home

Below is the text of my final essay in the "International relations" course I spend the last year in at U of T. I needed it to fill out a requirement to graduate. I think I have already blogged enough about how I have to see much of University level education and especially 200 level courses. Thank heavens this is the last 200 course I will ever do. I have one or two 400 levels still that I want to do, and then I am going to graduate and to hell with higher education. About time, I will be just about 60.

When you read it, you will see why the teaching aid and the prof did not like it much. I appealed the mark to no avail, and it is not worth going further in the appeal. But I think it is worth a read, and here it is slightly modified and with footnotes stripped out. For your enlightenment by the mighty scholar of international affairs.

Essay; A new kind of currency war

I am required to write an essay on the likelihood of a "global currency war" in the near future and whether it would be an indicator of some "broader changes" in the global system. I am told that the "economics of the monetary system are of no interest". I am to examine how three political theorists, Rodnik, Krasner, and Simmons, would answer these questions and to pronounce on which one has the best theoretical "tools" for explaining what is going on.

This is the kind of nonsense essay question typically given to me lately; very hard to answer without saying something false or ridiculous. The question and statement is very complex, taking up most of a page, really several questions in one. It comes from very myopic assumptions. It expects an answer within a synthesizing, Aristotelean frame, as part of the war on analytical thinking which seems to be going on at U of T. I am not at this university to learn to be stupid. Assess this essay objectively or turn it over to someone who can.

My thesis is this; that of the three given theorists, Rodnik cannot predict a currency war, Krasner can predict one, but only Simmons offers any practical ideas for preventing or ameliorating one.

As for the points I will use to prove this, I have been studying the international situation closely and have my own opinions about it. Here is what I will take as given in this essay; that what is happening now is that the currency stability maintained by the dominance of the United States is starting to break down as U.S. hegemony breaks down. There is nothing to take the place of the hegemon in the foreseeable future and the world currency system will have to adapt. The "BRIC" countries are far ahead of the "north" countries in thinking through the implications of this. They are preparing for a "multipolar" system in which several powerful currencies trade against each other. It is therefore impossible to fully separate politics from economics as per the guidelines. Further to that, in discussing this topic there is no way to fully separate the concepts of "trade war" and "currency war"; countries fight trade wars mainly by devaluing their currencies.

As for material support, I will use five articles from the ones I am given; the Guardian blog's entry of January 24, 2013, and the Eichengreen article, as background. I take the Rodnik article as the neoliberal, a subset of rationalism, position on global monetary systems, Krasner as the neorealist, also called structuralist, position. If Simmons is not a constructivist, it is hard to imagine who would be. Her way of analyzing the social causes of various states reactions to the trade and currency wars of the interwar period derives from social sciences and conforms to the constructivist approach that events in international relations are socially and historically contingent, not inevitable. Yet as constructivism is a way of analysis and not a theory in itself, she is also a realist and her results enhance realist conclusions about trade wars; that states do what is in their best interests as they see them. Whoever claims she is not a constructivist, I call on to explain what she is, then.

Of the two background articles The Guardian blog makes clear that, unlike in "the old days", the problems bringing on currency wars are not trade imbalances, but investment imbalances. Money is fleeing from poorly managed economies to more prudently managed ones, having the perverse effect of driving up the currencies of well managed countries. As well, many large countries are using "experimental measures" to try to "compensate for policy inadequacies and political dysfunction."

Eichengreen's paper asks whether we will replay the 1970's or the 1930's in the next few years. Of course, we will replay neither, we are playing out the 2010's. But he has many useful facts; the Russian prime minister says that the U.S. is "living like parasites off the global economy and their monopoly of the dollar". Obviously, to parasite off the rest of the world slowly destroys the domestic economy and creates imbalances in the global system; not sustainable in the long run. As for the Euro's home base; "unlike the United States, Europe has no federal fiscal system to transfer resources from prosperous to troubled regions and European leaders seem unwilling to create one." This problem with the Euro mirrors the problem any global currency or trade system would have unless a global government could establish such resource transfers. He notes that the currency war of the 1930's, connected to the great depression, was about the inability of Britain to continue the gold standard and the inability of the U.S. at that time to take over as currency hegemon. There was the beginning of a currency war in the 1970's when the U.S. had to stop supporting a gold standard, but at that time found "creative" solutions which kept the system going. Finally, Eichengreen discusses possible solutions to the present crisis and the problems with them. China is unlikely to take over as currency hegemon due to its own internal structure. An international currency based on the idea of "Special Drawing Rights" would be hard to implement due to questions of how it would be allocated among states.

Now, to the three prescribed theorists. Rodnik, as a neo-liberal, thinks international integration is a good idea. He admits that we are very far from this; that "capital flows between rich and poor nations fall considerably short of what theoretical models would predict." Theoretical models of international trade are interfered with by local population's "home biases", or by national sovereignty which makes contract enforcement difficult in international transactions.

Krasner the realist structuralist confirms the period of instability and currency wars during the hegemony "interregnum" between the U.K. and the U.S. He considers the lag in this transfer of power to be due to the need for state power to develop new institutions to fit new realities, and to disestablish old ones which are no longer appropriate. The structure of the international system changes according to the distribution of state power and is limited by past decisions of states. This is a constructivist element in his thinking.

Simmons the constructivist has many tools for examining how internal factors make nation states act as they do. She discusses the "Prisoner's Dilemma" and identifies the problem with that as a method of analysis; each player has a different incentive to remain in the game. From this, she found that the effort to preserve the gold standard during the "interregnum" failed because it required each "player" to put the stability of the international currency system above their domestic needs. She found the countries most likely to "cooperate", meaning to support the system, were those with internal stability and a strong interest in the status quo. These were generally smaller and more trade dependent countries. Larger countries and ones with some insulation from the rest of the system were most likely to "defect". Internally, conservatives wanted currency stability, liberals wanted to devalue currencies and liberalize trade, and the socialists wanted to preserve local industries at all costs. Simmon's view is essentially realistic and antiliberal and she admits that her study is to supplement theory, not to supplant it. Though some will find this definition problematic, constructivism is a really a method of analysis, not a true theory.

Now, to predicting currency wars. Rodnik has no tools for predicting, explaining, or ameliorating currency war because his theory is unfounded. For example, he has a "trilemma" to show that countries cannot have national independence, internal democracy, and prosperity at the same time. This trilemma is based on false concepts; for example, a possible valid triangle would replace "Integrated National Economies" with "Democratic Global Governance", "Golden Straight Jacket" with "Free Floating Currencies", "Nation State", with "Sovereign National State", "Bretton Woods Compromise" with "Direct Interstate Negotiation", "Mass Politics" with "Participatory Democracy", and "Global Federalism" with "Democratic International Institutions". Seen this way, there is no reason why polities cannot have all three. As well, most of the world flatly does not agree that there are any advantages accruing from the supposed "efficiency" of the neoliberal system. He admits that many countries did very well out of import substitution policies until neo-liberalism was forced on them, and so he is internally inconsistent and not credible about any solutions for the problems of a currency war.

Krasner predicts a currency war on the basis of a breakdown of hegemony such as in the interwar years. Simmons supports Krasner's view of an unstable interregnum where actors no longer have a hegemon's gun to their heads and are free to act in their own interests. Her findings strongly imply that we are having the war because more nations are feeling insulated from the global system, and the influence of hegemonic powers is declining. These developments can be clearly observed at present.

However, as for preventing or ameliorating a global currency war, Krasner is of small use. He thinks the solution is a new hegemony with a new international system, or failing that some sort of international currency to act like a "gold standard". Eichengreen has debunked these ideas well and The Guardian shows that the causes of the present currency war are not the same as during the Great Interregnum. But implicit in Simmons' game theory analysis is an end to such wars; when all participants have, through directly interacting and negotiating with each other, reached a new equilibrium which does not need to be maintained by a hegemon.

My thesis that Simmons offers some solutions, Krasner predicts but has no solutions, and that Rodnik is irrelevant, is now proved. The implications for the essay questions are this; as shown by the Guardian, we are now in a period of currency wars. This tells us that the following are now happening; that the United States is losing its influence and power to intimidate, and thus to enforce a world order. State actors are starting to deal directly with each other to manage currency flows between them, instead of through the present international systems; an open system. Globally, opinion is moving to the left, away from conservativism and toward socialism, or from currency stability to protectionism. Neoliberalism is losing its influence because it depends on enforcement. Power is becoming less centralized; a multipolar world is replacing a unipolar world.

My takeaways from all this are; that constructivist methods within the frame of realism are the best tools for predicting and solving problems of international trade and currencies, thus there is no real boundary between realism and constructivism, and that unlike in the "old days", what will likely emerge from this unstable period is not a new hegemony but an open system in which those countries with sensible internal policies do well, and none gain at others expense.

However, I have one apparent contradiction here; the perverse deflationary effects on well managed economies as described by The Guardian. There is no way to predict how this will effect the evolution of an open world currency, trade, and investment system because there are no known precedents. Simmons' analysis, while useful, deals with a case which is different in many ways than the present one. When we try to predict the future specifically we are merely speculating. But we can make a general prediction, with reasonable certainty, from Simmons' work, that the dynamics of interplay between diverse agents, interacting freely and outside a hegemonic system, will lead to a solution for this problem.

The essay question is now answered as well as I can answer it within these limits.

return