bad master" (Ibid.: 176), having a largely negative effect on the capacity of governments to discharge their responsibilities in terms of either financial supervision or international monetary management (Ibid.: 186). In this way, a market-based transformation of the global system of credit creation and allocation, pushed by the activities of non-state actors in the form of international banks, introduced a whole series of constraints on both national and international monetary management. Combined with the ever-expanding pool of dollars linked to the US deficit and domestic monetary laxity, the expansive growth of the off-shore Eurodollar market undermined the fixed exchange rate system and introduced short-term capital mobility as a management problem in international monetary relations. This development was part of a wider pattern of growing and complex interdependence which reduced the general capacity of states to govern and rendered international co-operation simultaneously more necessary and politically more difficult; these constraints were asymmetrically distributed across the system of states (Ibid.: 354-9): "changes in the money markets...were making increasingly obsolete the public sector adaptive policies so carefully devised at Bretton Woods and later revised and amended" (Ibid.: 188). Of course, states - especially the United States and the UK authorities - had played a crucial role in the emergence of this "market" phenomenon (Ibid.: 179-84).

The international monetary system, then, is for Strange the infrastructure on which trade and production, in short the market, depend. The international monetary system is in turn shaped by the power to create and allocate credit, a power which "is shared by governments and banks, (and much will depend therefore on the political and regulatory relation of one to the other)." This ensemble was characterised by Strange as the 'financial structure' (Strange 1988: 90). In this sense, changes in the financial structure are likely to have a direct impact on the pattern of production and trade in the global economy by altering the options of firms in raising capital. In recent years, "The balance has shifted from a financial structure which was predominantly state-based with some transnational links, to a predominantly global system in which some residual local differences...persist as vestiges of a bygone age" (Stopford and Strange 1991: 41). "The paradox is that this has not happened entirely by accident. The shift from state authority to market authority has been in large part the result of state policies." (Strange 1996: 44). As she insisted to the last, it is politics which is the key to understanding the pattern of change in the structures of international political economy. The array of structural forces were set free not by markets in some sort of vacuum or "by blind chance, but by the conscious decisions of governments, more especially the government of the United States" (Strange 2000: 85). "Sometimes pushed by market forces, they still had freedom of choice, and by and large opted to give way, rather than resist. If this caused problems for them later, it was their own doing, their choice" (Strange 1998b: 18).

This transformation of the financial and monetary order has had implications for the global structure of production and of trade in goods and services. As capital has become more mobile, firms and markets have become more transnational, enhancing their power in relation to governments, which remain territorially based. The increase in capital mobility and the corresponding transnationalisation of financial institutions, combined with technological changes which facilitated this process, was intimately related to changes in the global structure of production. Thanks to the liberalization of international finance, "The old difficulties of raising money for investment in off-shore operations and moving it across exchanges vanished" (Strange 1994b). Aspiring or already global firms are no longer stuck with national capital markets, and can raise funds wherever they cost the least. Restrictions on a broad spectrum of investment decisions have been lifted. This facilitated a rapid transnationalisation of corporate production strategies and a commensurate increase in intra-firm and intra-industry trade, developments again associated with rapid technological change. Firms could fragment production processes and locate activities closer to markets or wherever production costs were most advantageous, spurring a rapid transformation of the international division of labour. From a system of national economies with a few multinational firms, the global political economy has become a system of ever more intense competition and thus ever more rapid adaptation of states and firms to the realities of the new "triangular diplomacy" of state-state, firm-firm, and state-firm (Stopford and Strange 1991: 19-23).

To summarise this section, Strange has argued cogently and consistently across a number of major works that changes in the global financial system, originating with the rise of the Eurodollar market, had a knock-on effect on the broader global political economy. In the first place the onset of short-term capital mobility overwhelmed the fixed exchange rate monetary system and undermined the capacity of states to regulate their financial sectors and manage relatively independent macroeconomic policies. Further wide-ranging liberalization of the financial system accentuated these developments in the 1980s and continued into the 1990s, enhancing greatly the volatility and uncertainty of the global economic climate for firms and states alike. These changes in the domain of money and finance were in turn associated with changes in the structure of production and trade. The trend towards global production strategies accelerated as both cause and consequence of rapid technological developments which facilitated the emergence of a global economy. States and firms alike found themselves in a more dynamic and competitive environment with (sometimes severely) asymmetrical consequences for different social constituencies and states in the system. This was the abiding image developed in her seminal work, Casino Capitalism (Strange 1986), and to which she returned in last work, Mad Money (Strange 1998a). It was the financial structure which was the key to understanding this brave new market world of ours which has earned the much-abused cliché "globalization."


The Decline Of State Power

Strange's argument concerning the nature of the global political economy did not stop with her analysis of the specific domains of finance, money, production, or technology. She was also interested in how the pieces of the puzzle fit together - what she called the four interlocking structures of the world economy: security, production, finance, and knowledge (Strange 1988). In looking at the broader picture of global order, she went on to make equally persuasive arguments about the nature and role of the state in the emerging global system. This section will examine how Strange moved from an analysis of the underlying structures of political economy to an analysis of the implications of structural change for the complex patterns of political authority in the system of states in the last years of the twentieth century and on into the millennium.

The result of the shift to a more market-oriented and transnational economic order, propelled largely by global financial and monetary developments, is the diffusion of authority which once belonged firmly in the hands of states: "The declining authority of states is reflected in a growing diffusion of authority to other institutions and associations, and to local and regional bodies, and in a growing asymmetry between the larger states with structural power and weaker ones without it." (Strange 1996: 4).

In the first place, as Stopford and Strange argued in 1991, states were manifestly less interested in the acquisition of territory than in the pursuit of wealth for the national economy: "national choices of industrial policy and efficiency in economic management are beginning to override choices of foreign or defence policy as the primary influences on how resources are allocated" (Stopford and Strange 1991: 1). The traditional "Westphalian" state was undergoing important transformations and our ideas about the state, for Strange, needed a corresponding adjustment (Strange 1994c). States now competed to attract capital and economic activity to further their economic development goals in international competition. The transnationalisation of markets had placed ever stronger cards in the hands of global firms. This accentuated the need for states to make themselves attractive to firms and thus dissipated their control over the levers of economic development. Once again asymmetry predominates: some states are manifestly better positioned than others to use their power and resources in this game of state-firm diplomacy which increasingly prevails over the tradition state-state variety. States are far from being pawns in this game, but the enhanced role of non-state actors, especially firms, is clearly analysed by Stopford and Strange and further developed by Strange herself (Strange 1994b).

The enhanced role for firms is also highlighted by the new game of firm to firm diplomacy which Stopford and Strange pinpointed (see summary in Strange 1994b: 108-10). Capital mobility and transnationalisation of production allows firms to develop their strategies more autonomously, yet intensified global competition pushes them to collaborate with each other and pool resources and innovations. This game of firm-firm diplomacy is intimately related to state-firm bargains and to the more traditional state-state diplomacy of international trade negotiations. The power exerted by the changing preferences of major multinational corporations as non-state actors was for Strange undeniable, and it was also undeniably altering the world of states themselves. A further effect was "the dilution of the national identity of the business enterprise" (Strange 1998a: 181). 1

These new realities cast ever longer shadows of doubt on the validity of traditional realist and other state-centric approaches to international relations. Significant doubt was cast on a wide range of theories in economics, especially those of a liberal persuasion (Strange 2000: 85-6). As early as 1970, Strange had argued the need to overcome these theoretical shortcomings of economics and international relations by developing international political economy as a separate discipline (Strange 1970).

This increasing power of firms and therefore of market forces in the global political economy was a result of the structural changes in the financial and production structures, as well as in rapidly changing technologies (see section II above). The argument need not be repeated here, suffice to say that money and finance were at the heart of any explanation proffered by Susan Strange. The real economy, sector after sector, "dance[s] to the fast or slow rhythms of financial markets" (Strange 1998a: 180). Likewise with states: "all run up against the limits set by international finance" (Ibid.). The conclusion which Strange drew from these developments was that state power was being significantly circumscribed in an ongoing fashion. Sometimes this power had shifted upwards to institutions such as the European Union or other international instances, sometimes it had moved downwards to markets and local institutional bodies.

It was not just market actors, then, which had become the repositories of authority and power in the global political economy. Strange argued that other non-state actors were increasing in power too. International organizations such as the International Monetary Fund or the European Union were obvious candidates with their legions of "econocrats" (Strange 1996: ch. 12). They are very much part of the fabric of global governance as states seek to overcome their own limitations through the delegation of power, but not necessarily the most important. A range of private agents and networks, which had always been present, are emerging as important repositories of power and authority in the global economy. Private cartels controlling and manipulating markets, the power of the self-regulatory bodies of the professions, and even international mafias and criminal networks, had a role to play in this diffusion of authority (see section II of Strange 1996). To a considerable extent, Strange's arguments lie behind the emerging recognition of the importance of non-state actors by other scholars (Cutler, Haufler and Porter 1999; Higgott, Underhill, and Bieler 2000).

This notion of power and authority residing in private as well as "legitimate" public bodies implies that political authority is not just exercised by states, whatever international law or traditional political scientists may say. In fact, Strange's emphasis on non-state, especially private, actors requires a broadening of the traditional notion of politics to encompass not just what states or politicians in the formal political arena do, but as a pervasive activity determining who gets what, when and how among a wide range of public and private actors in an increasingly transnational space (Strange 1996: ch. 2).

States are not, then, the only important actors in either a domestic or international context. In fact, the distinction between the domain of international politics and the domain of domestic politics was a dubious one for Strange. Her challenge of this distinction was integral to her critique of traditional international relations scholars of the realist paradigm. Furthermore, political power is most often exercised in a quiet, almost unthinking way by those actors who have it, state and non-state alike, through structural as opposed to relational, or what some theorists call "instrumental" power (Strange 1988: ch. 2; see also Verdun in this volume). Private non-sate actors, such as bankers, exercise their authority through structural power, not a genuine ability to coerce others directly. They cannot compel states or other players to do things in the positive sense, but their control over the creation and allocation of credit constitutes power nonetheless.

So if the state is in retreat, is it necessarily the case that non-state actors, especially market players, are advancing? Her arguments go a long way to support this conclusion. One possibility, Strange argued, was that authority had not gone anywhere: "as power has become more dispersed, away from the sovereign state that was supposed to be the unit of analysis in international society, so some of the functions of authority are not being discharged by anybody. Power has evaporated, like steam" (Strange 1994a: 15). This situation yields the "defective state" (Strange 1995) which could no longer fulfil the functions commonly assigned to it in the international system by the underlying assumptions of democratic governance. States had more and more difficulty smoothing out the economic cycle, affecting exchange rate determination, raising tax revenues from the corporate sector, or satisfying the welfare demands of citizens (Strange 1994c: 213).

This issue of democratic legitimacy surfaced again and again throughout her work. It was an abiding concern in Sterling and British Policy (Strange 1971), was expressed strongly in Casino Capitalism (Strange 1986), to resurface in Mad Money. Structural change, the retreat of the state, and corresponding increase in power for non-state actors of various kinds has considerable implications for the future of democratic governance: "not much remains of the accountability of market forces to political constraints," and hence "the casting of a vote from time to time becomes a merely symbolic act.... Moreover, none of the non-state authorities to whom authority has shifted, is democratically governed" (Strange 1996: 197).

To this emerging crisis of the state, increased co-operation and institution building at the international level was not providing a viable solution. Part of the reason for this was once again the lack of democratic accountability in the international domain and the inability of states to develop alternative structures of governance which ensure that democratic processes prevail. The result was a increasing sense of fundamental insecurity amongst many populations and constituencies in the international system (Strange 1994c: 216). Behind her work lay an enduring uncertainty about the fragile legitimacy of the changing international (dis)order and almost certainly, as a colleague once put it, a fear of Armageddon, the most recent version of which was the 1930s and the War. After all, she lived through it. This is what she called the "clash between the legitimacy of the liberal economy and the legitimacy of the liberal polity" (Ibid.).

The individuality and distinctiveness of particular national states and economic systems was also under threat from the process of global integration. Given that states were less able to make fundamental choices concerning key areas of policy and governance, it followed that they were less able to defend the specific values which history had, for better or for worse, conferred upon them. Opting for the world market is no longer an option, but an imperative for rich and poor alike. Yet let us not forget asymmetry: these imperatives are more powerful for the weaker, dependent societies and socio-political constituencies than for the dominant political economies of Europe and North America, especially the United States. This led Strange to postulate an ongoing and accelerating convergence of national economic models, a convergence towards the Anglo-Saxon style of capitalism (Strange in Crouch and Streeck 1996).

Yet Strange's version of convergence was different from most and contained more than a note of ambiguity, which is significant for the next section of this chapter. It was more sophisticated than many detractors would accept. For Strange, convergence and the retreat of the state were related phenomena, but were not the operation of result of blind, structural economic forces of the market. The retreat of the state did not mean sovereignty at bay in the simplistic sense (Strange 1996: 46), or blind economic forces overwhelming a dysfunctional politics. In this way Strange took her political economy seriously - she never forgot her own insistence that the political and the economic domains could not meaningfully be prised apart. States have ceded power to non-state actors, but not for lack of choice. This was the significance of her account of "non-decisions" in Casino Capitalism (1986), the (particularly American) non-decisions which led to the emergence of global financial integration as a structural force in the international system (Strange 1986: Introduction). Political decisions and non-decisions had set in motion the transnational market forces which were steadily emasculating state authority and capacity, and which risked undermining the legitimacy of the market system. "The shift from state authority to market authority has been in large part the result of state policies" (Strange 1996: 44). Hers is an agent-centric explanation, not a determinist one.


New Forms Of State And Market

Strange was perhaps best known for her book States and Markets. This was her signature: she was a states and markets person. Her challenge to scholars and policy makers to rethink their understanding of the relationship between the economic and the political domains (and therefore between their concrete embodiment as states and markets) was surely her most important contribution to the discipline. It is with this signature that she can be credited, with little exaggeration, as midwife of the discipline of international political economy in its contemporary manifestation. Modesty always led her to insist it was someone else, usually Charles Kindleberger 2 , but she was at the very least among the most explicit in issuing her call to arms (Strange 1970) to dismantle the academic apartheid between economics and political science/international relations.

Yet Strange was more interested in developing the challenge than in developing the theoretical case itself. She also was insistent that her challenge should rest on exhaustive empirical demonstration of her conceptual arguments, especially in her major works on the international monetary system 3 . There was often more than a hint of disdain for those who devoted themselves primarily to theoretical work: "I am not generally regarded - nor would I wish to be - as a theorist in international relations. Instead, I devoted much time to analysing the global financial system and how it emerged" (Strange 2000: 83; emphasis added). In another article: "I do find that most - not all - of my colleagues who teach international relations theory tend to suffer from some degree of myopia when it comes to the world around them" (Strange 1994c: 209).

The message was that theory was wont to go astray if not systematically related to empirical research and enquiry into the concrete nature of the world around us. This is a point which one can only welcome, and of course Strange was not by any means alone in making it. But it would not be unfair to point out the corollary: if one is to issue an challenge to theory, the conceptual points in question would be the stronger if rigorously developed in conceptual terms. In this regard Strange was far more interesting in challenging orthodoxy, in broadening the intellectual agenda, than in a systematic theoretical statement.

Strange did explore theory in considerable depth. Her work on power is widely recognised (see several of the contributions to this volume). States and Markets developed a model of interlocking structures in the global political economy, and also explored the role of values in theoretical enquiry (Strange 1988: chs 1-2, 3-6). But if the relationship between states and markets was her signature, the hallmark of her work so to speak, then the absence of an explicit theoretical account of the relationship is the more interesting for its absence. There is no explicit theory of the state-market relationship, despite consistent and persuasive assertions backed by empirical evidence that the two were interdependent, inextricably intertwined.

As should be clear from the discussion in the previous section of this chapter, the state-market relationship is central to the retreat of the state argument. The retreat of the state is the result of state decisions and non-decisions setting in motion the powerful market forces which have diluted state authority and enhanced the authority of non-state actors. It was, as I argued, very much an agent-centred explanation which nonetheless had an important place for structural forces and structural power. But Strange never fully clarified in her theoretical work how this transformation took place. Her analysis suggests a series of unanswered questions: how could institutions which she recognised as being so jealous of their power in many respects (states) participate so fulsomely in their own, if partial, demise, at the hands of market forces and the non-state actors which constitute these forces? Was it foolishness? Myopia? Naivete? How could states voluntarily give up their power over so crucial a domain as monetary and financial policy, especially when it was such a hard-won historical battle to gain the prerogative in the first place (Schwartz 2000)? Furthermore, if the state could voluntarily give up its power, why could it not get it back, a scenario she appears to judge as highly implausible? Did states, through decisions and non-decisions alike, dissipate their authority once and for all, like light and matter down a black hole? Indeed, if states retreat from some domains of activity, does this necessarily make them weaker? If state agents could alter the structure, is this irrevocable, and how is the ongoing process of structural change driven once states have given up much of their capacity to affect the system? Where does the politics go if not to a nether world where states have little in terms of functions to perform?

Were Strange alive, she would have some rapid-fire answers to these questions I do not doubt. It would not be the first time we had discussed this point. Strange would not see the problem as necessarily urgent, but more one of finesse. Yet I believe there is a conceptual point at stake here which is central to the whole state-market debate, and thus to international political economy as a discipline.

That states participated in their own retreat and emasculation, a process fraught with danger for the legitimacy of the global system, remained for Strange a paradox. Her contribution was to force us to grapple with the implications of this transformation, not to explain precisely how states and markets were integral to each other. But her account of this development presumes a close relationship between the power of non-state actors in the market and the outcome (or "non-outcome," to emphasise once again the role of non-decision making) of the policy process. In other words, she assumes, but did not develop a theory of, a close relationship between states and non-state actors, particularly those in the market. This is in may ways common sense, but the precise nature of the relationship is crucial to theoretical debates in IPE. To what degree are states autonomous actors in the global system? How beholden to capital is the state in a recognisably capitalist system? Is a liberal-pluralist model, or marxist model, or a realist model of state most appropriate for our study of international political economy? There is a need to be clear about what one means by state, and what one means by market.

Strange's starting point in the early 1970s (Strange 1970) was that both disciplines in her firing line, international relations and international economics, assumed a real separation between, and a separate set of explanatory variables for, the economic and political domains. She insisted in contrast that the two were part of the same puzzle. So the behaviour of states cannot be separated from their key constituencies of non-state market actors, whether these are becoming more transnational and thus independent, or not.

Somehow states are related to, embedded in, the social and economic constituencies which they seek to manage, and Strange was not of course unaware of this. In several works she emphasised the importance not just of understanding the "national" interest of states, but of understanding in whose interest the national interest had been defined and constructed: who decides what policies are in the national interest?" (Strange 1998b: 18). Society, with its complexity, diversity, and asymmetrical power relationships, was present in her theoretical landscape without being explicitly explained: "History gives us many examples of states choosing policies supposedly in the national interest, but which in fact were chosen to serve the interests of social, political, or economic elites, and burdened society with high costs and risks...." (Ibid.: 18-19). Strange even argued in a well-known exchange with Stephen Krasner (1994c: 215), yet without further developing the point herself, that society-based approaches to IPE were likely to flourish and state-centric approaches likely to atrophy for lack of relevance.

The problem here is that Strange, for all her radical advocacy of the imperative of integrating international economics and international relations in a new, broader and discipline of international political economy, still treated the state and the market as two separate, if interdependent, entities. There was in her work, as in most scholarly analysis of the global political economy across a range of perspectives (eg. Gilpin 1986; Boyer and Drache 1996; Schwartz 2000), an epic struggle between the state and the market. Either the state or the market was in control, depending on one's perspective (eg. Strange 1996 and various, vs. Kapstein 1994). As long as the system is portrayed as a tug-of-war between the two, then they may be interdependent but not genuinely part of the same global system or political economy.

Yet we need to take our Polanyi (1944) and the notion of political economy seriously: he argues that the market makes no sense without the state, that indeed the market was structured and enforced by the state. The idea of a separate economic domain without politics was a stark utopia which failed, resulting in surely the greatest human tragedy of the modern period, the depression and the Second World War.

This means that there is still one more and crucial conceptual step to take in order to move beyond the tug-of-war position of state-market dichotomy. The concept of states and markets as separate entities is an often useful abstraction, but we need to remind ourselves that states and markets are not separate things as such. They are part of the same integrated ensemble of governance, a state-market condominium (Underhill 1997), and should be thought of as such. This can be demonstrated empirically through case material, whether it be on global financial markets or international trade (Ibid.; Underhill 1998). The private interests of the market are integrated into the state, asymmetrically in accordance with their structural power and organisational capacity, through their close relationship to state institutions in the policy decision-making process and in the ongoing pattern of regulatory governance of market society. This is particularly prevalent in financial market governance (Underhill 1997a). What we tend to consider state prerogatives are often delegated to self-regulatory associations of private interests anyway, demonstrating that "public" responsibilities can be exercised by private bodies in many instances, just as private interests can appropriate public institutions for their own particularistic purposes.

The adjustment process and structure of economic interaction in the political economy is managed simultaneously through the process of economic competition among firms on the one hand, and the policy and regulatory processes mediated by the institutions of the state, on the other. This is clearly visible in corporatist systems in western Europe, where even labour is integrated into both state policy processes and the strategic decision-making of firms, or in the close integration of private firms/associations into the system of bureaucratic management which characterises the economic development process in Japan. The point is less obvious to observers of Anglo-Saxon political economies where the independence of the private sector appears more marked than in other societies. But the considerable evidence of "regulatory capture" of the agencies of governance in the US economy should indicate the need to avoid the stereotypes developed in particularly the economics literature. A market without institutions and governance, including some form of judicial authority or arbitration, is inconceivable. If we all admit that perfect competition is an abstraction from a messy, more prosaic reality of various forms of second best market-fixing, we can begin to see more clearly the reality of the political economy: if the state does not rig the market, private interests will. That the state exists in symbiosis with private interests explains how private interests are an integral part of the pattern of market governance even in so-called "strong state" systems like France (Underhill 1998: chs 2-3).

In this sense, the regulatory and policy-making institutions of the state are one element of the market, one set of institutions, through which governance operates. The structures of the market are constituted as much and simultaneously by the political processes of the state and the political resources of the various constituencies involved in the policy process as by the process of economic competition itself; likewise the political and regulatory process is likewise as much part of the strategies of firms as the game of investment and marketing. (Underhill 1998: 18-25; passim). The preferences of market agents and other constituencies of market society are integrated into the institutions of the state through policy and regulatory processes at domestic and international levels of analysis, depending on their individual organisational capacities/coherence, and of course power. The incentives and constraints of state policy and regulation are in turn part of the landscape of firm decision-making, conferring advantages on some and costs on others just as some are more capable of affecting the policy outcome than others.

Of course this conceptualisation of states and markets appears counter-intuitive in our era of global integration increasingly dominated by private sector market processes. The case also appears difficult to support in view of the existence of multiple sovereignties in the global economy. Our contemporary experience of modern capitalism and the prevalence of economic modes of analysis engraves on our intellects the idea of the state-market dichotomy. Yet it is precisely against this sort of orthodoxy that Strange taught us to rebel. Adam Smith is useful here - he pointed out that the very public responsibilities of generating and distributing wealth are better accomplished through a free interaction of private economic agents (see discussion in Underhill forthcoming). Public goals could be accomplished by private agents, and (more worrisomely in Smith's opinion) vice versa. This however does not render the economy any less political: one can delegate authority and decision-making power, but one cannot de-politicise the system as such. It remains an ensemble of governance.

There is also nothing surprising in the idea that a transnational market structure, or indeed any market, should have multiple institutional nodes exercising authority in different ways and even with different functions. There is nothing necessarily coherent about the institutions and preferences of the state in this regard, anymore than we would expect coherence across a system of multiple sovereignties. The federal state analogy is useful here. Therefore, we should not misconceive the identifiable institutional/organizational structures of the state as a separate phenomenon external to the dynamics of the market. The phenomenon of multiple sovereignties does not detract from this view - it simply means that the market is structured by multiple sovereignties, legal fictions all, rather than one single institutionalized locus of authority. Again, anyone who lives in a federal state or indeed the European Union should be comfortable with this assertion.

So what can we make of this in relation to Strange's retreat of the state argument? I would argue that the notion of a state-market condominium as an integrated ensemble of governance makes the retreat of the state argument much more tenable and comprehensible, while altering it in crucial ways. It provides answers to the questions posed earlier in this section of the chapter: how could states do this to themselves? How could they emasculate their capacity to govern crucial aspects of the social whole? Why would they retreat, and can they ever get their power back again?

If the process of market structuration is as much a phenomenon of the policy and regulatory processes of the state as it is of the process of competition among firms, then it is not difficult to understand the role of "non-state" private interests, integrated into the complex institutional fabric of the state, in driving the process of global integration. In this sense Strange is perfectly correct to identify the role of states in propelling the integration process forward. As the pattern of material interests in national political economies has become more transnational, so the state has changed. The state has become far more a facilitator of global market processes than a protector of domestic market structures and interests. The pattern of political authority becomes more transnational in symbiosis with the transformation of the market. The state has progressively delegated a number of tasks either to private bodies or to institutions of international co-operation, though it maintains its functions in terms of domestic political legitimacy and all the tensions that entails.

In this sense what we have seen is not so much a retreat of the state, but a transformation of the state in symbiosis with the transformation of economic structures. We have changing forms of state emphasising different functions over others, not an emasculation as such. This is akin to Jayasuriya's argument concerning the transformation of sovereignty: there has been a steady transnationalisation of the institutions of governance of the global political economy (Jayasuriya 1999). There may be a retreat of the state from particular activities and functions, but if one properly understands the dynamics of the state-market condominium, it should be clear that the form and functions of the state will continue to evolve as indeed they have in the past. This also implies that the state could claw back (at a cost!) its authority should political and market circumstances make this likely, just as the state in the interwar period wrested authority over the market from private actors following the economic collapse and crisis of legitimacy spawned by the depression. The war strengthened this trend as market activity became organised around the function of community survival (expansion in the case of the aggressors) as opposed to private opulence. It is worth pointing out that this period from the depression to the 1970s, the period of national economic management, was relatively exceptional in historical terms (Schwartz, 2000). In many respects we have returned to the more limited role for states which was the norm under 19th century laissez-faire, albeit with enhanced public welfare functions. The question is not why is the state in retreat, but how long is this form of state-market condominium sustainable in the face of the increased volatility of the global financial markets? That was a question which was also central to the work of Susan Strange.



Strange argued cogently that the process of financial globalization had considerable implications for the nature of political authority in the political economy. From this, and from her observations concerning the changing nature of technology and the transnationalisation of production, she postulated that the state was in retreat in the face of market forces and other forms of non-state authority in the global system. She rightly observed that this was as much a political process as a market phenomenon. This observation challenged all of us to think more innovatively about the relationship between states and markets. Yet Strange herself never went on to develop a theoretical account of this state-market relationship, leading her to the somewhat misleading conclusion that the state as such was in retreat. Despite her insistence on their essential interdependence, she still portrayed a tension between the dynamics of markets and the dynamics of states. However, if we reconceptualise the state-market relationship as a condominium, an integrated ensemble of governance, as opposed to two separate things with separate dynamics, a clearer picture emerges. This is one of changing, indeed transnationalising, patterns of political authority in symbiosis with the changing structure of the market. Political authority and the market remain inseparable as Strange insisted, but there is a changing balance of public and private authority which is reflected not in a retreat as such, but in the changing forms of state over time.



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*: Chair of International Governance,, Afdeling Politicologie, Faculteit der Maatschappij-en-Gedragswetenschappen, Universiteit van Amsterdam Oudezijds Achterburgwal 237, 1012 Amsterdam, Netherlands, tel. +31-20-525-2172,fax +31-20-525-2086; This is a draft of an article to be submitted as a contribution to A. Verdun and T. Lawton (eds.), Strange Power: shaping the parameters of international relations and international political economy (Aldershot: Ashgate Publishing, forthcoming 2000), Section III (Global Finance and State Power), chapter 12. This working draft was presented to the annual conference of the International Studies Association, Los Angeles (California, US), 14-19 March 2000, to the panel Common Ground: Reflecting the Relationship between International Relations and International Political Economy. Comments welcome. Back.

Note 1: This thesis is hotly contested by others: see for example Pauly and Reich 1997. Back.

Note 2: Whose own immense contribution I am not trying to diminish in any way. Susan was just more direct in challenging others to rethink both international relations and international economics as disciplines. Back.

Note 3: Though this emphasis on in-depth empirical research was this was perhaps less evident in her later years. Back.