International Herald Tribune, 3 April 2009

Paul Kennedy

Karl Marx and the G-20

With the eyes of the politically conscious classes riveted upon the G-20 summit meeting of world leaders in London, it might seem odd or obscure to begin this article with a thought from Karl Marx.

The intellectual founding father of communism probably would have found it difficult to understand that global capitalism was still alive a century and a half after his major writings -- and that the world's major governments, though shocked by certain stupid investment and banking practices, were coming together from East and West, North and South, to cobble the international market system back together again.

In truth, Marx completely underestimated the capacity of capitalism to reinvent itself time and again, and to show, with all its defects and with some prudent modifications of purely free-market policies, it was preferable to other “isms.” Nor did he foresee the excesses committed in pursuit of the dictatorship of the proletariat.

Yet despite the failure of Marx's political predictions, significant parts of his economic analysis are worth rescuing. In particular, consider his understanding that while longer-term, tectonic changes in “the forces of production” moved at a different pace from the hectic, week-by-week activities of governments and rulers occupying the “superstructure,” nonetheless they would have a more important historical impact than any declaration by any group of heads of state.

Is that not true? History is littered with solemn agreements — the Versailles pacts of 1919 being perhaps the most notorious — that failed to capture the shifting tectonic plates below. Yet at the time of such summits, the media focused upon the glamorous coming together of so many distinguished politicians, their lofty rhetoric about saving the world, and their pledges to work together to advance humankind's goals. So why should not the general public -- and the stock markets -- have believed that awful international problems were at last being addressed?

So will it be for the G-20 conference in London. There will be resolutions made that the world's media can only purr at: Greater lending resources must be available to the International Monetary Fund to aid economies and currencies in distress; the needs of the poorest countries (that is, the concern of the IMF's sister organisation, the World Bank) have to be met; and protectionist tendencies need to be headed off. What right-minded person could complain at those ideas? A couple of other proposals about handling our global economic crisis are unlikely to end in such cozy intergovernmental declarations. The first is the idea that the peculiar role of the US dollar as the predominant (in some people's eyes, only) world currency should be altered to respond to the changing international circumstances.

Whether the advocates of this proposal are talking about creating a recognised “basket of currencies” or inventing a synthetic unit of account termed Special Drawing Rights or something else, everyone in this debate knows that it is not just about a technical alteration of weighted currencies — it is about pulling the American dollar down a bit and, with it, Washington's capacity to throw its weight around in the world, at least, in the economic world.

Leading Chinese figures have talked about this for some while now. There are Russian sentiments in support of the idea, too. And it is difficult to imagine that President Sarkozy and other Euro nationalists would not like to see this happen.

It will not happen, at least not at the London Summit. There are serious technical difficulties here, plus genuine market fears that there could be a run on the dollar (if its values declines, as it most likely will, then it should be gently, giving smart money the time to get out before the slower-witted investors act.).

More important, it would be politically impossible for the new Obama administration to return to Washington amidst inflammatory headlines like “Dollar Booted Out Of First Place,” and his British hosts and other leaders will have assured him that this is not on the public agenda of the conference.

Yet a glance at the objective global economic data would suggest that a diminution in the dollar's excessively positioned role as reserve currency is going to come, sooner or later, so why not figure out how to do this smoothly?

Crudely put, the US possesses around one-fifth of the world's GDP, but its own paper provides around 75 per cent of the world's exchangeable currency reserves. To American triumphalists, this is evidence of their country's power, its role as the linchpin of the globe. To more sober financial analysts, this is a worrying imbalance, especially when Washington is relying upon foreigners to cover its own enormous federal deficits.To historians of the longer term, there is the precedent of a not-so-Great Britain seeking to preserve the special role of the pound sterling even when its own share of world product was less than it had been a half-century earlier.

To Marx, gazing down at the London Summit from his grave at the Highgate Cemetery a few miles away, it is an obvious capitalist “contradiction” — that is, when the national forces of production differ so markedly from the international shares of tradable currency, something is going to crack. And that something will be the latter.

The second touchy issue is one that could get more of an airing, although in a very controlled way, and that is the balance of power at the top of the International Monetary Fund.

Virtually everyone agrees that the Fund should be given much greater resources than at present — two times? three times? — to assist states and their currencies beaten down amidst the current economic whirlwinds. Japan has already pledged $100 billion; the EU the same; and the United States will also commit such funds, the Congress permitting. But everyone is looking to the world's greatest possessor of currency reserves, China, also to make a very large contribution.

But why should they become a major banker to an institution that they have only recently joined and that is clearly tilted in its governance and its culture toward the Western capitalist system?

If China and other Asian countries are asked to contribute greater tranches to the IMF's total loan holdings, then surely they have to occupy a larger place on the governing board? Why should it be assumed that the old Bretton Woods disposition of chairs, with the president of the World Bank being an American and the manager of the IMF being a (continental) European, will continue for very much longer? When, perhaps within a decade's time, China's share of IMF funding becomes larger than the EU's, wouldn't it be a “contradiction” for Europe to claim the top managerial spot?

It is one thing (and a good thing) for leaders of the world's leading nations and fiscal institutions to meet in London and try to avert the international slump from getting worse. If they can all look like a happy family, it will seem even better, and the shortsighted market traders will love it.

But it is another thing to suppose that by these important political proceedings, and with a bit of luck, things can be returned back to “normal” — that is, the world before the banking and credit and commercial crisis broke. Underneath, the economic tectonic plates — Marx's oft-derided “substructures” — are still moving, away from the West, and toward the successful parts of the Rest.

These shifts will affect the Bretton Woods institutions; the place of the dollar in world currency markets; the EU's frazzled 50-year bid to be a major player in world affairs before being pushed aside by China and India; and, ultimately, the position of the United States as the fulcrum of our globe.

This is an interesting world summit alright but perhaps for more reasons than the excitable and breathless media coverage may appreciate.

Paul Kennedy is Dilworth professor of history and director of international security studies at Yale University. He is the author/editor of 19 books, including The Rise and Fall of the Great Powers