Tony Smith

The debate that raged between social democrats and revolutionary Marxists for much of the twentieth century was long and bitter. Social democrats defended national reforms supposedly capable of instituting a just capitalist order. Adherents of revolutionary Marxism, in contrast, insisted that that the property relations defining capitalism necessarily involve exploitative production relations on a world scale. In my view Marxists had the far stronger arguments. But in the countries of the industrialised West, at least, social democracy won the debate politically, attaining a hegemonic position on the left and centre-left.

Today this debate is a distant memory. It has become increasingly difficult to distinguish social democratic parties from their traditional rivals on the right and centre right. Whatever their rhetoric outside of office, once elected social democratic parties have consistently attempted to cut social welfare programs, increase the so-called "flexibility" of labour markets, and serve the interests of financial capital.

Theorists associated with the social democratic tradition have responded to this development in three main ways. One group echoes Thatcher’s "there is no alternative" war cry. On their view globalisation makes the above policies all but inevitable. Any divergence from "fiscal responsibility" will invariably and almost instantly be punished by global capital markets. On this view social democrats must be content to lessen somewhat the social costs associated with neoliberal policies.

A second group of theorists, horrified by the accommodations to neoliberalism made by social democratic parties, holds that "globalisation" is an ideological category, not an irresistible force. For these thinkers the extent of global economic integration has been wildly overestimated. Most economic activities continue to be contained within national borders, and states continue to have the power to regulate economic life and further social democratic values. The turn away from traditional social democratic policies is thus not due to the lack of feasible alternatives, but to a political balance of forces in which financial capital predominates. With a different political balance of forces neoliberalism could be reversed and authentic social democracy revived.

Adherents of a third viewpoint agree with the first set of theorists on one essential matter: the rise of globalisation has indeed undermined the pursuit of traditional social democratic policies on the national level. But they share the misgivings of the second group regarding the accommodations to neoliberalism made in the name of globalisation. Refusing to abandon the values of social democracy, they argue that the proper response to globalisation is the institutionalisation of those values on a global level. I believe that the most powerful defence of this third perspective is found in David Held’s Democracy and the Global Order. The present article is devoted to a critical examination of the transformations in the global economy called for by Held and other defenders of what he terms "cosmopolitan democratic law."

I shall simply assume for the sake of the argument here that globalisation has undermined the traditional social democratic project of establishing "capitalism with a human face" on the national level. I shall also grant the equally contentious thesis that the values of social democracy as interpreted by Held are indeed the normative standards that ought to govern social life. Finally, I shall not investigate the question of social agency, that is, the question of whether there are (or could be) social movements with the potential to institute cosmopolitan law in the face of the undoubtedly bitter opposition of neoliberals and their allies.

Decisions by agents operating outside a given set of national borders can profoundly affect the lives of those within these borders. In Held’s view, for a political order to be democratic those exercising decision-making power must be accountable to those over whom the power is exercised. The democratisation process, therefore, must expand beyond the on-going democratisation of the nation state (and more local forms of government) to include a new political regime on the global level. Held advocates a global "Charter of Rights and Obligations" articulating the basic precepts of cosmopolitan democratic law. A system of international courts is required to which appeal can be made when particular agents – including state officials - fail to adhere to these precepts. He also calls for regional parliaments on the continental level, general referenda cutting across nation-states, elected supervisory boards for international organisations, and an "authoritarian assembly of all democratic states and agencies." Finally, Held does not shirk from demanding a permanent independent military force under the control of this global assembly. It is needed both to enforce laws on the regional and global levels and to provide a "general check on the right of states to go to war."

Most debates regarding the institutional implications of cosmopolitanism have concerned the feasibility and normative attractiveness (or lack thereof) of these proposed political institutions. In the present context, however, our focus will be on Held’s call for reforms of the global economy. There are two main reasons for this. First, Held himself unequivocally recognises that "if the rule of law does not involve a central concern with distributional questions and matters of social justice, it cannot be satisfactorily entrenched, and the principle of democratic accountability cannot be realised adequately." In other words, no economic justice on the global level, no global political democracy. Second, an examination of Held’s economic proposals brings us to the heart of the debate between cosmopolitanism and a Marxian perspective.

Held insists that the global Charter of Rights and Obligations include constitutional guarantees of two fundamental economic rights, along with constitutional commitments to two forms of economic policy. Each of these four proposals is designed to provide a necessary condition of the possibility of substantive (as opposed to merely formal) autonomy throughout the global economy. They are:

1) the right to a basic income;

4. controls on short-term capital flows.

These proposals form the core of "a new ‘Bretton Woods’ agreement – an agreement which would tie investment, production and trade to the conditions and processes of democracy." Corporations and states would then be subject to "democratic audits" of their compliance with cosmopolitan law. If an audit reveals that they have disregarded the precepts of the global social charter, sanctions would follow:

These bans would be "enforced by agencies which would monitor not just the rules of sound finance and market transaction, but also the rules which specified the possibility of mutual respect for autonomy and self-determination."

The goal of cosmopolitan law is to ensure that the material preconditions for effective exercises of autonomy are provided throughout the global economy. It should be clear that this project is nothing less than the institutionalisation of social democratic values on the global level. Does Held accept the thesis that these social democratic values are compatible in principle with capitalist property (and production) relations? The answer is complicated by the fact that Held calls for the "enhancement of non-state, non-market solutions in the organization of civil society." He also advocates "systematic experimentation with different democratic organizational forms in the economy," leading to a "pluralization of patterns of ownership and possession" including "strict limits to private ownership of key ‘public-shaping’ institutions: media, information, and so on." Nonetheless, the general thrust of his position points in a quite different direction:

In light of the italicised portion of this passage, Held’s "cautious and experimental" project appears designed to reform capitalism in light of the normative imperatives of cosmopolitan democracy. This supposition is confirmed in the following passage: "The corporate capitalist system requires constraint and regulation to compensate for the biases generated by the pursuit of the ‘private good’." Providing "compensation" is obviously far different from rejecting the corporate capitalist system. Or consider Held’s comment regarding rights to participation in workplace decision making:

From a Marxian perspective there is no question that Held’s position is vastly superior to both the neoliberalism of the right and the staggering political degeneration of social democracy represented by the so-called "third way" of Blair and his cohorts (Callinicos 2001). Nonetheless, for Marxists "the question of the particular forms of property right" cannot be dismissed so quickly. In this paper I shall argue that capitalist property and production relations are of overwhelming significance. They ultimately prove incompatible with the democratic values Held seeks to advance with his four proposals.

Those who enjoy basic income guarantees have a greater ability to make choices in consumer markets than they would otherwise have. This enhances a form of economic autonomy that separates capitalism from earlier social systems. A basic income, if set at a sufficiently high level, could also significantly lessen the economic coercion forcing workers to take low pay, low status, and dangerous jobs. But is the provision of a reasonably high basic income consistent with capitalist property relations? For social democratic theorists, the historical periods in which social democratic regimes provided relatively generous basic incomes guarantees appears to offer conclusive empirical proof for an affirmative answer.

This is not the place to examine the history and limits of social democracy in different national contexts, for Held’s project is the extension of social democracy to the global plane. In the present context the key point to stress is the danger of committing a fallacy of composition. From the fact that some regions with capitalist property relations have provided somewhat high levels of basic income in certain historical contexts, it does not follow that all regions with those property relations in place can do so in all contexts.

The most basic social relation in capitalism is the capital/wage labour relation. If cosmopolitan law is to systematically cohere with the capitalist world market, the provision of basic income must be compatible with the continued reproduction of this relation. This cannot occur unless those who do not have access to capital continue to see entering into wage contracts as their best available option. In circumstances where wage levels and workplace satisfaction are low, this implies that social assistance must be quite limited if capitalist property relations are to be reproduced. Few would choose to sell their labour power in such conditions if acceptable alternatives were available. The limited level of basic income compatible with capitalist property relations in these circumstances is unlikely to provide the material conditions for effective exercises of autonomy to the extent required by the precepts of cosmopolitan democratic theory.

A corollary of this point is also worth stressing. The lower the wages and the worse the work conditions in a particular region of the global economy, the lower the basic income must be if the reproduction of the capital/wage labour relation is not to be undermined. The basic income proposal considered by itself thus would appear to reproduce, rather than transform, the profound unevenness that characterises the contemporary global order.

Of course it would be unfair to place too much weight on this first proposal in isolation. It is but one of a set of reforms intended to function together. Other aspects of cosmopolitan law seek to ensure that levels of wages and work satisfaction are relatively high throughout the global economy. If these objectives were attained, Held might reply, the level of basic income could be set relatively high without undermining the capital/wage labour relation.

I shall offer some criticisms of Held’s other proposals below. For the moment let us assume for the sake of the argument that they can in fact attain the goal of a global economy with low unemployment and high levels of real wages and work satisfaction. Let us assume further that under these conditions basic income guarantees could indeed be set at a level high enough to provide essential material conditions for the effective exercise of autonomy without undermining the attractiveness of wage contracts. If these (highly questionable!) points are granted, the question then becomes whether such a "golden age" could persist indefinitely.

This question brings us to the complex and contentious question of crisis tendencies within capitalism. If the basic form of crisis in capitalism were underconsumption crisis, it might be plausible to hold that the basic income guarantee could contribute to the indefinite avoidance of economic downswings. For this guarantee provides higher levels of income to precisely those economic agents with the highest propensity to consume. But this element of cosmopolitan law looks rather different from the perspective of other, more convincing, theories of economic crisis.

Developing themes discussed in the tenth chapter of Capital III, Geert Reuten and Robert Brenner have argued persuasively that a systematic tendency to overaccumulation crises can be derived from the property relations defining capitalism. Their account begins by noting that the drive to appropriate surplus profits necessarily tends to lead more efficient plants and firms to enter a given sector. But established firms and plants do not all automatically withdraw when this occurs. Their fixed capital costs are already "sunk," and so they may be happy to receive the average rate of profit on their circulating capital. They also may have established relations with suppliers and customers impossible (or prohibitively expensive) to duplicate elsewhere in any relevant time frame. Further, their management and labour force may have industry-specific skills. And governments may provide subsidies for training, infrastructure, or R&D that would not be available to them if they were to shift sectors. When a sufficient number of firms and plants do not withdraw as a result of these sorts of factors, the result is an overaccumulation of capital, manifested in excess capacity and declining rates of profit. In more traditional Marxist terms, insufficient surplus value is produced to valorise the investments that have been made in fixed capital. In certain circumstances this dynamic may lead to an economy-wide fall in profit rates for an extended historical period.

When overaccumulation crises break out, previous investments in fixed capital must be devalued. At this point the entire system becomes convulsed in endeavours to shift the costs of devaluation elsewhere. Each unit, network, and region of capital attempts to shift the costs of devaluation onto other units, networks, and regions. And those who control capital mobilise their vast economic, political, and ideological weapons in the attempt to shift as many of the costs of devaluation as possible onto wage labourers, through increased unemployment, lower wages, and worsened work conditions.

As the concentration and centralisation of capital proceeds in the course of capitalist development, both overaccumulation and the resulting need for devaluation necessarily tend to occur on an ever-more massive scale. Global turbulence and generalised economic insecurity increasingly become the normal state of affairs. It may not be logically impossible for a high level of basic income guarantees to be maintained across the global economy in such circumstances. But this will surely tend to not be the case.

To summarise, if we assume that the remaining planks of cosmopolitan law fulfill their objectives, a case can be made that a high level of basic income is in principle compatible with the continued reproduction of the capital/wage labour relation in the global economy. But if the theory of overaccumulation crises is accepted, it follows that this compatibility cannot be maintained over time. Held’s first proposal thus does not appear to be generally compatible with capitalist property relations, even if an exceedingly favourable (and, as we shall see below, implausible) assumption is made for the sake of the argument.

One final comment is in order before turning to Held’s other proposals. Setting a baseline of income below which people are not allowed to fall does not in itself remove economic inequality. Providing such a baseline in a global social charter is even fully consistent with a significant increase in the relative inequality of the distribution of income and wealth. This is a profound problem for Held, since he himself explicitly grants that large economic disparities tend to be translated into disparities in social power great enough to constrict the effective exercise of autonomy by disadvantaged individuals and groups. We may conclude that providing a level of basic income sufficiently high to further the effective exercise of autonomy is ruled out by capitalist property and production relations.

The second feature of cosmopolitan democratic law relevant to the global economy is the precept granting labourers, local communities, consumers, and investment fund holders access to the sites of industrial and financial decision making. Held insists that this access must go beyond mere "conversation or consultation." Management must negotiate with representatives of these groups "to create decision frameworks on matters as diverse as employment prospects, work methods, investment opportunities, and income and dividend levels." The German system of co-determination, a social democratic reform reserving just under half of Board seats for representatives of labour, offers an example on the national level. Here too Held’s cosmopolitan law can be understood as an attempt to globalise social democracy. And here too one can question whether Held’s objectives are compatible with the property and production relations underlying the capitalist world market.

A first point to note is that even if "access avenues" were somehow established and functioning smoothly, the external pressures imposed on units of capital by the valorisation imperative would remain in force. When sufficient profits are not appropriated by a given unit of capital - whether due to product or process innovations successfully introduced by competing units, a general economic slowdown, or any other cause - then the workers employed by that unit of capital necessarily tend to suffer unemployment, lower wages, job speed-ups, and so on. The communities in which they live also tend to suffer significant material losses. Under capitalist social relations, then, a tendency arises for workers enjoying "access avenues" to seek to deflect the social costs of innovation and crises onto other units of capital, other work forces, other communities. Implementing the proposal would thus appear to have the foreseeable consequence of strengthening the bonds between workers in particular enterprises and the managers and investors of those enterprises, at the cost of exacerbating divisions among the work force as a whole. These divisions may shift the balance of power between capital and labour in favour of the latter. In this manner rights to negotiation may improve the situation of particular sectors of the work force at the cost of worsening the situation of the labour force as a whole. In other words, "access avenues" to sites of decision making that leave capitalist property relations untouched do not in themselves reverse the alien power of the value form. They instead provide a mechanism whereby this power would be intensely internalised within the subjectivity of wage labourers, leading them to grant "free" consent to what the value form imposes. It can surely be questioned whether this should count as furthering the institutionalisation of autonomy.

Held might reply that a high degree of worker solidarity and organisation could check any tendency to exacerbate differences among workers out of play. The ease with which capitalist property relations allow "divide and conquer" strategies to be implemented suggests that such a high level of solidarity and organisation would be extremely difficult to attain. But I am happy to grant that it is both possible and one of the main political projects of our new century. But once a sufficiently high level of solidarity and organisation had been attained, would not a unified global work force begin at once to consider ways to remove capital’s ability to implement divide and conquer strategies effectively? And would not attempts to eliminate this ability call capitalist property relations into question in a truly fundamental manner? A consideration of the so-called "principal/agent problem" in this context provides further reasons for thinking that this would be the case.

In the business literature the principal/agent problem is usually defined in terms of the relationship between investors and managers, with the former taken as the "principals" and the latter as their "agents." The problem arises from the fact that managers can be expected to pursue their own interests, which may not always coincide with those of investors. Recent accounting scandals in the United States have revealed just how wide this divergence can become. When such conflicts arise, however, there are a series of mechanisms within capitalism that tend to realign the interests of investors and managers closer together. Ultimate power to appoint, reward, and remove management lies with investors and their representatives, and managers who do not effectively operate as the agents of investors can be sued under "due diligence" legislation. Such mechanisms provide strong incentives for most managers to further their interests in a manner that does not fundamentally diverge from the interests of investors over time.

Held’s proposal to institute forums for negotiation between management and the work force can be seen as an attempt to view the management/labour relation in terms of the principal/agent problem. These forums are meant to provide an institutional mechanism ensuring that managers will further their own interests in a manner that is generally consistent with the interests of wage labourers. But what of cases where the perceived self-interest of investors and labourers are in essential conflict? Of which group would management then consider itself the agent? To answer this question we must ask a series of others. Under Held’s proposal, is the work force or its representatives granted the power to appoint management? No. Is the work force or its representatives granted the power to change management? No. Is the work force or its representatives granted the power to fix the reward of management? No. Does Held’s proposal grant workers legal rights to sue if managers do not exhibit "due diligence" in the pursuit of workers’ interests? No. The system of capitalist property rights continues to give these social powers to investors. Cosmopolitan law grants workers the much weaker right to "negotiate." Is it really plausible to hold this will be sufficient to ensure that in the controversial cases – that is, the cases that matter - there will be a systematic tendency for management to act in a manner consistent with the interests of the work force rather than private capital?

The third and final point I would like to make in this context concerns the institutional settings in which the access avenue proposal would be implemented. Some forms of relationship between financial capital and industrial capital are surely far more compatible with providing opportunities for worker participation in decision making than others. Bank-centred systems appear to be most compatible with the "stakeholder capitalism" called for by Held.

For our purposes bank-centred systems can be defined by three features. First, national savings are "intermediated," that is, deposited in the banking system. Second, the general direction of financial flows from these banks to the non-financial sector of the economy is determined through a process of formal and informal negotiations between banks, state agencies, and industrial corporations. Third, these banks hold a high portion of the equity of the corporations to which they lend. Now no system of "relationship banking" in the history of capitalism has actually institutionalised anything remotely approaching the sort of democratic "access avenues" called for by Held. Nonetheless, I would argue that the thesis that such institutionalisation is possible under capitalist property relations is most plausible for bank-centred systems. In so far as the determination of the general direction of financial flows is already a matter for negotiation among various social groups, an institutional space is established within which representation could in principle be extended to wage labourers and other "stakeholders" of corporations. And explicit government commitments enable banks to take a long-term perspective on their investments in non-financial corporations. They are thus more capable, at least in principle, of resisting pressure to sacrifice the medium-to-long term interests of other stakeholders for the sake of short-term benefits to private shareholders.

Matters would be greatly complicated for cosmopolitan social democrats if there were a tendency in global capitalism towards "disintermediation," that is, for direct relations between firms and investors, without banks mediating between them. Such a development would remove the most favourable institutional space for "stakeholder capitalism." I believe that a general tendency to disintermediation is necessarily given with capitalist property relations, at least once the concentration and centralisation of capital has proceeded to the point attained today. This tendency can be derived from a number of other, more basic, tendencies.

• There is a tendency for communications technologies to advance under the capital form. As these technologies advance, investors in distant regions are potentially able to acquire more and more relevant information regarding possible objects of investment directly for themselves, without the intermediation of banks.
• This potential tends to be actualised, due to the fact that firms have a number of incentives to provide information to capital markets. Once they have grown past a certain size, at least, they generally prefer reliance on impersonal markets to the much more intrusive oversight that tends to develop when they are dependent on a specific bank.
• Also, the one-to-one interaction of relationship banking is often not as financially advantageous to corporations as the many-to-one relation established when they tap global capital markets. The more investors there are competing to provide investment funds, the better the rate a corporation can hope to pay on its debt, everything else being equal.
• Further, if a rapid growth of asset values is expected, corporations can tap funds through equity offerings without having to pay either high dividends or interest payments in return.
• By bundling loans of different risk together, securitization allows the overall risk from any given unit of investment to be lower. It also allows a dispersion of risk among numerous investors, as opposed to a concentration of risk in a few banks. Both tend to lower the capital costs of firms, while encouraging firms to break from relationships they may have had with investment banks.
• In periods of rapid innovation these banks may themselves wish to be freed from long-term ties to corporations. Even the most successful firms regularly have difficulty adjusting to rapidly changing technological and economic environments. If they decline banks do not want to share this fate.
• Finally, depositors can generally expect better rates of return from international capital markets than from deposits in national savings systems.

If it is true that as capitalism evolves we can derive a systematic tendency for "relationship banking" to give way to impersonal global capital markets, and if it is true that the "stakeholder" ideal of capitalism is far more compatible with the former than the latter, then we have a reason to question whether Held’s embrace of this ideal fits easily with his acceptance of capitalist property relations. At a certain stage of development, at least, capitalist property relations tend to lead to financial systems that make the effective implementation of "stakeholder" capitalism increasingly unlikely.

This argument reinforces the conclusion of the above discussion of the principal/agent problem. If there is a tendency for "disintermediation" in global capital markets, investors tend to acquire more and more "exit options" relative to those possessed under relationship banking. If they chose to exercise these options managers may be left without access to external sources of capital. This dynamic allows us to reaffirm the derivation of a systematic tendency for managers to act as the agents of private investors whenever the perceived self-interest of investors conflicts with that of other "stakeholders." Disintermediation reinforces the thesis that there is no reason to suppose that the presence of forums for negotiation would lead to a qualitatively different resolution of the principal/agent problem.

We should recall once again that Held’s proposals for cosmopolitan law form a package. Might it be the case that increased social control of investments in the global capitalist economy would greatly alleviate the difficulties that have been mentioned thus far?

Held recognises that if flows of investment funds in the global economy are entirely left to private capital markets individuals and groups in many regions will lack the material conditions necessary for effective exercises of autonomy. As a cosmopolitan democrat Held insists that this problem must be addressed, and he formulates a number of remedies. He calls for "a new coordinating economic agency, working at both global and regional levels . . . capable of deliberation about the broad balance of public investment priorities, expenditure patterns and emergency economic situations." One task for this agency would be to direct flows of investment funds to disadvantaged regions through the use of interest rate differentials. This agency would also collect investment funds by taxing corporate profits at an increasing rate as they rise. These funds could then be allocated to community banks in regions of the world with the most pressing social needs. Held also calls for greater democratic control of pension funds, and suggests that a percentage of the dividends paid out by enterprises should be set aside for allocation by their work forces. He clearly assumes that these latter two pools of investment funds would tend to flow in the same general directions as the social investment funds appropriated through corporate taxes.

Before commenting on these proposals separately I would first like to present what I take to be a general problem. They are all designed to complement, not replace, flows of private capital. Held explicitly states that his goal is to "work wherever possible, ‘with the grain of private property rather than against it’." This implies that if global flows of private investment capital result in a certain pattern of development in the global economy, there is no reason to assume a priori that Held’s proposals would be sufficient to reverse that pattern. In my view a strong pattern of uneven development does necessarily tend to emerge in the capitalist world market; units of capital from regions at the "centre" of the global system are systematically able to reproduce and expand their advantages over economic agents at the "periphery." This is not the place to give a full account of the theory of uneven development. For the purposes of this paper a brief presentation of but one of the many social mechanisms underlying uneven development must suffice.

The heart of inter-capital competition is the drive to appropriate surplus profits through temporary monopolies from product or process innovations. The research and development process is obviously a crucial element in process and product innovations. Units of capital with access to advanced (publicly or privately funded) R&D are best positioned to win this form of surplus profits. They are thus also best positioned to establish a virtuous circle in which surplus profits enable a high level of R&D funding in the future, which in turn provides important preconditions for the appropriation of future surplus profits. In contrast, units of capital without initial access to advanced R&D tend to be trapped in a vicious circle. Their resulting inability to introduce significant innovations prevents an appropriation of surplus profits, which tends to limit their ability to participate in advanced R&D in the succeeding period. This in turn limits future innovations and future profit opportunities.

This fundamental dynamic of capitalist property relations has profound implications for our comprehension of the world market. Units of capital with the greatest access to advanced R&D almost by definition tend to be clustered in wealthy regions of the global economy. Units without such access tend to be clustered in poorer regions. The former are in a far better position to establish and maintain the virtuous circle described above, while the latter have immense difficulty avoiding the vicious circle. When units of capital in poorer regions engage in economic transactions with units of capital enjoying temporary monopolies due to innovations, they necessarily tend to suffer disadvantageous terms of trade. In other words, the former tend to appropriate a disproportionate share of the value produced in the production and distribution chain. In this manner the drive to appropriate surplus profits through technological innovation – an inherent feature of capitalist property relations – systematically tends to reproduce uneven development in the world market over time.

Of course the centre/periphery distinction is fluid to a certain extent. Hegemonic firms and regions in the "centre" may lose their leading position over time, and under certain conditions poor regions may enjoy high rates of growth and rising per capita income. But fluidity within the general pattern of uneven development does not imply that the pattern itself is unstable. The centre/periphery distinction remains necessary if we are to describe accurately an essential feature of the capitalist world market.

We can now restate the general objection to Held’s proposals to subject global capital flows to some social control. These proposals are explicitly designed to complement, rather than replace, the flows resulting from the decisions of those who privately own and control capital. They are designed to "work wherever possible, ‘with the grain of private property rather than against it’." The circuits of capital within which capitals from leading regions are able to appropriate surplus value produced throughout the global economy would remain in place. And so the structural tendencies to uneven development would remain in place as well. There is thus no reason whatsoever to assume that the reforms associated with cosmopolitan democratic law will be capable of reversing these tendencies. The most that might reasonably be expected is that the mechanisms underlying the reverse flow of wealth from the poorest regions of the world to the centres of capital accumulation might operate with somewhat less force than they do presently, improving matters at the margin. And even this vague hope may need to be qualified after a consideration of Held’s specific proposals.

The interest rate differential proposal can be interpreted as an attempt to generalise a key element in the so-called "Asian miracle." In East Asia certain local corporations were able to grow rapidly partly as a result of being able to borrow investment funds at quite low interest rates. Held’s idea is that a regime of global governance ought to include a global institution operating analogously to the "developmental state" of East Asia, spurring economic growth in disadvantaged regions of the global economy by making credit available at low interest rates.

There are a number of reasons to question whether this proposal could attain its objectives apart from the considerations already presented (see footnote 41). The East Asian countries where this approach had success for a period of time enjoyed extremely high levels of domestic savings, which then flowed into the domestic banking system due to the lack of alternative outlets. Poor regions of the global economy today lack comparably high levels of domestic savings. And the rise of disintermediation (that is, the erosion of relationship banking) tends to eliminate captive pools of domestic savings. From where would the funds come that are to be lent out at low rates? It goes without saying that private funds from the wealthier regions will tend to not flow into areas where the interest rates received for lending those funds are significantly lower than the norm in the world economy. The only alternative, it would appear, is for the global institution implementing Held’s proposal to have far more power than the mere ability to set interest rates in disadvantageous regions. It must also have the power to create new credit money.

Keynes proposed an international authority with the power to create credit money, and his contemporary followers have formulated elaborate recommendations towards this end. Given the profound economic disparities characterising the global economy today, the scale of credit money creation required for the interest rate differential proposal to reverse uneven development would surely be colossal. At some point, such a process of public creation of investment funds would just as surely call into question essential features of capitalist property relations. Well before that point, however, this proposal would confront some of the basic determinations of the capitalist world market.

Not all forms of money are created equal in the hierarchy of states that forms the interstate system. The currency of the hegemonic state necessarily tends to play a privileged role in the world market; this currency necessarily tends to become the main de facto form of world money. As a direct result the hegemonic state necessarily tends to enjoy certain privileges in the world market. For instance, it will not face limits on the ability to create credit money that are imposed on other nations. For extended periods of time it will also be able to fund massive trade deficits without significant loss in the value of its currency. These privileges of "seigniorage" (in the broadest sense of the term) rest on the need and desire of foreign economic agents to obtain the dominant reserve currency of the world market in order to undertake international payments and investments. As long as credit flows to the hegemonic state continue, that is, as long as loans are rolled over by new loans, its trade deficits can balloon. For extended periods of time deep recessions can be avoided, as more and more of the world’s output is consumed in the domestic markets of the hegemonic state. The only costs of maintaining this state of affairs are the fees involved in the new loans. To leave capitalist production relations in place is to leave in place the hierarchical interstate system in which one state plays the hegemonic role. Is it really plausible to hold that this hegemonic state will give up the benefits of seigniorage by handing over a significant role in the creation of credit money to an international institution dedicated to reversing global inequality? The question answers itself.

For the sake of the argument, however, let us make the truly heroic assumptions that this hardly insignificant difficulty can somehow be overcome, and that something like Keynes’ international credit money can be instituted on an extensive scale. There are at least five good reasons even then to think that interest rate differentials are not likely to eliminate systematic disparities in the global economy. First, interest rate differentials are not likely to reduce systematic disparities significantly during periods of economic upswings. In periods of rapid capital asset inflation higher interest rates in the more advantaged regions do not neutralise their advantages. In such boom periods venture capital investments and returns from shares and initial public offerings provide easy access to cheap capital, so higher borrowing costs for loans may be fairly irrelevant. Second, indicative planning through interest rate differentials is unlikely to be effective at modifying uneven global development significantly during economic downswings either. The Japanese economy in the last decade provides the latest illustration of the fact that in periods of extended stagnation corporations refrain from borrowing money in order to expand, however low interest rates may fall. In periods of deflation real borrowing costs can be high even at borrowing rates of zero percent. And interest rates are only one factor underlying investment decisions. In situations of overproduction and weakening consumer markets investments won’t be made, even if historically low rates are available.

Third, the effectiveness of the proposal obviously also depends upon firms throughout the global economy requiring significant amounts of external funds. This can be assumed to hold for many small and medium firms (especially start-up companies). But as the concentration and centralisation of capital proceeds, more and more "core" firms in the global economy are able to fund their investments through retained earnings. Fourth, units of capital in the South able to attain loans at interest rates below those holding in global capital markets would still tend to lack access to the state of the art R&D crucial to establishing a virtuous circle of innovation and surplus profits. Access to loans at low interest rates is not sufficient to break out of the inverse vicious circle. Fifth and finally, the interest rate differential proposal rests on yet another fallacy of composition. The fact that it is plausible to hold that some countries may employ low interest rates as part of a successful developmental strategy does not imply that all can. Under capitalist property relations there will be a tendency for units of capital in disadvantageous regions of the world economy to be clustered in competitive sectors sandwiched between giant oligopolies of the so-called first world. To the extent the interest rate differential proposal was successful, the most probable result would be more units of capital clustered in the these sectors, leading to greater overcapacity problems, declining prices, and worsening terms of trade vis-à-vis the global oligopolies.

Held hopes to modify the flow of investments in the global economy both indirectly, through interest rate differentials, and directly, through the pooling of social investment funds. It is now time to consider the latter. Held mentions three forms the pooling of social investment funds might take. First, taxes on corporations could be imposed that increase as corporate profits rise. Held also states that cosmopolitan law should establish enhanced democratic control over the allocation of pension funds, and he suggests that a percentage of the dividends distributed by enterprises be set aside for new investments under the control of their workers. In what direction would these funds tend to flow in the global economy?

Either these three pools of investment funds would generally tend to flow along similar paths as other flows of finance capital or they would not. To the extent the relevant agents have internalised the valorisation imperative, the former would be the case, and the proposal presently being considered cannot be expected to have significant social effects from Held’s normative point of view. For the sake of the argument, however, let us assume that the three socially-controlled investment funds taken together would tend to flow to firms and industries where labour and environmental standards are higher than average, to regions in the global economy neglected by private capital, and so on, at a much higher rate than other forms of portfolio investment. The returns from such investments would then either tend to be comparable to (or higher than) those from standard capital investments, or they would be lower. If they were lower, then over time there would be a tendency for the democratically controlled funds to be stuck with the "lemons" in the global economy. It is difficult to see how this would further the democratic values Held advocates.

What of the cases where comparable (or even higher) returns resulted from democratically controlled investment? The particular areas of investment selected by the socially controlled funds would then become increasingly attractive to private investors. Unless the social investment funds increased at the same rate as the concentration and centralisation of capital, the most successful bits of this "social sector" would eventually tend to be appropriated by the private sector, once again leaving the dregs to the social sector. From this perspective cosmopolitan law would provide just another mechanism for the socialisation of risk and the privatisation of reward.

Why would this matter? If social investment funds push private investment down a socially attractive path, isn’t this precisely what is to be wished? Once again, however, the question of property relations arises. Private owners of capital are predisposed to find a higher degree of negative externalities regarding wage levels, workplace conditions, the environment, and so on, more acceptable than other social agents. This is due to the fact that such states of affairs tend to benefit them far more than other social groups, while most of the burdens of these externalities fall upon others. After they have been privately appropriated the firms and industries in question will thus tend over time to lose whatever social advantages they once enjoyed.

There is no question that rapid and massive inflows and outflows of portfolio investments generate great instability and suffering in the global economy. Held is far from alone in calling for increased capital controls on short-term portfolio flows. The question here is not whether the need for such controls is to be affirmed. The question is instead whether this reform of the "international financial architecture" relegates the issue of property relations in the global economy to a completely secondary status, as Held suggests:

The fact that so many mainstream economists are willing to accept short-term capital controls, and the fact that most states in the history of capitalism have in fact made extensive use of them in one form or another, provide hints that Held’s downplaying of the "forms of ownership and control" may not reform the established global order to the extent Held himself insists is required for the institutionalisation of cosmopolitan democratic values. Two other considerations confirm this suspicion.

First, the attempt to minimise the social disruptions caused by short-term portfolio investments can be seen as an attempt to rationalise the process whereby circuits of capital from leading regions appropriate surplus value produced throughout the global economy. Even if this rationalisation were successful, many of the other mechanisms producing uneven development in the global economy would still remain in place, including the appropriation of surplus profits through innovation.

Second, this attempt at the rationalisation of the global capitalist economy would not in fact remove the irrational features at the heart of both industrial capital and financial capital. Regarding industrial capital, the tendency towards overaccumulation crises on the global level discussed above would remain. The systematic and recurrent need for massive devaluations of capital in order to resolve these crises would thus also remain in place. And the profound capital/wage labour and intra-capital conflicts that arise from attempts to displace the costs of devaluation would not be lessened either.

Financial capital, of course, plays an essential role in this story. Flows of financial capital from across the world market tend to be centralised in a few points at the centre of a global financial order, and then allocated across borders. With credit money and fictitious capital the provision of funds can be a multiple of the temporarily idle profits, depreciation funds, and precautionary reserves pooled in the finance sector. In this manner financial capital "appears as the principal lever of overproduction and excessive speculation in commerce." Once an overaccumulation crisis commences, the rate of investment in sectors suffering overcapacity problems slows significantly. A large pool of investment capital is formed once again, now seeking new sectors with a potential for high future rates of growth (that is, a potential to appropriate great amounts of future surplus value). When such sectors are thought to be found, financial capital from throughout the world market will tend to flow in their direction. If the flows of investment capital to these new sectors are high enough, capital asset inflation results. Expectations of future earnings soon become a secondary matter, as financial assets are purchased in the hope of profits from later sales of these assets. Previous (paper) gains in capital assets are then used as collateral for borrowings to fund further purchases of capital assets, setting off yet more rapid capital asset inflation. Throughout the course of this speculative bubble, however, it remains the case that financial assets remain in essence nothing but claims on the future production of surplus value. When it becomes overwhelmingly clear that the ever-increasing prices of capital assets are ever less likely to be redeemed by future profits, the speculative bubble collapses and a financial crisis ensues.

The intertwining of the tendencies to overaccumulation crises and financial crises implies that the impact of concentration and centralisation on the former extends to the latter as well. The devaluation of loans and fictitious capital following in the wake of financial crises necessarily tends to occur on an ever-more massive scale. The pressure on units, networks, and regions of capital to shift the costs of devaluation on to other units, networks, and regions thereby increases as well. Most of all, capital’s attempts to shift as much of the cost as possible onto wage labourers and their communities intensify. Global turbulence and generalised economic insecurity increasingly pervade the world market. The capital controls over short-term flows that Held advocates would not eradicate a single one of these tendencies.

Neither the capitalist state nor the capitalist world market can resolve the fundamental irrationality and social antagonisms at the heart of capitalist social relations. Further deregulation of global capital flows will not reverse this state of affairs. A resurgence of nationalism will not reverse this state of affairs. A ‘new international financial architecture’ will not reverse this state of affairs. And attempts to institute social democracy on the global scale will not reverse this state of affairs.

There is indeed a systematic incoherence between Held’s acceptance of capitalist property relations and his affirmation of a global regime institutionalising the principles of cosmopolitan democracy. As long as capitalist property rights define the dominant social forms of production and distribution, "value" will remain an alien power, an abstract pseudo-subject imposing its imperatives on working men and women and their communities (Arthur 1993). The reproduction of the capital/wage labour relation will remain the reproduction of class exploitation. Overaccumulation crises will continue to force units of capital to attempt to shift the costs of devaluation onto other units. Financial crises will inevitably reoccur. And "globalisation" will remain characterised by alienation, exploitation, crises, and uneven development on a global scale. Cosmopolitan democratic law thus cannot attain its professed objective of substantive equality of opportunity in the global economy as long as it is simply grafted on to a global economy dominated by the value form. As long as capitalist property relations persist the vast majority of the world’s population in both the centre and the periphery will be threatened by increasing inequality, economic insecurity, and erosion of the material conditions necessary for happiness and the effective exercise of autonomy.

This conclusion does not imply that social movements struggling for reforms of the global economy should not be supported. Reforms that only improve matters on the margin can still alleviate human suffering to a profound extent. And the attempt to bring about reforms can form part of a "transitional program" to a new social order. Held’s proposals effectively address the level of political consciousness generally found within progressive groups and individuals today. And the struggle to institute them is likely to contribute to a transformation of political consciousness in which it gradually – or, perhaps, not so gradually – comes to be recognised that an adequate institutionalisation of the values of cosmopolitan democracy eventually requires a profound rupture with capitalist property relations.

What might such a rupture look like? Alex Callinicos is surely correct that it is far too early to propose a fixed alternative model:

Nonetheless, I shall propose that an adequate alternative model must include five crucial features: a) decisions regarding the level of overall new investment in the global economy must be democratized, b) the priorities of new investment must also be a matter for democratic discussion, c) new investment funds must be allocated to different regions of the global economy on a per capita basis (at least this should be the presumption in the absence of compelling reasons to do otherwise), d) scientific-technological knowledge must be treated as a free global public good, and e) socially necessary labour must not be predominantly organised in the social form of wage labour.

The first two features are necessary to break the domination of the value form over social life. These proposals do not imply the immediate abolition of all markets. It is not the mere presence of markets per se that establishes the alien power of the value-form, but the institutionalisation of the drive to accumulate surplus value to the greatest extent possible, whatever the costs to social life. These first two proposals also do not imply bureaucratic central planning on a global level. We can imagine democratically accountable decision making bodies operating on global, regional, national, and local levels along the lines sketched by Held, but with these bodies are now replacing, rather than merely complementing, private capital markets. After decisions have been made regarding the general level of new investment and the order of social priorities, the actual allocation of investment funds to enterprises could then be undertaken by community banks, whose boards would include representatives of a broad range of social groups affected by the banks’ decisions.

The drive to accumulation as an end in itself, overriding all other social ends, is put out of play when decisions regarding the rate and direction of new investment are a matter for democratic debate and decision. The systematic tendency to overaccumulation crises would also be eliminated. And with the abolition of financial markets the systematic tendency to financial crises would dissolve as well.

The third and fourth measures are designed to overcome the systematic tendency to uneven development in the present global order. If the equal moral worth of all individuals is to be institutionalised, all individuals must be granted an equal right to the material preconditions for the effective exercise of autonomy. Held and other cosmopolitan thinkers fully acknowledge the force of this argument. But they fail to recognise that an equal right to these material preconditions can only be provided in a given region if that region has access to the preconditions for a flourishing economy. The equal right to autonomy of individuals thus implies the (prima facie) equal right of their communities to new investment funds. It also implies that scientific-technological knowledge is not treated as a weapon of economic warfare, monopolisable by the economically powerful.

With the fifth and final feature the class relationship upon which the law of value is based, the capital/wage labour relation, is abolished. We may imagine community-owned enterprises organised as worker co-operatives, with managers democratically elected by and accountable to those over whom they exercise authority. In such circumstances adequate basic income guarantees and rights to employment could be established, two structural changes that are not compatible with the global reproduction of the capital/wage labour relation. Any earnings above and beyond the basic guarantee would then depend upon the shares individuals received as members of their co-operative.

The specific details of these proposals may well require revision. Be that as it may, the main thesis of this paper remains in force: without a radical break from the social forms of global capitalism the dreams of cosmopolitan democratic theorists are doomed to disappointment.

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