The Second Coming:

The Global Market and the Need for an International Political Authority

Justin Stein

Department of Political Science

University of North Carolina - Asheville

December, 1998


This is a theoretical inquiry into the nature of international political economy. The question it explores is simple: Will an international political authority be necessary for a global market economy to succeed? After examining the basic logical extensions of market-state relations on the national level, it becomes clear that the answer to this question must be yes. The route to this conclusion begins in Part I with an investigation of the nature of the marketplace. What are its advantages and what functions does it serve? Ultimately, the market requires basic services that it cannot provide on its own. A liberal democracy supplies these services within a framework of individual rights, but while it agrees with the market in promoting competition among free individuals, liberal democracies place a greater emphasis on equality. Part I concludes with a look at the implications of this conflict between the market and liberal democracy, which Arthur Okun calls the "Big Tradeoff" between equality and efficiency.

Part II builds on the logic presented in the previous arguments. If it was necessary to embrace a mixed economy on the national level, will such a move have to be made internationally? This section investigates the measures and growth of the global economy, finding an extended level of economic interdependence. In addition to the rise of the global economy, intergovernmental organizations (IGOs) have been expanding. What roles do IGOs play on the international scene and in the absence of an international political authority, do they supply the rules necessary for a market economy to succeed? Since IGOs are generally incapable of acting outside of the wishes of their respective members and have no ability to challenge national sovereignty, they do not.

Part III explains why an international political authority can be expected to be established in the context of a global economy. First, the global economy does not possess the basic rules and infrastructure a market must have if it is to avoid failure. Second, globalization is fast eroding the ability of individual nation-states to control externalities in their own spheres. Third, a global economy without a global government places Okun’s tradeoff in a new context where the tradeoff disintegrates into a wholesale dismissal of notions of equality and equity. This is morally unacceptable.

Part IV examines the implications of an international political authority and questions the logical implication that this authority would/should take the form of a liberal democracy. If liberal democracies allow markets to determine social ends, and if the social ends markets produce are morally unsound, then fundamental questions must be addressed considering our conceptions of liberty and rights.


Adam Smith’s Wealth of Nations argued that the most efficient and prosperous manner of running an economy was to adopt a policy of laissez-faire. This doctrine, which literally means to "leave alone," is defined in Websters as "an economic doctrine that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a free enterprise system to operate according to its own economic laws." Although some still argue in the vein of Herbert Spencer that any government is too much government, especially where the economy is concerned, Smith never intended that the marketplace was self-sufficient to the degree that no government was needed at all. On the contrary, arguing for the necessary functions that only the state could serve, Smith described three duties of great importance:

They are, first, ‘the duty of protecting the society from violence and invasion’; second, ‘the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it’; and third, ‘the duty of erecting and maintaining certain public works and certain public institutions, which it can never be to the interest of any individual, or group of individuals, to erect and maintain because the profit would never pay the expense though it may frequently do much more than repay it to a great society" (quoted in Heilbroner 1993, p. 71).

The twentieth century, especially in the United States, has forced a rethinking of laissez-faire doctrines. Events such as the Robber-Baron monopolies of the nineteenth century, the Great Depression, and the Great Society, resulted in theorists extending Smith’s basic services of the state to include economic planning, and even efforts at attaining substantive equality. After the "collapse" of the economy in 1929, progressive economists and politicians inspired by the ideas of John Maynard Keynes argued that a market economy, left wholly to its own devices, could ultimately be self-destructive and yield to "rampant individualism" (Daniel Bell 1975, p.16). The best way to manage a market and avoid its potentially hazardous side effects was to construct a political process that ensured "a dynamic tension among the forces of the market [and] government [which] balances the often competing societal needs for essential order [and] the efficient production of goods and services" (Daniel Korten 1996, p. 191). Discussing the meaning and impact of the state response to the collapse of the economy in the 1930s, Robert Heilbroner writes,

The New Deal programs spelled a fundamental change in the role of the government in a market society. The essence of that change was that the government sought to alter the structure of certain markets to allow the competitive process to produce socially acceptable results...Government now began to be envisioned as a permanent stabilizing and growth-promoting agency for the market economy as a whole (1972, p.149-150, 152).

While it is debatable whether or not the competitive process has indeed produced socially acceptable results in the years since the Great Depression, it is clear that for the market to work acceptably, guidance from the state is required to some degree. Commenting on the mythic nature of unregulated markets, Robert Dahl writes, "Even in the United States, which is often thought of as the very citadel of laissez-faire capitalism, to describe briefly all the ways in which governments - national, state, municipal, regional, district, and so on - regulate, supplement, displace, or otherwise alter the operation of markets would take a small library" (1990, p. 82). It follows that the fundamental question of political economy is not a problem of whether the market should be regulated or not regulated, rather just how much the respective spheres of the market and the state should overlap. Before we can look further at what the impact of this relationship is on a global scale, however, some basic questions must be addressed: What is the marketplace? If state involvement is required, which form of central planning should that take, and why?


Classic liberal economic theory, also known as the market system, claims that individuals have the right to choose their own ends. The reality of scarcity produces competition, as people pursue finite amounts of goods. It is this competition among individuals, and their desires for the accumulation of wealth and resources, which gives the marketplace its robust nature. As Robert Gilpin writes, "the dynamism of the capitalist system is due precisely to the fact that the capitalist, driven by the profit motive, must compete and survive in a competitive market economy. Competition weeds out the inefficient while rewarding efficiency and innovation" (1996, p.15).

This competition, classic economists argue, invigorates individual liberty and choice. "Because market exchanges are voluntary, and if there are no trade impediments to trade among individuals... everyone can be made as well off as possible... all participants in the market, in other words, will be at their highest level of utility" (Jeffrey Friedan 1996, p.27).

These free individuals compete in the marketplace which determines who will receive which goods. A market economy is a process in which goods and services are delivered and exchanged on the basis of relative prices. "Its essence...‘is the making of a price by higgling between buyers and sellers.’ Phrased in more formal terms, a market is ‘the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly" (Gilpin 1996, p. 17).

Robert Heilbroner writes that the market is best explained by the mechanism of supply and demand. "Supply and demand is a way of understanding how the clash of buyers and sellers in the marketplace brings about prices that ‘clear’ the market" (1982, p. 158). In this tradeoff demand means "not just how much we are spending on a given item, but how much we are spending for a given price, and how much we would spend if its price changed" (ibid. p.158). Supply, on the other hand, is the reaction of sellers to price changes - "the higher the price, the more sellers are able and willing to put on the market; the lower the price, the less" (ibid. p. 159).

As the tendencies of the seller and the buyer move in opposite directions, an equilibrium is determined at which the price "clears" the market, that is, when the item sells at a price that satisfies both the seller and the buyer. This, of course, does not mean that all sellers and buyers will always be happy. The balancing mechanism of supply and demand is "constantly changing as [people’s] tastes or experiences change in their income and costs" (ibid. p. 160). What evolves out of this mutable balance of supply and demand is what Heilbroner calls the "rationing function." Once a certain equilibrium price is set, some buyers will be able to afford it, while others will not. "Thus the market, in establishing an equilibrium price, has in effect allocated the goods among some buyers and withheld it from others. It has permitted some sellers to do business and denied the privilege to others" (ibid. p. 163).

Robert Gilpin describes three characteristics of the market’s dynamic nature: "(1) the critical role of relative prices in the exchange of goods and services, (2) the centrality of competition as a determinant of individual and institutional behavior, and (3) the importance of efficiency in determining the survivability of economic actors" (1996, p. 18). The perpetual forces of competition and the drive for low prices cause economic development to spread to wherever the cheapest labor and the most abundant resources can be found. The process by which the market allocates goods and services most effectively drives the market to incorporate as many facets of traditional structures and social relations as possible (Heilbroner 1981, p.165; Gilpin 1996, p.19). To maximize this drive towards efficiency, minimal interference in the process by the state is the generally recommended prescription.


To retain the benefits of the market - individual liberty and efficiency - the interventionist policies adopted by a government must be cognizant of those advantages. It follows that a political system must share the same values of the market. That way, the state could provide Smith’s basic services and get in the way of the competitive process as little as possible. There are three central assumptions at the base of liberal economic thinking: the belief that individuals are the principal actors in political economy and therefore the proper unit of analysis; individuals are rational beings who seek to maximize their interests when confronted with a range of options; individuals increase their utility by making trade-offs between goods (ibid.). Liberal democracies make similar assumptions about human nature and the value of protecting individual liberties and choice.

Like economic liberalism, liberal democratic theorists, such as Locke, Kant, Jefferson, and Mill, exalt the rights of the individual above any desired ends of the community or the state. John Stuart Mill wrote, "The only freedom which deserves the name is that of pursuing our own good in our own way..." (1859, chap. 1) Likewise, John Rawls argues, "Each person possesses an inviolability founded on justice that even the welfare of society as a whole cannot override...The rights secured by justice are not subject to political bargaining or to the calculus of social interests" (1971, p. 3).

Committed to the value that a neutral framework with respect to particular ends is better than value-oriented policy, the liberal democratic state assumes that "we are separate, individual persons, each with our own aims, interests, and conceptions of the good life. It seeks a framework of rights that will enable us to realize our capacity as free moral agents, consistent with a similar liberty for others" (Sandel 1996, p.11).

The supremacy of individual rights in the framework of classical liberalism rests on two substantial justifications. The first is, in the words of Rawls, the fact that we become "self-originating sources of valid claims" (1980, p.543). Empowered by the ideology that individuals are free to decide for themselves what is best, people become the sole determinant of their respective success or failure. The state’s purpose, according to liberal thinking, is limited to ensure the sanctity of property rights and the freedom from criminal activity. The state, does not, however, have any role whatsoever in determining which ends are better than others for citizens to follow. The second justification is the idea that every member of society will want to ensure the sanctity of rights. If it is established that every person’s rights and choices are, within reason, valid, then every individual is safe from persecution.

In the 1950s empirical political theorists argued for a revised understanding of liberal democracy and its method. Although the relationship between "rights" and "ends" was not altered, the terms by which liberal democracy was defined were challenged. No longer defining democracy in terms of sources of authority for the state, or purposes served by the government, the focus shifted to the procedures constituting it (Huntington 1991, p.6).

Joseph Shumpeter argued that the basis of the democratic method was not, after all, a rational debate on the common good, but a competition among leaders for votes. Classical democracy rested on certain assumptions about man and politics which were simply unrealistic: "Democratic man is neither as rational, as disinterested, as informed, nor as active in public affairs as he is assumed to be" (Lane Davis 1964, p. 37). Furthermore, there is no way to come to any clear understanding of what a common good is, since individuals’ interests are so fundamentally varied. For democracy to best be served, Shumpeter argued, the decision-making process should not be accessible to a varied and often uninformed public, but restricted to the most fundamental and important issues. A proper definition of the democratic method, Shumpeter proposed, "is that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for people’s vote" (1950, p.250).

Robert Dahl argued that in order to steer clear of the highly ambiguous and conflicting preferences of "the popular will," criteria with a "high degree of control" were necessary for comparative analysis. For example, Dahl argued that such criteria should include most adults being able to vote in elections with no significant rewards and penalties directly attached to the act of voting or to the choice among candidates. Other criteria involve the necessity of votes of citizens being of the same weight, nonelected officials subordinate to elected leaders in making organizational policy, adults having available to them several alternative sources of information, and "an opportunity, either directly or through delegates, to offer rival policies and candidates without severe penalties for their doing so" (1963, p. 275).

Thus, according to the empirical democratic theorists, liberal democracy shares the same essential assumptions as found in the marketplace. Both systems exalt the rights of the individual above any communal desired ends, common good, or popular will. Therefore, it is sensible to believe that a liberal democracy would provide the basic services required for a market to function efficiently, and impede the competitive processes of the market with only minimal interference.

There is, however, a serious discrepancy between classic economic theory and classic liberalism. Although fully a proponent of individualism, the liberal democracy is charged with the duty of maintaining equality, equity, and justice. Michael Sandel writes,

The idea that there is more to a person than the roles he plays or customs she keeps or the faith he affirms suggests a basis for respect independent of life’s contingencies. Liberal justice is blind to such differences between persons as race, religion, ethnicity, and gender, for in the liberal self-image, these features do not really define our identity in the first place. Once these contingencies are seen as products of our situation rather than as aspects of our person, they cease to supply the familiar grounds for prejudice and discrimination (1996, p. 13).

As we will see, these egalitarian implications of the liberal democratic system come into conflict with the realm of the marketplace. To be sure, the market does not care if its participants are black, white, fat, Jewish, or gay - they are all competitors with as much right to their piece of the pie as anybody else. The market, however, also lacks any interest in the outcome of this competition. The state, by necessity, must.


While the ideas of individualism and competition are found both in the marketplace and the liberal democratic state, the egalitarian aspects of the democratic state are in direct contradiction to the decidedly unequal tenets of the marketplace. This discrepancy, which simultaneously serves as a saving grace and an Achilles heel, provides political economists with a dilemma.

The "efficiency" of the marketplace, "perhaps the most important aspect of how markets work" (Heilbroner 1981, p.164), results in "land, labor, and other so called factors of production [to] become commodities to be exchanged. As a consequence, markets have a profound and destabilizing impact on society because they dissolve traditional structures and social relations" (Gilpin 1996, p. 19). The liberal democratic state, on the other hand, has interests in maintaining a stable and egalitarian society. This conflict of values has led Arthur Okun to write, "Such is the double standard of a capitalist democracy, professing and pursuing an egalitarian political and social system and simultaneously generating gaping disparities in economic well-being" (1975, p.1). Gilpin describes the tension between capitalism and democracy as a basic logical bind. He writes, "The logic of the market is to locate economic activities where they are most productive and profitable; the logic of the state is to capture and control the processes of economic growth and capital accumulation" (1996, p. 11).

Okun explains that "society faces a tradeoff between equality and efficiency" (ibid.). Okun defines the tendency of the market towards "efficiency" as "getting the most out of a given output, that more is better, insofar as the ‘more’ consists of items that people want to buy." The liberal democracy, through its protection of political and social rights, tends toward "equality," which is defined as "implying smaller or greater disparities among families in their maintainable standards of living, which in turn implies lesser or greater disparities in the distribution of income and wealth" (1975, p. 4).

This tradeoff, as Okun explains, is far from perfect but is a good balance between the possible negative implications of the market and the state. The market, on the one hand, left to its own devices itches to turn society into a great "vending machine," where anything and everything is for sale, threatening the bonds of friendship and family - "the glue that holds society together" (Okun 1975, p.14). On the other hand, when the state is unaccompanied by market competition, it will stifle economic progress by removing incentives, as well as strangle individual rights and liberties. Capitalist democracies therefore enjoy a compromise between the benefits of equality and efficiency.


It has been shown that capitalist democracies inevitably run into a tradeoff when trying to balance the advantages of an efficient market economy and an egalitarian liberal democracy. At the national level liberal democracies seek to avoid the possible extremes of the marketplace by attempting to supply a social safety net with welfare and social security programs. This move by a liberal democracy takes it beyond its procedural framework into the business of pursuing substantive policy. If it was necessary to embrace a mixed approach to prevent the market from collapsing on the national level, will a centralized political authority be necessary for the ever-advancing capitalist world economy to succeed?

In order to properly investigate the question of an international political authority, we must first ask, what is the global economy and how has it risen? Have international agencies been created, and if so, have they kept pace with the rise of the global economy? Who are the actors in the global economy?


According to John Rourke, three central gauges measure the rise of the global economy: trade, investment, and monetary exchanges. The two central components of trade are goods and services. Goods are tangible items that either come in the form of raw materials or manufactured products. Services, on the other hand, are the intangibles that one individual or group does for another. Services trade is a rapidly growing component of world trade. In 1980 the export of services made up 24.1% of all world trade and amounted to $363 billion. In 1994, however, services trade accounted for 31.1% and $1.9 trillion.

The overall international exchange of goods since the 1960s has been skyrocketing. In 1960, world trade in both goods and services was approximately $100 billion dollars. In 1995 world trade was measured at $5.2 trillion. In the United States, for example, export expenditures have increased from $40,130 million in 1965 to $344, 440 million in 1996. The role of trade in the American economy has taken such a prominent position that "in dollar volume, exports and imports are both larger than consumer spending for durable goods, residential construction, and plant and equipment investment" (Frumkin 1992, p. 105).

The second gauge of global economic activity is international investment The increase of financial ties among nations has developed as rapidly as world trade. As citizens and groups of certain countries invest in other countries,

a web of financial interdependency is begun. Such international investment has long existed but has accelerated greatly since World War II. In 1950 U.S. direct investment abroad was $11.8 billion. That figure grew to $78.1 billion in 1970 and in 1995 stood at $856 billion. Total world foreign direct investment, involving a major stake in foreign companies or real estate, is well over $2 trillion (John Rourke 1998, p. 306-307).

While governments contribute sizably to the flow of international investment, multinational corporations (MNCs) represent a much more significant aspect of such activity. More than just trading among nations, MNCs signify the ownership of manufacturing plants, have access to the allocation and determination of certain resources, and maintain personnel operations - all in a variety of countries. MNCs are growing fast and are powerful economic engines, often with as much economic firepower as nations themselves. Rourke writes

There are now about 2000 large MNCs and over 37,000 smaller MNCs. These MNCs control 270,000 subsidiaries... [T]he top 500 world corporations in 1995 had combined assets of $32.1 trillion, a combined gross corporate product (GCP) of 11.4 trillion, and over 35.1 million workers...if General Motors [the biggest manufacturing MNC] GCP counted as GDP, the company would have been the world’s twenty-second largest economy (ibid.).

As global trade and investment increase, they enhance the importance of international monetary exchanges. The flow of money across borders has reached such a frenzied rate that it has become almost "impossible to calculate very accurately" (ibid.). Nonetheless, in 1995 a survey of several large banks across the globe was conducted which reported that the daily rate of exchange in the United States was $244 billion, $464 billion in the United Kingdom, $85 billion in Japan, and $461 billion in Germany. This rate of exchange implies a global currency flow of approximately $548 trillion a year which is a $348.8 billion increase in six years.

Taken together, the combined growth of world trade, international investments by both states and MNCs, and monetary exchanges represent a rapid and steady progression of economic interdependence in the global economy. Whereas material goods and services used to be predominantly produced by the people living in the same territory or state, the impact of global markets has forced a system of production where production has no loyalty ties to its local markets. The liberal forces of competition and efficiency have pushed the market to look across borders for the cheapest labor, resources, and the greatest profits. Ultimately, individual national economies are becoming less important as markets progressively expand into a world system of trade, investment, and supply and demand.


In tandem with the rise and growth of the global economy has been the phenomenon of individual countries coming together to work out different problems and deal with international issues. Intergovernmental Organizations (IGOs), organizations whose memberships consist of national governments, have been steadily increasing over the last half of the twentieth century. In 1940, there were seven such organizations. In 1995, there were 110, including groups such as the United Nations, GATT, and NATO. The roles of IGOs, in addition to their quantitative numbers, have also been quickly growing. As international relations continues to expand so does the need for IGOs to deal with the same issues that national governments must address in their own spheres.

One practical reason for this increase of international activity over the last half of the twentieth century is that nations have had increased contact with each other. Thanks to revolutionary advances in communication and transportation, states have come into contact with such regularity and consistency that international structures become necessary to standardize and conduct relations. A second reason for the expansion of IGOs has been the global economy itself. Economic interaction and interdependence at the very least needs a framework with which nations can deal with one another. In order to deal with this phenomenon, institutions such as the World Bank and the International Monetary Fund (IMF) were created at the Bretton Woods conference. A third reason for the expansion of IGOs is the need to deal with transnational problems that no one country has the resources to solve or arbitrate on its own (ibid. p. 158-159).

There are two different perspectives about what functions IGOs should serve - a traditional perspective and a progressive one. Traditionally, IGOs are seen as institutions which can provide a framework, or "interactive arena in which member states pursue their national interests" (ibid. p.160). In addition to supplying a neutral playing field, IGOs perform a functional role in which they facilitate global cooperation through pragmatic efforts dealing with problems as they come. This view also holds that IGOs nourish trust among members by cooperating in non-political, non-ideological behaviors.

As it stands, IGOs are far and away understood in this traditional sense. They perform tasks that help facilitate the interactions of different members across borders, and supply a framework for dealing with problems as they arise. The United Nations, the most prestigious of IGOs, is severely limited in what it actually can do in the international sphere. Without the muscle of its largest members, it is a body bonded by friendly diplomatic ties, and not much more. As Ali Dessouki has written, "When the big powers are in agreement, the UN performs. When they aren’t, the UN is paralyzed" (ibid. p.185). The independence of IGOs such as the UN is severely limited, and their activities are ultimately nothing more than a reflection of the willingness of its members to cooperate.

Progressive views of IGOs, on the other hand, claim that the authority and role of IGOs should be expanded. As opposed to the pragmatist approach that issues should be dealt with as they arise, progressives argue that IGOs should play a more active and forceful role in international relations, possibly becoming supranational organizations which hold real authority. This kind of organization would have the ability to implement global regulations and policies, possibly taking the form of a world government or international legislature, and limiting national authority (ibid. p. 160-161).

Both Smith and Okun agree that for a market economy to function efficiently, basic services that it cannot provide on its own must be provided by an outside source. In addition, it is essential that the market be coupled with egalitarian notions of equality to balance out the narrow-minded drive for efficiency that can result in the marketplace. Do these services already exist on the global level, and therefore explain the rapid growth and "success" of the global economy?

IGOs, although a powerful mechanism for facilitating cooperation among states, have no real power to supply the rules of the game for the global economy. IGOs are organizations with no authority beyond the interests of its individual members with no capacity to cleave national sovereignty, and are therefore impotent as regulatory agencies. Lester Thurow writes that

With the addition of the second world to capitalism and the decision of much of the third world to play the capitalist game, the global economy is both bigger and more of a reality than it has ever been, but there is also no system of rules to guide that economy. The existing trading system - the GATT-Bretton Woods system - was designed for the unipolar world that existed in the aftermath of WWII and not today’s multipolar world. It will have to be redesigned for new multipolar realities... (1996, p. 131).



In 1947 Reinhold Niebuhr argued that the possibility of a world government was an illusion. He stated that this illusion, or "fallacy," existed because a world government could not be created by simple will or fiat, and would have only a limited capacity to integrate communities (p. 380). Niebuhr argued that the only way an international political authority could come into existence would have to be because the times necessitated it. The second half of the twentieth century has begun to create an environment that is conducive to an international authority: the advancement of a capitalist global economy. Likewise, the integration of communities has been rapidly developing, not due to state intervention, but to the dynamic processes of the market. The growth of regional trading blocks and political integration such as NAFTA and the European Union are examples of this process at work.

There are three reasons why an international political authority is now necessary. First, a market economy fails when it does not have a basic infrastructure. The fundamental principle of the market is to maximize efficiency. If the infrastructure provided by a liberal democracy makes a market more efficient, then it follows that a global capitalist economy requires an international political authority. Second, globalization is fast eroding the ability of individual nation-states to control externalities in their own spheres. As national regulations become antiquated it becomes clear that global regulations will be necessary if MNCs are going to be checked in their drive for monopolistic control. An international political authority could provide such standards and regulations, whereas individual nations cannot. Third, a global economy without a global government places Okun’s tradeoff in a new context where the tradeoff disintegrates into a wholesale dismissal of notions of equality and equity. A global economy unimpaired by politically supported egalitarian attitudes produces socially unacceptable results.


As Smith has argued, ‘the duty of erecting and maintaining certain public works and certain public institutions" cannot be left to the market because "the profit would never pay the expense." These public works and institutions are known as public goods, the benefits of which are shared equally and simultaneously by all persons. Public goods, such as national defense, clean air, parks, and the protection of life and property, do not operate on the basis of supply and demand, as do private goods. Public goods are accessible to all, as the costs are forcibly shared by the public through taxation. Public goods are problematic for the market because once one is produced, everyone can benefit, regardless of whether or not they pay for it (Richard McKenzie 1978, p.342-344). This, as Smith argued, removes the incentive for private producers to supply the good.

The market, therefore, has no means of supplying public goods. A difficulty associated with this failure is what is known as the free rider problem. Once a group of individuals volunteer to finance a public good, it becomes difficult to maintain cooperation. Every individual has incentive to not cooperate, as it will be in the best interests of each individual to enjoy the benefits of the good at no cost. Ultimately, the production of the public good becomes impossible for private business, as all citizens will try to avoid the cost of contributing. The free rider problem is most serious at the national and international level. Edgar Browning writes, "The larger the group, the more severe is the potential free rider problem, and hence the more likely it is that a public good could not be financed by voluntary contributions (1979, p. 26).

In addition to the provision of public goods, the market fails to successfully cope with externalities, which are positive or negative effects which competitive exchanges have on people not participating in the market. Externalities are similar to public goods in that many people either benefit or are harmed by effects for which they did not pay nor did they choose. This effect, as Browning writes, will "generally lead to an inefficient allocation of resources [because] market demands and supplies will reflect only the benefits and costs that fall on others [and] will not be taken into account in determining production" (ibid. p. 36). Because externalities skew the supply and demand of products, businesses inappropriately estimate the costs and benefits of production. The result is an underproduction of activities with external benefits and an overproduction of those with external costs.

Another result of business’ failure to count as part of the costs of production the harm they do nonparticipants is the fact that it becomes profitable to become "social reprobates." Discussing the example of air pollution, McKenzie writes

An individual producer who voluntarily installs pollution abatement equipment while others do not will incur costs that are higher than those of the other producers. The other producers can then underprice the first producer, take over that producer’s market, and perhaps, drive the producer out of business... [C]ompetition can lead even those producers who are concerned about the environment to pollute and thereby impose costs upon others (1978, p. 346).

From the illustration of the market’s failure in dealing with public goods and externalities, it follows that government is necessary for the market to succeed. While national governments have been capable of providing these public services and regulations of externalities in the past, the advent of the global economy has been making it much more difficult for them to do so.


David Morris writes that "those who oppose and those who support new trade agreements agree on one thing: The world economy is broken and needs new rules. The debate is about what those rules should be" (1996, p. 445). Lester Thurow argues that while global rules are essential, their advent is far from certain. Even more fundamental than the debate about what the rules should be is the question of how the rules, once agreed upon, could ever be enforced. Thurow claims

World regulation is not about to replace national regulation. No one can agree on who should regulate, what should be regulated, or how it should be regulated. Whatever might be agreed upon, it would have little meaning, since someone would always have an incentive not to adopt those agreed-upon regulations. If that someone didn’t agree, that form of economic activity would simply move to their jurisdiction and add to their economic success (1996, p.130).

It is clear that an unguided market fails. It is also clear that deciding upon and enforcing global regulations for the world economy will be extremely difficult, as market forces will push production to cost-effective areas and nation-states vie for national sovereignty. However, it is also clear that for the failures of the global market to be avoided, such "world regulation" must be implemented. Alluding to a possible Global Great Depression, Thurow writes "Those who were alive then (the 1920s and 1930s) saw something that needed to be regulated. Without regulations, perhaps we too will again see something that needs to be regulated" (ibid. p. 131).

Nation-states cannot supply rules for the global economy on their own since the forces of globalization are quickly eroding fundamental notions of national authority. First, as people recognize that success is more dependent on the acquisition of portions of the world market, and less on territorial acquisitions, as well as become aware of the reality of nuclear warfare, maintenance of armed forces becomes more and more obsolete. As needs for national defense diminish, so do needs for the state (Strange 1997).

The second justification for state authority - that it maintains the value of currency - is also disappearing. Unable to resist foreign exchange markets, individual states are quickly losing the capacity to halt the collapsing of national currency, and are becoming increasingly dependent on powerful coalitions of central banks. The expansion of credit card and digital shopping moves even larger portions of purchasing power out of reach from state intervention. Strange writes

The central banks’ Bank for International Settlements in Basel confessed just this past year that its concordats on bank regulation cannot be relied on to preserve the global financial system against the dangers besetting it. Commercial banks must therefore be trusted (and helped) to regulate themselves... (1997, p. 369).

Strange argues lastly that the strength of the state in providing a social safety net, the balance of the efficient with the egalitarian, has also been eroded.

Globalization has opened tax-evading doors for multinationals and many individuals. As more tax havens open up and more use is made of them, state’s revenues suffer; everywhere welfare services are cut back. In desperation, states raise money by selling off state-owned enterprises. The public sector that once was an important lever of state power over the economy cannot survive the pressures of global competition. Even the power of the state to use trade protection as an economic weapon against foreign competition and a supplementary safety net for those in declining occupations is fast disappearing. The global consensus declares protectionism wrong, liberalization right (ibid.).

The power of governments to regulate business and provide public goods within their own economies is sustained as long as business has no recourse but to obey. Globalization undercuts this power, however, by offering businesses ways in which they can profitably avoid regulation. The global economy therefore creates an environment conducive to "social reprobate" behavior.

A global economy creates some fundamental disconnect between national political institutions and their policies to control economic events and the international economic forces that have to be controlled. Instead of a world where national policies guide economic forces, a global economy gives rise to a world in which extranational geoeconomic forces dictate national economic policies. With internationalization, national governments lose many of their traditional levers of control (Thurow 1996, p. 127).

Ultimately, neither IGOs nor individual governments have real ability to guide, maintain, and secure the global market. This creates a dilemma. "A market economy, whether global or national, needs a lender of last resort, an authority - able to discipline but also to give confidence to banks and financial markets, and able to apply Keynesian logic in times of slow growth and recession" (Strange 1997, p. 366). It follows that if global regulations are needed, and if they are not going to come from IGOs or individual governments, the global economy must be deconstructed, or an international political authority capable of forming and enforcing global rules must be created.


The players in Okun’s Tradeoff are the market and the liberal democratic state. The tension between the two forces, Okun explains, leads to a balance between equality and efficiency where society retains the benefits of market competition and political equality. This balance, Okun notes, is far from perfect. For example, despite the New Deal and the Great Society the United States still experiences gaping disparities in income and wealth. In the United States, for example, roughly thirty five percent of wealth is in the hands of 1% of the population, while less than 10% is owned by the bottom quarter. It is with democratic policies in place that we still see stark inequalities in income and opportunity. What happens, then, if this supposed "safety net" is removed with the absence of the liberal democratic state?

This is precisely the question that must be answered in considering the global capitalist economy. Okun acknowledged the fact that with the benefits of the welfare state, extreme inequalities persist. To consider the implications of a global market unchecked by notions of equality is to invoke Herbert Spencer’s description of the market: "survival of-the-fittest capitalism," where the economically proficient drive the economically weak into extinction. Benjamin Barber writes that laissez-faire strategies operating on the international level are indeed "fatal, for here sovereignty vanishes and aggressive transnational bodies pursue market strategies in the absence of any countervailing regulatory bodies whatsoever" (1996, p. 240).

These "fatal" forces have been slowly manifesting themselves in the dramatic disparity in wealth between Economically Developed Countries (EDCs) and Less Developed Countries (LDCs). To be sure, overall absolute growth has occurred all over the world in the past several decades. This "growth," however, is embarrassing when viewed in the context of global growth among EDCs. John Rourke writes that this small absolute growth

does not diminish the fact that, in general, there is a vast economic gap between North (EDCs) and South (LDCs) that has devastating consequences for those who are poor...The north is predominantly a place of reasonable economic security, literacy, and adequate health care [while] the lives of the people of the south are often marked by poverty, illiteracy, rampant disease, and early death (1998, p. 42).

A serious problem with the growing gap between EDCs and LDCs is that there is no reason to currently think that this disparity is going to shrink. Many models of political development explain why processes of poverty and national incapability are cyclical in nature (see Migdal 1988), but a fundamental explanation for the fact that the problem will not get better but worse is the internationalization of the market. Market forces are designed to drive weak agents and actors into extinction, and reward the strong. Indeed, it is a system created to exploit and reward human greed. "Values," as Thurow writes, "are the black hole of capitalism" (1996 p. 277). As long as the global market is not tempered by egalitarian values, it follows that poor nations with weak economies will neither be lifted by foreign aid from EDCs, nor an invisible hand. Rather, in the economic race for the survival of the fittest, the poor will only keep getting poorer.

Multinationals and national economic agents in the EDCs cannot, however, be blamed for the unappetizing reality of the distribution of wealth on the globe. Equalizing schisms of wealth is anathema to the market - for this is the role of substantive democracies. As Benjamin Barber has written, "Markets simply are not designed to do the things that democratic polities do" (1996, p.242). If the less advantaged actors in the global market are going to have a chance at economic survival, much less success, an international political authority will have to be created.


Assuming that an international political authority is eventually constituted, empirical experience would suggest that this authority would take the form of a liberal democracy. Liberal democracies share similar assumptions about human nature with the market. They both emphasize the importance of the individual and the advantages of free competition between these actors. If the economic sphere is one infused with a survival-of-the-fittest ideology, what happens when such ideology runs counter to dominant social norms? The answer up to this point has been the addition of a liberal democracy. Liberal democracies originally founded to secure procedural equality, however, may be unfit to deal with the morally questionable consequences of a market economy. There are generally two interpretations of how democracy should operate- procedural and substantive. The advent of an international political authority forces us to ask: which form of democracy is better suited to deal with the global economy?



The procedural justification of liberal democracy came into fashion in the 1950s as empirical democrats in the mode of Shumpeter and Dahl argued that democracy should be understood procedurally and not be defined by the sources of authority of government, or the purposes served by government. To succinctly and appropriately understand democracy, the empirical theorists argued, is to realize that the essence of democracy is "the selection of leaders through competitive elections by the people they govern" (Huntington 1993, p. 6). A strictly procedural framework is useful because it provides empirical referents and analytical precision, whereas a democracy defined in terms of the will of the people is notoriously fuzzy. What is the will of the people? Who can define it? How should it be sought?

Since people disagree about the best way to live, government should not affirm in law any particular vision of the good life. Instead, it should provide a framework of rights that respect persons as free and independent selves, capable of choosing their own values and ends. Since this liberalism asserts the priority of fair procedures over particular ends, the public life it informs might be called the procedural republic. (Sandel 1996, p.4).

This procedural egalitarianism is weak, and as Michael Sandel has written, deserves the name of "minimalist liberalism." Minimalist liberals argue that their "case is political, not philosophical or metaphysical, and so does not depend on controversial claims about the nature of the self. The priority of the right over the good is not the application of Kantian moral philosophy, but a practical response to the familiar fact that people in modern democratic societies typically disagree" (Sandel 1996, p. 18).

Classic liberals who advocate the procedural republic do not see the "weakness" of their egalitarianism as a disadvantage. On the contrary, the fact that procedural republics do very little, if anything, in pursuing social ends is the only way that personal freedom can be protected. By supplying a neutral framework in which the rights of individuals are ensured, and providing public goods such as law and order, the behavior of free competing individuals in the marketplace determines the public good.

Unfortunately, it is the fact that it is the market that determines the public good in the world of the procedural republic that is precisely the problem. Individuals left to compete in the marketplace bring about increasingly extreme levels of inequality which are morally unacceptable. If one desires a political system to deal with this problem and provide a mechanism which could alleviate extreme inequality, they are pursuing a common good, or particular social end. A procedural democracy is not equipped to provide such mechanisms. Its job is to ensure the fairness of the decision-making process, not the fairness of outcomes.

Procedural commitments to rights and a lack of substantive commitments to ends results in a political economy where public goods can be provided, externalities can often be met, and offensive rates of unemployment can be prevented. What it cannot do, however, is fairly redistribute wealth and level the economic playing field. A liberal conception of democracy is a political system unequipped to satisfactorily deal with the individualistic tendencies of the market because liberal democracies themselves advocate individualistic tendencies.

It has been established that neither the market nor a minimal democracy "requires a sense of belonging, a concern for the whole" or any moral bonds whatsoever. The individual is the locus of these systems’ concern. It follows that if a market produces morally unsound consequences, and if a minimal democracy does nothing more than to provide a framework for the market to determine the public good, the combination of a liberal democracy and a market economy is morally unsound. If a political system is to have an answer to such normative questions, it must have a means of implementing substantive policy.


Up until the mid Twentieth century, Aristotle’s definition of the political association as an institution which "must devote itself to the end of encouraging goodness" was the dominant understanding of democracy. This conception, known as substantive democracy, views the role of the state in the protection of individual rights as a necessary component, but not as its first duty. Rather, "the end and purpose of the polis is the good life, and the institutions of social life are the means to that end" (Aristotle quoted in Michael Sandel 1996, p. 7). John Dewey argued in line with this understanding of democracy that "The political and governmental phase of democracy is a means, the best means so far found, for realizing ends that lie in the wide domain of human relationships and the development of human personality" (1939, p. 400). According to the classical doctrine, the democratic method was one in which popular participation is broadened as much as possible, insofar as the "popular will" or "common good" would be carried out. This way, the people themselves in a direct democracy, armed with a rational understanding of the needs of a community, could vote and debate on all issues (James Wilson 1962, p. 340). Sandel explains that this republican tradition understands democracy to go beyond the procedural process and involves self-government.

According to republican political theory...self rule means...deliberating with fellow citizens about the common good and helping to shape the destiny of the political community. But to deliberate well about the common good requires more than the capacity to choose one’s ends and respect others’ rights to do the same. It requires a knowledge of public affairs and also a sense of belonging, a concern for the whole, a moral bond with the community whose fate is at stake (Sandel 1996, p. 5).

Does this mean that substantive democracy, the conception of democracy that the empirical democrats displaced with the procedural republic, can bring about moral ends? Substantive democracy has a very different understanding of human nature and the relationship between rights and goods, as it "gives priority to the justice or rightness of the substantive outcomes of decisions rather than to the process by which the decisions are reached" (Dahl 1990, p. 116).

Substantive democracy, which often takes the form of communitarianism, seems to promote the necessary ideology needed to counter market driven forces of individualism. After all, communitarians prioritize the public good above the individual right. It advocates the protection of community and social groups as the highest end. It also claims that citizens should be cultivated with certain specific attributes that are better suited to self-governance, quality debate, and communal understanding. Opposed to the idea that freedom consists in being able to choose one’s own ends, communitarianism teaches "that to be free is to share in governing a political community that controls its own fate" (ibid, p. 274). They argue that liberal or procedural democracies greatly curtail human freedom in that citizens are kept so far out of touch with the ruling.

Liberal democrats in turn claim that the substantive view of freedom is at odds with liberty because it denies individuals the ability to choose their own ends. In addition, those who call for a return to the Aristotelian tradition are met with critics who ask, "just when are you referring to?" There have certainly been periods in time where substantive democracies that value the common good above the individual right have enjoyed more discussion and support by scholars, but a time when people actually behaved in such a way has been more difficult to determine (Dahl 1990, p.300). Is there any value in discussing the benefits of a substantive democracy when such a thing has never existed?


Daniel Bell (1975) explains that there are three primary spheres of influence in modern social life. They are the political sphere, the economic sphere, and the moral sphere. Determining the shape and nature of political economy involves figuring out just how these spheres need to relate to each other. The liberal conception of this relationship involves a market economy guided by a liberal democracy. This version of the political sphere provides a framework of rights and public goods which help the market to be successful. The moral sphere is ignored, as all social ends are determined by individual actors in the market place. A normative criticism of this conception of political economy is that the market should not be the determinant of the common good because it allows morally unacceptable results.

The question of moral ends is an issue that procedural democracy cannot adequately deal with. It advocates governmental abstinence from social ends and intentionally ignores the moral sphere, which makes procedural democracy complicit to the morally troubling consequences of free competition among individuals. Substantive democracy, however, is armed with answers as to how to deal with extreme inequalities. It actively engages the moral sphere in public policy, promotes ends above rights, and loves community stability above individual wealth. Balancing the playing field and reducing extreme forms of inequality are its foremost duties. Unfortunately, the search for a moral solution to procedural democracy’s deficiencies does not end easily.

It is useful to review the logical extensions explored thus far. (1) A market economy is desirable because it efficiently maximizes growth. (2) A market economy needs an outside source to provide services that it cannot provide on its own. (3) A political system must be cognizant of the advantages of the economic sphere and share basic assumptions of human nature. (4) Liberal democracies do this. (5) Liberal democracies allow the marketplace a great role in determining the public good. (6) The social implications of the market are morally troubling. Can these implications be dealt with, and still retain the benefits of a market economy? Can capitalist democracies have their cake and eat it too?

It would appear not. History provides us with two clear choices with little in between. First, a liberal conception of political economy produces a successful market in which growth is rapid, individual rights are secured, and an ever-widening gap between the rich and the poor would simply have to be taken as an unfortunate, yet acceptable, side-effect. Second, a substantive conception of political economy favors the cultivation of particular virtues and the value of community, but produces a possibly fatal prescription for the market. Competition would be curtailed, the protection of the less advantaged would be considered above the right of the rich to get richer, and individual freedoms would be limited. Incentives to be productive and creative could diminish, and overall economic growth could stagnate. With the political sphere not being cognizant of the advantages of the economic sphere, the market could slowly melt into a command economy, a state-driven strategy which has never known much economic success.

The choice we face boils down to a contest between substantive egalitarianism and economic efficiency. This struggle is ultimately a normative one. Liberal democrats claim that a procedural republic is amoral in that it is simply a pragmatic method of dealing with a body of people who all have different ideas of what the good should be. A substantive democracy is unfair, they argue, because it pursues a particular social end. It is undeniably hypocritical, however, for classic liberals to make such a criticism. The procedural republic advocates a value just as much as any substantive system. It values the right of the individual preference as the highest good. To claim that a procedural system is valueless is simply cloudy thinking. Toleration and fairness are values just like any others, and to defend them by claiming that all values are equal and none can be loved by government more than another, is really no defense at all.

The logical extensions are clear. If one values substantive egalitarianism as the highest good, an international political authority must take the form of a substantive democracy. This will inevitably have negative consequences on economic efficiency, as well as individual liberties. If one values individualism and the freedom of the marketplace as the highest good, this body must take the form of a procedural democracy. If the latter were to occur, and a procedural democracy was established to allow the global market to determine the public good, it would be "to ignore the social aspects of humankind [and] design a world for a human species that does not exist" (ibid.). The value advocated by the liberal choice is ultimately intolerable because it simply punishes too many people for the benefit of very few.

The solution is not a world in which inequalities are banished. Empirical experience has taught that competition is the key to progress and growth and it is a given that human beings have different abilities and talents, where some are smarter, some are stronger, and some just work harder than others. The outcome of our pursuits need not, and should not, be identical. They do, however, need to be guided by a set of standards that do not simply come from haphazard interactions of greedy people in the marketplace. The goal of an international political authority must be the establishment of a social order in which the best man wins, but the survival and dignity of the loser is ensured at the same time. It is not clear whether or not a substantive democracy will be able to succeed in doing this. What is clear as crystal, however, is that a political system blind, deaf, and dumb to the social implications of the market will not, and cannot, do it.


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