------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (November 2006)
Leonard Seabrooke, _The Social Sources of Financial Power: Domestic
Legitimacy and International Financial Orders_. Ithaca, NY: Cornell
University Press, 2006. xvii + 223 pp. $45 (cloth), ISBN:
0-8014-4380-6.
Reviewed for EH.NET by David M. Andrews, Department of Politics and
International Relations, Scripps College.
This is an interesting book. The author, an associate professor at
the Copenhagen Business School, begins by posing a conventional
political-economy question -- how do states generate financial
capacity? -- but addresses it unconventionally. Normally the focus of
such a study would be, as the author puts it, on "the big end of
town," meaning the relationship between large financial institutions,
national regulators and economic elites. Seabrooke instead
scrutinizes "the small end of town": the half of the population below
the median income, and in particular the broad group capable of
scraping together some savings without ever running the risk of
amassing a fortune. Seabrooke insists that the everyday economic
struggles faced by this group "have causal significance in shaping a
financial system" (p. 1), and that understanding these struggles is
necessary for a correct understanding of both domestic and
international finance.
The delicate financial relationship between state and society is well
known, and it is hardly novel to argue against killing the goose that
lays the golden egg. But Seabrooke's thesis differs from most in his
focus on the role of non-elites. He draws attention to what he calls
the "financial reform nexus": the cluster of policies affecting the
tax burden, credit access, and prospects for property ownership of
lower-income groups. Seabrooke argues that progressive (or what he
calls "positive") state intervention in the financial reform nexus
"deepens and broadens the domestic pool of capital and propagates
financial practices that bring capital flowing back to the state" (p.
xii).
Central to Seabrooke's discussion is the concept of legitimacy.
People have expectations about what forms of state intervention in
the economy are appropriate; and while prevailing social norms differ
across societies, and from one time period to the next, failure to
act in consonance with those norms comes at a price. Seabrooke's
careful case studies counter the conventional wisdom on a number of
points; for example, he finds that state intervention in the
financial reform nexus in Wilhelmine Germany was regressive
("negative") rather than progressive ("positive"), as Berlin's
policies consistently favored rentier over bourgeois interests. His
focus on local expectations also leads him to unconventional
conclusions, as in his characterization of U.S. financial policy in
the 1990s. He argues that this was "positive" rather than "negative,"
even though domestic income inequality was not relieved -- as this
latter outcome was not a requirement for legitimacy under prevailing
social norms.
The four main cases -- England and Germany during the decades prior
to the First World War, and the United States and Japan during the
late twentieth century -- are excellent, and the evidence presented
therein is sufficient to establish the plausibility of the book's
main domestic thesis: namely, that there is an intimate connection
between the everyday economic struggles faced by the lower half of
the domestic population and the financial and political trajectories
of individual states.
The book's claims at the international level, however, find less
support. It is certainly true that the cases underline how domestic
interests shape the international financial policy preferences of
leading states: for example, Seabrooke notes (as have others) the
connection between the views of private U.S. banks regarding capital
adequacy requirements and official U.S. policy on the same, leading
to the Basel Accord in 1988. But that is a conventional story -- a
story about how actors at "the big end of town" influence
international policy. Seabrooke's intention is more ambitious.
"The key proposition of this book," Seabrooke writes, "is that if a
state intervenes positively to legitimate its financial reform nexus
for lower-income groupings, it can provide a sustainable basis from
which to increase its international financial capacity" (p. 173).
More specifically, "if the principal state [in the international
financial order] can legitimate its financial reform nexus to a high
degree, it has a more sustainable basis with which to influence the
international financial order and encourage other states" to organize
their own domestic economies accordingly (p. 17).
To test this thesis, the case studies are structured around two
questions: why was Germany unable to replace England as the world's
financial leader in the years before World War I, despite widespread
contemporary expectations that it would do so; and likewise "why did
Japan fail to wrestle primacy in the international financial order
away from the United States" (p. 141) in the late twentieth century.
Seabrooke concludes that a large part of the answer has to do with
the failure of the challenger state to pursue progressive financial
policies at home.
This is a bridge too far. The domestic policies Seabrooke traces so
heroically may indeed have played a role in sustaining England's
financial dominance of one hundred years ago, as well as the
hegemonic position of the United States today. But the evidence he
mounts, while impressive, does not allow us to judge whether that
role was decisive or incidental. The respective failures of early
twentieth century Germany and late twentieth century Japan, after
all, seem overdetermined.
As Seabrooke employs numerous counterfactuals in this volume, I
indulge in one here. Had the Japanese state adopted more progressive
domestic financial policies toward its non-elites in the late 1980s
and 1990s; and had these changes in policy permitted Japan to avoid
entirely its long national economic stagnation -- a very big if, but
let us grant it -- the external consequences would doubtless have
been profound. Certainly Tokyo would have been in a much stronger
position to influence the content of the international financial
order -- to fight its corner and defend its interests. But it remains
far from clear that Japan would then have been able to "wrestle
primacy ... away from the United States," even a United States led by
the far-from-progressive administration of George W. Bush (the
subject of the book's epilogue).
International financial primacy results from many factors. Domestic
legitimacy, understood in Seabrooke's terms, is logically one of
them. Whether legitimacy's influence is predominant, however, is a
question ultimately left unanswered by this very provocative volume.
David M. Andrews is editor of _International Monetary Power_ (Cornell
University Press, 2006), and co-editor of _Governing the World's
Money_ (Cornell University Press, 2002).
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Published by EH.Net (November 2006). All EH.Net reviews are archived
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