THE ECONOMIC ORTHODOXY of nation-states counseled state intervention in the national economy as a necessary means of achieving growth and other goals. Economic regulation was part of this orthodoxy and fitted the ethos of nation-states that relied so heavily on law. Market-states will have their own economic orthodoxy and their own distinctive tools.
Eventually, all the leading members of the society of market-states may come to accept views similar to these: that capital markets have to become less regulated in order to attract capital investment and that capital has to become more global in order to achieve the maximum returns on investment; that labor markets have to become more flexible in order to compete with other, foreign labor markets and to keep jobs at home that depend upon producing products at a cost that can compete with the products of states that have lower labor costs; that if the world economy is to grow, access to all markets has to be assured and trade has to become less regulated; that a state's trade policy will have to become more free if that state's goods are to be able to penetrate foreign markets and thus participate in this growth; that government subsidies, spending, and welfare programs have to be managed in order to permit more investment in infrastructure and to allow greater private saving (which will lower the cost of investment); and that tax policy has to provide incentives for growth in order to attract enterprise and to maximize innovation and entrepreneurship. Early in the twenty-first century, it seems not unlikely that virtually all major states will accept for themselves the fundamental assumptions that Margaret Thatcher and Tony Blair urged for Britain and that Bill Clinton and George W. Bush urged for the United States, and furthermore that they will accept that if these states do not heed those recommendations, the United States, the United Kingdom, and other states will gain a decisive advantage over them.
If a market-state fails to provide tax incentives for capital formation and capital retention, domestic investment will either not take place or will flee along with foreign investment; if investment goes elsewhere, then innovation and productivity gains will go with it, so that the products that are its result will be cheaper and better than those produced at home; if the products of other states are more competitive, then jobs will be lost to those states; if jobs are lost, then tax revenues will fall, and unemployment and welfare costs will become unsupportable. Ever higher taxes will produce ever lower revenues. The state that resists liberalizing its labor markets in order to protect high-wage jobs will end up with no jobs to protect; the state that resists cutting back on welfare will find it has to cut back anyway when revenues fall and that it now has even larger welfare bills to pay as unemployment climbs; the state that attempts to protect its domestic industries by refusing to liberalize its trade policy will find that those industries are locked out of other markets and in any case are uncompetitive, so that domestic prices stay high and the domestic standard of living falls; the state that tries to restrict capital flight will be shunned, and the state that inhibits capital imports will be ignored. That too will raise the cost of production and depress the standard of living in another turn of this vicious circle. If Mikhail Gorbachev could get this message in the 1980s the secure leader of the richest and most powerful socialist nation in the world—it will not be lost on anyone else.
Moreover, the market-state promises a “virtuous” circle to those states that copy its form and obey its strictures. The privatization of state-owned firms brings immense capital gains to the state as it liquidates vast monopolies; this windfall supplements the savings from cuts in welfare programs and thus lowers deficits, which leads to less inflation, which attracts capital and lowers the borrowing costs required to finance deficits, which in turn lowers the deficits still further, which permits lower taxes, which can produce more savings, which can enable more investment, which produces more funds for research and development, which enhances productivity, which lowers prices thus making exports more competitive, which creates jobs while lowering the cost of living for the consuming public. In the underdeveloped world, such policies mean higher growth owing to comparative wage advantages, which growth leads to a more educated population, which brings more women into the workplace, which leads to lower birth rates, which enhances political stability, which means greater macroeconomic prudence, which leads to more foreign investment, which finances still more growth, which tends to liberalize authoritarianism, which encourages personal autonomy.
The new orthodoxy of the market-state will surely play out in several competing formulations. In the following pages I will speculate about these different versions and describe what they might look like in the future. Like different race cars, they all compete in the same race, meet roughly the same specifications, and are governed by the same rules, but they approach the common competition with different drivers who use different tactics.
In Washington, for example, state intervention is anathema. The state can never adjust prices as quickly and as efficiently as the market, and every state intervention skews the price function to some degree. Moreover, the democratic, representative, deliberative state is slow-moving and cumbersome—just the sort of institution one wants where human rights are at stake or in a society where it is difficult to achieve consensus across many cultural communities but one that is deadly to innovation and the nimble reactions required to take advantage of changes in the marketplace. All market-states take as their legitimating charter that they are responsible for maximizing the opportunities of their citizens. In Washington, this means providing infrastructure (including intangible infrastructure like education and the means of enforcing agreements) and relying on private enterprise to maximize the abundance of consumer choice and minimize the costs to the consumer of exercising choice.
In Tokyo, by contrast, maximizing opportunity means protecting domestic industries so that future generations will have a full array of employment opportunities, subsidizing research and development so that future opportunities for innovation will be practicably exploitable, and restricting the import of capital so that the government remains in control of its capital allocation.
In Berlin, maximizing opportunity means ensuring social and economic equality among citizens, using the corporation as a stakeholder for the public interest so that the opportunities available to communities, workers, and future generations are maximized rather than maximizing the short-term profits of shareholders.
Because the market-state secures political legitimacy through the active pursuit of opportunity for its citizens but declines to specify the goals for which opportunity is to be used, there will be different models whose advocates can plausibly maintain that their constitutional strategy best maximizes opportunity. For example, consider these contrasts between the Tokyo and Berlin models: education financed privately versus public education; high savings rates versus low savings; low currency values versus high currency values; low interest rates versus high interest rates on corporate borrowing; high interest rates versus low interest rates on consumer loans; personal sacrifice versus a higher quality of life; long working hours versus leisure consumption. Either set of choices can plausibly be said to maximize opportunity, depending on what that opportunity is for and what it consists in. What is more difficult to maintain is a set of choices that skips around, pairing high leisure consumption (which maximizes the freedom of choice for one's pleasure) with personal sacrifice (which maximizes the freedom of the society as a whole). So these choices tend to fall into discrete sets.