Today, some more analysis of the debate about globalisation and the capacities of the nation-state. We consider the debates in the early 1970s about the power of transnational corporations and the claims that they undermined the capacity of the nation-state to further the interests of the population. On the one hand, the free-market liberals claimed that the emergence of the transnational corporation was a move towards increased global efficiency and the nation-state, which served narrower interests, would be swept aside, along with its regulative structures, by this trend. Global welfare (and solutions to international poverty) would be maximised by the demolition of national borders by transnational capitalism. This view considered the nation-state to be ‘dispensable’ – that it only served narrow interests and the global organisation of production no longer required national governments to operate in this way. The Marxist position was, understandably, at odds with this view. It considered the nation-state to be indispensable to the growing needs of international capital. This was in the sense that governments could provide essential stability to reduce the risk of transnational operations. My position is more in line with the latter view although it clearly recognises the relevance (and power) of the national governments in which they choose to operate. Further, these transnational corporations are typically very large firms within the nations they operate. it is hard to differentiate the political clout that being large exerted from the influence of being global. Certainly, the early literature was not clear on that issue.
The series so far:
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
The transnational organisation and the nation-state
Since the end of the Second World War, a common narrative has been that the nation-state is becoming increasingly restricted by the creation of supranational (multilateral) institutions and the accelerating growth of international capitalism.
In the 1950s, this thesis concentrated on the supranational institutions, which function either at the global scale (for example, GATT) or the regional scale (for example, NATO).
In the 1960s, as major advances in technology, transportation, and communication facilitated the growth of transnational corporations, the focus in the narrative shifted to these developments. These corporations were considered to be so powerful that no individual nation-state could control their activities.
A number of theories (for example, the ‘product-cycle theory’) were advanced to explain the rapid growth of transnational corporations. The specifics do not need to concern is here and are based on various versions of comparative advantage.
Free-market proponents (such as Raymond Vernon, 1971) argue that these developments override national political interests because they reflect market-driven processes, which create ‘world efficiency’ and maximise ‘world welfare’ by using all available real resources in their most productive way.
Market liberalism on a global scale thus becomes the model for economic development for all nations and narrow national interests give way to a larger frame.
Of course, this view was not uncontested.
Opponents of this emerging free-market rhetoric, counted by saying that the multinational corporation was just a manifestation of the dominant capitalist class pursuing its own interests at the expense of the productive class (that is, the workers).
Hymer (1972) argued that nation-states were compromised by the growing exploitation of the international division of labour in two ways: first, they lost sovereignty, and second, the traditional economic policy levers became less effective.
The result is that the state is less able to defend the interests of the workers (if it ever did), the workers become increasingly divided as firms exploit low-wage areas, and the international flow of capital provides new sources of return for the wealthy.
However, it’s not quite as simple as that. Hymer and Rowthorn (1970) argued that the transnational companies need stable polities in which to function. While it is in their interests to ensure the nation-state does not impede their activities they also rely on the nation-state for rule of law and economic and social stability.
So a new conflict emerged as capitalism became increasingly global because, on the one hand, the transnational corporations needed strong nation-states to protect their capital, but, on the other hand, these same corporations sought to undermine the regulative and tax structures that day were subject to in their head office locations.
Here we encounter a divergence in the literature between the conception provided by the free-market liberals of globalisation (for example, Vernon, 1971) and the Marxist argument.
The former considered that the power of the global market would see the state wither away.
Whereas, the latter, clearly understood that the spread of transnational capitalism required the role of the state to change from one of mediating the class conflict to one of supporting the interests of capital more closely (see also, Pitelis, 1991).
In this context, Huntington (1973) distinguished between an international organisation and a transnational organisation. The former is defined as an organisation where “the control of … is explicitly shared among representatives from two or more nationalities” (p.336).
An organisation is “transnational … if it carries on significant centrally-directed operations in the territory of two or more nation-states” (p.336).
The multilateral organisations, which Raymond Vernon (1971) considered to have compromised the independence of states, such as the United Nations or the World Banks, can only be created if there is “agreement among nation-states” to share or trade interests, which “puts an inherent limit on internationalism” (Huntington, 1973: 338).
In other words, “the extent to which they can become independent actors themselves is dependent on agreement among national actors” (Huntington, 1973, 338).
In the case of commercial organisations, Huntington said that while they are “very transnational in their operation” and “personnel” they are usually “almost wholly national in control”.
Another major difference pointed out by Huntington is that:
The international organization requires accord among nations; the transnational organization requires access to nations … International organizations embody the principle of nationality; transnational organizations try to ignore it.
For the Marxists, the nation-state was increasingly pressured to act in the interests of the transnational corporations. This is an important point of departure from those who argue that the nation-state was made impotent by rise of global capitalism.
What the early literature didn’t really discuss and, perhaps didn’t grasp, was that the nature of international capital flows by the 1970s was quite different to the early speculative type attacks on currencies that brought the fixed-exchange rate system down.
The multinational companies of the late 1960s, while influential in the nations where they invested, were typically very large companies in the nations where their head offices were located.
In that latter sense, they sought to exert significant influence in the formation of government policy in relation to trade, financial deregulation, and tax legislation.
In other words, the ways in which they attempted to co-opt national sovereignty, included this direct lobbying influence on the home nation-state.
That influence was also exerted by large companies, in general, irrespective of their transnational reach.
It is hard to differentiate the political clout that being large exerted from the influence of being global. Certainly, the early literature was not clear on that issue.
We might characterise the world in terms of a set of competing regulative environments managed by the national governments. The transnational companies, recognising that some environments are more favourable than others, strategically shift investment to increase their advantage.
This allows the corporations to exploit cheaper labour (which is both unorganised and unprotected by national laws) and differential tax structures.
But the fact that these corporations do scan the world for these niches of advantage reinforces the view that the nation-state remains potent.
It was no surprise that in the 1970s there was a major push by corporations (both transnational and national) to undermine the capacity of trade unions in the advanced nation. The attack on so-called ‘trade union power’ was well-organised and well-funded.
It was one of the early manifestation of the increased sophistication of the corporate lobbying machine intertwined with an increasingly concentrated media that served the narrow interests of capital.
The attack recognised that the nation-state had the power to change the legislative environment and shift the balance of bargaining power from labour to capital. That particular campaign exemplified the understanding within the corporate sector that their interests required them to reach settlements with the national governments in order to advance their interests.
So we see the beginnings of neo-liberalism in its modern-day form arising from the need of capital to divert government policy away from generalised welfare improvement towards the advancement of the more narrow interests of capital.
The social democratic governments of the Post Second World War period up until the 1970s had clearly mediated class struggle and the workers were successful in forcing the polity to act in their interests by creating full employment and the Welfare State.
This era clearly meant that the distribution of national income was such that real wages could grow more or less in proportion with productivity growth, which provided significant material improvement to the living standards of the population including reductions in poverty rates.
Without that successful class struggle, which worked through the government, profit rates and income inequality would have been higher. Government policy was very successful in this period of mediation in underpinning this trend. There is clear evidence that capital, through industrial organisations (peak bodies) etc consistently tried to undermine this broad consensus.
But the political process was such that the governments were clearly committed to broad goals of prosperity. Even Raymond Vernon (1971: 213) acknowledged that during this period the governments and corporations would “hold each other at arm’s length”, despite the latter continually seeking ways to alter the balance of power in favour of their interests.
This provides context for appraising the ideas of Vivien Schmidt who argued (1995: 76) that the most significant consequences of globalisation are the “strengthening of business, with the transnational corporations less tied to nations and national interests, and a weakening of the nation-state overall, in particular of the voice of the people through legislatures and nonbusiness, societal interests”.
She wrote (p.76) that:
By liberalizing their trade policies, by deregulating their economies, and by privatizing their enterprises, national governments have much less control over what goes on in their own territory or what their own multinationals do elsewhere, and they no longer have the resources they had in the past to solve social problems.
She argues that as governments lose their discretionary capacity to serve domestic policy, “democracy is at risk” (p.77).
The processes or changes she is describing here are the product of legislation within a nation-state. The process of privatisation clearly transferred resources from the public sector to the private sector and reduced the public bureaucratic control of the organisations in question.
Those processes are reversible. If we want a demonstration of that reversibility, then we need not look further than what happened to the banking sector in the early days of the GFC when many national governments effectively socialised the losses from the failed corporate strategies, protected depositors and nationalised the organisations.
There was no hint then that the nation-state had lost its power or discretion to act to advance the national interest and largely disregard the interests of the private shareholders of these large transnational, financial entities.
Schmidt also lumps together “multinational corporations” who “are less bound economically, politically, and morally to nation-states” with “supranational bodies such as GATT, NAFTA, and the EU” which “have given scant attention to the social spillovers” (p.77).
The can be no doubt that the former corporations cannot be relied on to serve national interests and in that sense need to be regulated. But, inasmuch as their decentralised, bureaucratic nature is, in one way or another, inherently national (their legal form has to be located somewhere) and they have to bring resources across national boundaries, then they become subject to legislative intent should the relevant sovereign government have the required will.
In the case of the supranational bodies, these are all voluntary constructs of nation-states as Huntington clearly points out.
And this discussion will be continued.
Bhagwati, J. (ed.) (1972) Economics and World Order: From the 1970’s to the 1990’s, New York, The Macmillan
Cooper, R.N. (1968) The Economics of Interdependence, New York, McGraw-Hill.
Gilpin, R. (1975) U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment, New York, Basic Books.
Haas, E.B. (1964) Beyond the Nation-State, Stanford, Stanford University Press.
Hirst, P. and Thompson, G. (1996) Globalisation in Question, Cambridge, Polity Press.
Huntington, S.P. (1973) ‘Transnational Organizations in World Politics’, World Politics, 25(3), 333-68.
Hymer, S. (1972) ‘The Multinational Corporation and the Law of Uneven Development’, in Bhagwati, J. (ed.) (1972) Economics and World Order: From the 1970’s to the 1990’s, New York, The Macmillan Co., 113-140.
Hymer, S. and Rowthorn, R. (1970) ‘Multinational Corporations and International Oligopoly: The non-American Challenge’, in Kindleberger, C. (ed.) The International Corporation: A Symposium, Cambridge, Mass., MIT Press, 57-91.
Kindleberger, C. (ed) (1970) The International Corporation: A Symposium, Cambridge, Mass., MIT Press.
Kozul-Wright, R. and Rowthorn, R. (1998) ‘Spoilt for Choice? Multinational Corporations and the Geography of International Production’, Oxford Review of Economic PolicyCapital and Class, 43, 131-52.
Schmidt, V.A. (1995) ‘The New World Order, Incorporated: The Rise of Business and the Decline of the Nation-State’, Daedalus, 124(2), 75-106.
Vernon, R. (1971) Sovereignty at Bay, New York, Basic Books.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.