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Fiscal and Organizational Capacity of States and Sovereignty

by ARGeezer Wed May 29th, 2013 at 08:30:12 AM EST

In their paper Fiscal Systems, Organizational Capacity, and Crisis: A Political Balance of Payments Approach  Nathaniel Cline and Nathan Cedric Tankus illustrate the power of carefully looking at economic history while illuminating some of the limitations of economic and monetary theory, in this case that of MMT, and clarifying factors that affect the abilities of different societies to create a truly sovereign state.

(Warren) Mosler argues that in the mid 1990s he thought, "the theory of the monetary circuit was correct to the point of being entirely beyond dispute". However, he also argues that the theory "could be further enhanced by starting from the beginning". This beginning for Mosler was of course why the workers accepted the units of a currency as payment for their labor services. His answer (which is quite well known among heterodox economists by now) was that imposed debts denominated in that unit of account, give it's units value; in other words taxes. This is an important part of the story, but we would argue it is in fact not the beginning. The true beginning to the circuit is the question of where people and organizations gain the ability to tax.


In order to impose liabilities onto a population (i.e., build a tax system), an organization or group needs to have the resources to impose a tax, collect a tax, and use the real resources it gains through spending to expand and institutionalize its power. The catch-22 is that all of these tasks take real resources and personnel, which is precisely what the tax system is supposed to get. This brings us to history and why this approach has fruitful insights for understanding growth and development. Western Europe was in many ways set up for the modern period by having a deeply institutionalized system of taxation and tribute (some of it in tally sticks and some of it in real resources) before capitalism started developing. They already had the ability and authority to extract real resources and thus it took minimal institutional change to do this purely through a monetary system run by a nation state rather then city-states and feudal hierarchies.

The authors note how the UK developed its fiscal capabilities after 1688 with the establishment of The Bank of England, [they skip over how the formalization of a commercial oligarchy in the guise of a constitutional monarchy, (see The Sinews of Power: War, Money and the English State, 1688-1783 and this shorter online review) gave wealthy Whigs the confidence in that government to lend it substantial portions of their wealth in the furtherance of national projects that strengthened that wealth], how the Napoleonic Wars, by greatly increasing the national debt, consolidated the financial power of the UK and how this led to a significant asymmetry in international political power by making the Pound Sterling the preferred currency in which to denominate international loans, along with the rise of the power of the Rothschild family.  

They note that the USA effectively inherited most of the needed institutions and financial knowledge, which greatly contributed to the development of effective sovereignty for the USA. And then they note that this did not happen in Latin America, where effective national fiscal sovereignty did not emerge in the 19th century, (or, in many cases, even in the 20th centruy).

   Political balance of payments constraint

    Among certain portions of Post-Keynesianism, there is much focus on the balance of payments constraint. While we don't disagree with the idea that there is a balance of payments constraint, we do feel that too often Post-Keynesians are willing to take it's existence for granted to the point of arguing that balance of payment deficits will adjust automatically. When pushed, these writers will acknowledge other factors, but those "other factors" are at best not a focus.

    We take the opposite approach. For us the construction of balance of payment constraints for some countries and their loosening to the point of elimination for others, is a deeply political process. A classic (although under-read and under-cited) example comes from Michael Hudson's 1970 book "A financial payments-flow analysis of U.S. international transactions":

          Analysis can highlight the adjustment process, which if it is to work on the cause of today's balance-of-payments disequilibrium, must work not so much "through the marketplace" as through self-controlling policies by the governments of the "key currency" deficit countries. Otherwise, disequilibrium must continue to be financed through compensating diplomatic arrangements (for example, troop offset-cost agreements such as have been drawn up with Germany), swap lending, and a reconstructing of the IMF to increase U.S. credit lines. Balance-of-payments evolution in this event becomes a function of international power politics.

    From this perspective the ability of a country to run persistent balance of payment deficits depends on how they finance those deficits and whether that financing can potentially go on indefinitely.


Add to this the analysis of Yanis Varoufakis in The Global Minotaur, online review here and, perhaps, we have the outline of a sturdy theory of international political economy.

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Effective sovereignty requires the ability to finance the development of the state from resources within that state it seems. If a state does not have that ability it is vulnerable to financial manipulation by foreign lenders of which it has no choice but to avail itself. But it also requires a degree of perceived legitimacy. That can be obtained through tacit bargains between large wealth holders and the state when those wealth holders have sufficient confidence in their control over the actions of that state.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 24th, 2013 at 11:54:16 AM EST
Another concept that should be included in such an analysis is strategic sabotage as both an instrument of imperial domination and of Realpolitik between states.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 24th, 2013 at 04:59:43 PM EST
So deep in the political mythology of the tax-cutters in the UK is the idea that income tax arrived with the Napoleonic Wars as a "temporary measure" and that it illustrates a slippery slope.

In fact it appears that this is correct, only it's a slippery slope not just to higher taxes, but to having a robust state and a growing economy.

by Metatone (metatone [a|t] gmail (dot) com) on Sat May 25th, 2013 at 04:45:23 AM EST
Actually this was more the accomplishment of 'The Glorious Revolution'. In the introduction to The Sinews of Power Brewer notes:
The late seventeenth and eighteenth centuries saw an astonishing transformation in British government, one which put muscle on the bones of the British body politic, increasing its endurance, strength and reach. Britain was able to shoulder an ever more ponderous burden of military commitments thanks to a radical increase in taxation, the development of public deficit finance (a national debt) on an unprecedented scale, and the growth of sizable public administration devoted to organizing the fiscal and military activities of the state. As a result the state cut a substantial figure, becoming the largest single actor in the economy. This was no minor adjustment in the scope and priorities of government; it was a major commitment of resources. Taxes rose to a level as high as any of those in Europe, matching those of many modern underdeveloped states. Borrowing reached such heights that if eighteenth century Britain had gone to the modern International Monetary Fund for a loan it would have been shown the door. The creation of what I call the 'fiscal-military state' was the most important transformation in English government between the domestic reforms of the Tudors and the major administrative changes in the first half of the nineteenth century.

Of course much of this involved becoming the paymaster of various Protestant states in Europe and focusing on developing the navy, while raising and disbanding armies which served abroad as needed. By establishing firm civilian control over the military, especially the army, through the power of the purse Britain was able to avoid the dangers of large standing armies. Being insular of course helped. Meanwhile, the great expansison in government consisted mostly of uncharismatic clerks (the human component of the sinews) who were ignored by all, especially Whig historians. As Eric Hobsbawm said in another context: "The Whig view of history simply won't do, if it ever did."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 25th, 2013 at 10:56:37 AM EST
[ Parent ]
If only the US had avoided the danger of a large standing army after WWII.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon May 27th, 2013 at 03:45:38 PM EST
[ Parent ]
impossible at the time: remember USSR
by Xavier in Paris on Thu May 30th, 2013 at 06:32:05 AM EST
[ Parent ]
Had Henry Wallace again been on the ticket with Roosevelt in 1944 it could have been a very different picture. Business interests fought hard to have someone else and Truman was who we got. Truman lacked the broad international political economy vision that Wallace possessed and was rather easily captured by the cold warriors. Had there been a post WW II detante between the USA and the USSR history might have been very different. Chris Hedges makes a good case for that argument.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 30th, 2013 at 10:18:43 AM EST
[ Parent ]
Excerpts from Death of the Liberal Class are available at Truthdig or an e-book is available for US$10 from Amazon, etc.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 30th, 2013 at 10:34:06 AM EST
[ Parent ]
I need to read the Hedges version.  I've heard the post Cold War detente possibility raised before, but am not convinced.

 Given the domestic political battles between militarists and the left, and the corresponding need for each of them to have their interpretation of the Soviet Threat to be correct, I'm not sure if this is a issue that Americans are able to think clearly about.

by Zwackus on Thu May 30th, 2013 at 09:12:12 PM EST
[ Parent ]
Hedges suggests that, had FDR's intentions been followed, there would have been no cold war and an entente between the USA and USSR would have moved global politics leftward in the west and towards more moderation in the USSR. Certainly, had Truman not turned into such a cold warrior developments in Greece and Italy would have been much more favorable to indigenous leftists in those countries. The British were failing in Churchill's effort to defeat the Greek leftists when the USA picked up the burden and the CIA had a lot to do with the victory and entrenchment of 'center-right' politics in Italy - for starters. With Eisenhower in charge of the US military in Europe such a policy could well have been implemented.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 30th, 2013 at 09:26:59 PM EST
[ Parent ]
The thing is, though, if Communists won power in countries further west, would they have turned into left leaning but independent Eurocommunist states, or into Soviet satellites?  I don't know if Europe or anyone would have been better off with a few more countries with the government of Romania or Poland.  

With Stalin alive, I just don't know if any Communist countries would have been able to escape a pretty strong degree of Soviet influence.  By the time he was dead, the moment had passed for the most part, and the Cold War was underway.

by Zwackus on Thu May 30th, 2013 at 09:34:35 PM EST
[ Parent ]
Hedges argues and provides some substantiation to the effect that Stalin and Roosevelt had a particularly good understanding and that Stalin was prepared to allow more flexibility within its sphere of influence if the relationship had continued, but, when the USA under Truman repudiated the basics of that understanding, Stalin turned hard line. I am certain that some of the old line US Stalinist members of the old CPUSA would have agreed, but there might have been some validity to the argument, and Wallace would likely have carried through on this particular part of Roosevelt's agenda.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 30th, 2013 at 09:53:04 PM EST
[ Parent ]
Of course, unless its a case of actually going out and rounding up hoarded gold, all taxes are income taxes, in the sense of functioning by drawing out a share of income ... a VAT (GST) is a tax paid out of incomes every bit as much as an income tax is.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon May 27th, 2013 at 03:49:08 PM EST
[ Parent ]
But since a portion of the income of previous year's and generations constitute assets which one owns for those with substantial wealth an asset tax is appropriate, despite the hundreds of millions of dollars such individuals have spent to convince all to the contrary. Land and capital assets, income streams from intellectual property rights along with capital gains are quite appropriate targets for higher taxes. One would know when the aggregate levels are correct when the Gini coefficient began to decline.    

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 27th, 2013 at 05:03:35 PM EST
[ Parent ]
What makes something a "Financial Asset" is that it generates a claim on current income.

And, yes, making part of the tax on incomes be determined by the amount of that kind of yellow bellied surplus sucking someone is engaged in is a perfectly legitimate thing to do. Its not a tax on wealth, its a tax on the ability to suck up income where that ability is derived from wealth.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jun 10th, 2013 at 01:34:05 AM EST
[ Parent ]


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