412 WORLD POLITICS of the pyramid will have fewer options than those at the top.Thus, states will be able to retain the political symbolism to be derived from issuing their own currencies,so long as they manage those issues in an appropriate fashion.Indeed good management,yielding a"strong cur- rency,"can"enhance a government's reputation"(p.121).Similarly,the prospects for macroeconomic management will depend increasingly on "how official policies interact with market preferences"(p.125).With regard to seigniorage and insulation,the emphasis is on asymmetry: those at the top of the pyramid will find their positions enhanced(so long as they do not drift too far from market preferences),while those at the bottom will lose out.The biggest changes,however,as Cohen re- minds us,are not about the differences between states but rather con- cern the fact that governments in general will have less power in relation to other social actors than they had in the distant past.The big winners politically are those private social actors who can choose their preferred transaction network. Chapter 7,"Governance Transformed,"considers this very question: the role of the state,especially vis-a-vis private actors,in the new mon- etary landscape.Here Cohen attempts to seize the middle ground. While states are weaker than they once were,they are surely not pow- erless.His main point is that"the shift in the structure of power gener- ated by cross-border currency competition has not so much diminished as transformed the role of the state in money's newly deterritorialized geography.Governance is now uneasily shared between the public and private sectors"(p.131).Privileged elements in the private sector now have an easier exit option,and governments are under pressure not to provoke such exit.But Cohen argues that this is only part of the pic- ture,because it restricts itself to the demand side of the equation.Gov- ernments,as the providers of currency,represent the vital supply side,a role that has not been eliminated by the transformation.Rather,gov- ernments have been transformed from monopolists to oligopolists. "States,once largely supreme in their own territories,have now become something like competing firms in an oligopolistic industry"(p.138). And as oligopolists,governments can act to preserve and promote the market share for their products.Governance,once provided by states, is now in the hands of the market forces that shape the strategies states must pursue in the context of their oligopolistic competition. Cohen the liberal economist has confidence in the efficiency of mar- ket governance,but Cohen the political scientist raises grave doubts about two aspects of the new geography of money.First,there is the problem of equity:some actors will get much more voice in the new
of the pyramid will have fewer options than those at the top. Thus, states will be able to retain the political symbolism to be derived from issuing their own currencies, so long as they manage those issues in an appropriate fashion. Indeed good management, yielding a “strong currency,” can “enhance a government’s reputation” (p. 121). Similarly, the prospects for macroeconomic management will depend increasingly on “how official policies interact with market preferences” (p. 125). With regard to seigniorage and insulation, the emphasis is on asymmetry: those at the top of the pyramid will find their positions enhanced (so long as they do not drift too far from market preferences), while those at the bottom will lose out. The biggest changes, however, as Cohen reminds us, are not about the differences between states but rather concern the fact that governments in general will have less power in relation to other social actors than they had in the distant past. The big winners politically are those private social actors who can choose their preferred transaction network. Chapter 7, “Governance Transformed,” considers this very question: the role of the state, especially vis-à-vis private actors, in the new monetary landscape. Here Cohen attempts to seize the middle ground. While states are weaker than they once were, they are surely not powerless. His main point is that “the shift in the structure of power generated by cross-border currency competition has not so much diminished as transformed the role of the state in money’s newly deterritorialized geography. Governance is now uneasily shared between the public and private sectors” (p. 131). Privileged elements in the private sector now have an easier exit option, and governments are under pressure not to provoke such exit. But Cohen argues that this is only part of the picture, because it restricts itself to the demand side of the equation. Governments, as the providers of currency, represent the vital supply side, a role that has not been eliminated by the transformation. Rather, governments have been transformed from monopolists to oligopolists. “States, once largely supreme in their own territories, have now become something like competing firms in an oligopolistic industry” (p. 138). And as oligopolists, governments can act to preserve and promote the market share for their products. Governance, once provided by states, is now in the hands of the market forces that shape the strategies states must pursue in the context of their oligopolistic competition. Cohen the liberal economist has confidence in the efficiency of market governance, but Cohen the political scientist raises grave doubts about two aspects of the new geography of money. First, there is the problem of equity: some actors will get much more voice in the new 412 WORLD POLITICS
STUDY OF MONEY 413 system,in particular,the wealthiest segments of society.Second,there is a crisis of accountability:however much politicians may be objects of scorn,at the very least they could be held accountable for their actions. Market forces,by contrast,"are neither elected nor politically account- able”(p.148). These crucial questions of equity and accountability are not,how- ever,the focus of the final chapter,"Can Public Policy Cope."For this reason,of the three grand chapters that close this book,this one is dis- appointing in that it does not fulfill the agenda raised by what came be- fore it.Cohen asserts,accurately,that there are"no easy solutions."The bottom line ultimately is that "governments must learn how to manage their oligopolistic rivalry,not make futile attempts to evade or suppress it"(p.151).Cohen then shifts gears and provides an overview of the new monetary landscape,emphasizing that neither a reassertion of state power nor a complete denationalization of money is likely to occur.Rather,exploring each level of the currency pyramid,including the euro,the yen,and the bottom dwellers,he concludes that the world is likely to continue to look pretty much the way it does now:with the gentle erosion of the still dominant dollar tempered increasingly not by competition from the euro or the yen but by the power of markets. CAN THE MIDDLE HOLD? Cohen's treatment of money,though politically sensitive and sophisti- cated,nevertheless represents the economistic pillar of the IPE main- stream.For this branch of the subfield,and especially with regard to the study of money,the use of market metaphors and the assumption of market efficiency must be carefully scrutinized. The use of economic metaphor is one of Cohen's key contributions. Between Westphalia and globalization,he argues,there is a middle ground of oligopoly-an attractive and novel conceptualization that would appear to strike a clear middle ground between two opposing schools.Issuers of currency can easily be cast as traditional oligopolists. +Cohen notes,for example,that the extent to which the yen is used as an international currency is essentially a policy choice and that both the Europeans and the Japanese manage their currencies with an eye toward avoiding confrontation with the United States(pp.161,164).He also assesses monetary geography in its most basic form,sustaining monetary alliances,and finds that economic theory,such as the theory of optimal currency areas,has little explanatory power.Rather,political factors such as power and ideology explain which monetary unions succeed and which fail (pp.82,84-85,87,91). See also the cases discussed in Cohen,"Beyond EMU:The Problem of Sustainability,"Economics and Politics 5(July 1993).He also traces the drive for EMU to political motives,but it should be noted that he reviewed the convergence criteria without a discussion of their possible distributional implications (Geograpby of Money,74,77)
system, in particular, the wealthiest segments of society. Second, there is a crisis of accountability: however much politicians may be objects of scorn, at the very least they could be held accountable for their actions. Market forces, by contrast, “are neither elected nor politically accountable” (p. 148). These crucial questions of equity and accountability are not, however, the focus of the final chapter, “Can Public Policy Cope.” For this reason, of the three grand chapters that close this book, this one is disappointing in that it does not fulfill the agenda raised by what came before it. Cohen asserts, accurately, that there are “no easy solutions.” The bottom line ultimately is that “governments must learn how to manage their oligopolistic rivalry, not make futile attempts to evade or suppress it” (p. 151). Cohen then shifts gears and provides an overview of the new monetary landscape, emphasizing that neither a reassertion of state power nor a complete denationalization of money is likely to occur. Rather, exploring each level of the currency pyramid, including the euro, the yen, and the bottom dwellers, he concludes that the world is likely to continue to look pretty much the way it does now: with the gentle erosion of the still dominant dollar tempered increasingly not by competition from the euro or the yen but by the power of markets. CAN THE MIDDLE HOLD? Cohen’s treatment of money, though politically sensitive and sophisticated,4 nevertheless represents the economistic pillar of the IPE mainstream. For this branch of the subfield, and especially with regard to the study of money, the use of market metaphors and the assumption of market efficiency must be carefully scrutinized. The use of economic metaphor is one of Cohen’s key contributions. Between Westphalia and globalization, he argues, there is a middle ground of oligopoly—an attractive and novel conceptualization that would appear to strike a clear middle ground between two opposing schools. Issuers of currency can easily be cast as traditional oligopolists. STUDY OF MONEY 413 4 Cohen notes, for example, that the extent to which the yen is used as an international currency is essentially a policy choice and that both the Europeans and the Japanese manage their currencies with an eye toward avoiding confrontation with the United States (pp. 161, 164). He also assesses monetary geography in its most basic form, sustaining monetary alliances, and finds that economic theory, such as the theory of optimal currency areas, has little explanatory power. Rather, political factors such as power and ideology explain which monetary unions succeed and which fail (pp. 82, 84–85, 87, 91). See also the cases discussed in Cohen, “Beyond EMU: The Problem of Sustainability,” Economics and Politics 5 ( July 1993). He also traces the drive for EMU to political motives, but it should be noted that he reviewed the convergence criteria without a discussion of their possible distributional implications (Geography of Money, 74, 77)
414 WORLD POLITICS Operating as they do in a world of interdependence and uncertainty, they must focus on promoting their brand name and assuring the mar- ket share for their product. But are the dollar,yen,and euro like Boeing,Coke,and Kodak?In at least one crucial way,the answer is no.It is not the obvious difference between public and private that undermines the analogy but rather the difference between the real and monetary sides of the economy.Boe- ing,for example,has orders and contracts that will take years to fulfill. It also has physical plants and equipment,technical know-how,and a small number of identifiable competitors.Entry and exit for producers and consumers in the aerospace industry,while certainly possible,is a relatively slow process.Thus,if Boeing has a bad quarter or even a few bad quarters,it may lose some of its market share.But it will lose only so much.There will be no "flight from Boeing"(as it were),even if it faced a great crisis,as might occur if one of its planes were found to have a design flaw. But currencies are different.Ultimately,they are worth,well,what people think they are worth.And if confidence wavers,people can get rid of that asset and almost immediately acquire any of dozens of alter- native assets.Further,those very actions may be self-fulfillingcreating expectations of further flight and a "rational"erosion of confidence. Cohen himself is quite explicit about the ephemeral nature of a cur- rency's attractiveness(p.97,and also pp.10-13)-it is attractive as long as it conforms to those policies that the market finds attractive.As Cohen notes,reputation,which comes at"considerable cost and effort," is crucial (p.141). But this raises a fundamental point.While the international use of currency may look like an oligopoly(concentrated use in a few brands), this does not mean that the producers enjoy oligopolistic power.What distinguishes oligopolists from other actors in a market economy is that they are not mere"price takers."Rather,they can affect the market and the price for their good-in a much more limited fashion than monop- olists,to be sure,but still to an extent that distinguishes them sharply from the textbook firm.But in currency affairs exit is so easy and the extent to which states are adhering to market preferences is so trans- parent that issuing states in fact may have very little leeway to act as oli- gopolists. Cohen's own arguments make this clear.Efforts to protect a cur- rency's reputation will be successful if they "make significant conces- sions to market sentiment"(p.122).This is true even for states at the very top of the currency pyramid.Cohen had argued that such states
Operating as they do in a world of interdependence and uncertainty, they must focus on promoting their brand name and assuring the market share for their product. But are the dollar, yen, and euro like Boeing, Coke, and Kodak? In at least one crucial way, the answer is no. It is not the obvious difference between public and private that undermines the analogy but rather the difference between the real and monetary sides of the economy. Boeing, for example, has orders and contracts that will take years to fulfill. It also has physical plants and equipment, technical know-how, and a small number of identifiable competitors. Entry and exit for producers and consumers in the aerospace industry, while certainly possible, is a relatively slow process. Thus, if Boeing has a bad quarter or even a few bad quarters, it may lose some of its market share. But it will lose only so much. There will be no “flight from Boeing” (as it were), even if it faced a great crisis, as might occur if one of its planes were found to have a design flaw. But currencies are different. Ultimately, they are worth, well, what people think they are worth. And if confidence wavers, people can get rid of that asset and almost immediately acquire any of dozens of alternative assets. Further, those very actions may be self-fulfilling—creating expectations of further flight and a “rational” erosion of confidence. Cohen himself is quite explicit about the ephemeral nature of a currency’s attractiveness (p. 97, and also pp. 10–13)—it is attractive as long as it conforms to those policies that the market finds attractive. As Cohen notes, reputation, which comes at “considerable cost and effort,” is crucial (p. 141). But this raises a fundamental point. While the international use of currency may look like an oligopoly (concentrated use in a few brands), this does not mean that the producers enjoy oligopolistic power. What distinguishes oligopolists from other actors in a market economy is that they are not mere “price takers.” Rather, they can affect the market and the price for their good—in a much more limited fashion than monopolists, to be sure, but still to an extent that distinguishes them sharply from the textbook firm. But in currency affairs exit is so easy and the extent to which states are adhering to market preferences is so transparent that issuing states in fact may have very little leeway to act as oligopolists. Cohen’s own arguments make this clear. Efforts to protect a currency’s reputation will be successful if they “make significant concessions to market sentiment” (p. 122). This is true even for states at the very top of the currency pyramid. Cohen had argued that such states 414 WORLD POLITICS
STUDY OF MONEY 415 could still reap the political benefits afforded by national money,such as seigniorage and the ability to practice macroeconomic management;in both cases such autonomy is circumscribed by the need to"retain com- petitive superiority in the marketplace"and by"how official policies interact with market preferences"(pp.123,135).Thus Cohen's oli- gopolists may face the constraints of perfect competition.5 This is critical for Cohen's analysis,because if the wiggle room of the oligopolist is eliminated,then we must confront the possibility that we are de facto in the purely globalized world where states have no power and markets rule.While Cohen raises political concerns about markets (equity and accountability,as mentioned above),he still holds to a fun- damental faith that unfettered market forces will yield optimal out- comes.Smaller states,for example,may achieve "a much healthier economic performance"if they "in effect submit their national sover- eignty,at least in part,to the strict discipline of the marketplace" p.126). But what if laissez-faire is suboptimal when it comes to international money?This,one of the fundamental divergences between Cohen and Strange,remains an unresolved question;it will be addressed at length below.Cohen does offer at least one good deductive reason to suspect that unregulated money is not a good idea.He notes,for example,that one technique of bolstering a currency's reputation is to raise interest rates.But in a world of oligopolistic competition,where reputation is relative,this may lead to competitive interest-rate increases-for polit- ical reasons,rather than for economic ones.The result-suboptimally high interest rates having no economic justification-would slow global economic activity. The prospect of flaws in the functioning of the international macro- economy is the weak link of Cohen's analysis and,by extension,of the study of money from this perspective in the IPE field as a whole.Cohen explicitly embraces the market,and quite pointedly so,explaining that as state power erodes,we are left not with anarchy but with governance by the market.Indeed,responding directly to the assertion by Strange that states have been replaced by anarchy,Cohen answers that"nothing s Cohen recognizes this,explaining that autonomy is likely to erode even for the most powerful states and noting that public policy will have to conform increasingly with what markets want(pp.130, 133).His faith in market efficiency masks the tension between these observations and his oligopoly analogy. For an illustration of the potentially disastrous consequences of interest-rate competition,derived in part from a concern with market reputation,see Barry Eichengreen,Golden Fetters:The Gold Stan- dard and the Great Depression (Oxford:Oxford University Press,1992).See also Jonathan Kirshner, "Disinflation,Structural Change,and Distribution,"Review of Radical Political Economics 30(March 1998)
could still reap the political benefits afforded by national money, such as seigniorage and the ability to practice macroeconomic management; in both cases such autonomy is circumscribed by the need to “retain competitive superiority in the marketplace” and by “how official policies interact with market preferences” (pp. 123, 135). Thus Cohen’s oligopolists may face the constraints of perfect competition.5 This is critical for Cohen’s analysis, because if the wiggle room of the oligopolist is eliminated, then we must confront the possibility that we are de facto in the purely globalized world where states have no power and markets rule. While Cohen raises political concerns about markets (equity and accountability, as mentioned above), he still holds to a fundamental faith that unfettered market forces will yield optimal outcomes. Smaller states, for example, may achieve “a much healthier economic performance” if they “in effect submit their national sovereignty, at least in part, to the strict discipline of the marketplace” (p. 126). But what if laissez-faire is suboptimal when it comes to international money? This, one of the fundamental divergences between Cohen and Strange, remains an unresolved question; it will be addressed at length below. Cohen does offer at least one good deductive reason to suspect that unregulated money is not a good idea. He notes, for example, that one technique of bolstering a currency’s reputation is to raise interest rates. But in a world of oligopolistic competition, where reputation is relative, this may lead to competitive interest-rate increases—for political reasons, rather than for economic ones.6 The result—suboptimally high interest rates having no economic justification—would slow global economic activity. The prospect of flaws in the functioning of the international macroeconomy is the weak link of Cohen’s analysis and, by extension, of the study of money from this perspective in the IPE field as a whole. Cohen explicitly embraces the market, and quite pointedly so, explaining that as state power erodes, we are left not with anarchy but with governance by the market. Indeed, responding directly to the assertion by Strange that states have been replaced by anarchy, Cohen answers that “nothing STUDY OF MONEY 415 5 Cohen recognizes this, explaining that autonomy is likely to erode even for the most powerful states and noting that public policy will have to conform increasingly with what markets want (pp. 130, 133). His faith in market efficiency masks the tension between these observations and his oligopoly analogy. 6 For an illustration of the potentially disastrous consequences of interest-rate competition, derived in part from a concern with market reputation, see Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression (Oxford: Oxford University Press, 1992). See also Jonathan Kirshner, “Disinflation, Structural Change, and Distribution,” Review of Radical Political Economics 30 (March 1998)
416 WORLD POLITICS could be more mistaken"(p.142).The market,like the state,according to Cohen,is a socially constructed system of authority.Thus,govern- ments have been replaced "not by anarchy but by the invisible hand of competition"(p.146).7 For scholars raised on a steady diet of IR theory,this will be the one awkward moment of the book.For while markets may be socially con- structed,once formed they do create an anarchic environment-that is, an environment that lacks central authority.In its purest form,while "the market"is the result of the sum of actions taken by individual ac- tors,those actions combine to create constraints on each one that no single actor can affect.It is this very market analogy and the appeal to anarchy that was the foundation of Kenneth Waltz's defense of sys- temic theorizing in international politics.Additionally,the implicit ap- peal to Adam Smith in this argument is also problematic,because Smith did not believe that all monetary matters should be left to the market.He supported,for example,regulations to control interest rates.9 Thus,despite Cohen's thoughtful ruminations on the nature of "gov- ernance,"it is hard to avoid the conclusion that as state power erodes, we are left increasingly to anarchic (though not necessarily chaotic) market forces.As noted,Cohen sees political consequences flowing from this change;such an arrangement,he states,faces a"crisis of le- gitimacy"(p.147).But ultimately,a basic faith in the market underpins Geograpby and that branch of the subfield which it ably represents. A MAD,MAD WORLD Susan Strange's Mad Money,like Cohen's volume,is a major statement that integrates the accumulated knowledge of a foremost scholar of the IPE of money.But beyond that,the similarities end.Even as Cohen re- fines themes and applies them in different contexts,Geograpby nonetheless reflects more continuity than change.Mad Money,by con- trast,completes a transition in Strange's work.Her early efforts,such 7In a parallel argument to his oligopoly metaphor,Cohen argues,with an appeal to Alfred Mar- shall,that governance that emerges from the market reflects the outcome of both demand and supply- side forces.But,following Marshall,it is the shape of the curves that is determinant.If the demand curve takes the shape of a flat line (is infinitely elastic),then supply has no voice in determining the equilibrium price. Waltz,Theory of International Politics(New York:Random House,1979).Interestingly,an out- standing application of systemic theorizing that illustrates the consequences of anarchy can be found in Benjamin Cohen,The Question of Imperialism(New York:Basic Books,1973). Smith,The Wealth of Nations(1776;Chicago:University of Chicago Press,1976),379-80
could be more mistaken” (p. 142). The market, like the state, according to Cohen, is a socially constructed system of authority. Thus, governments have been replaced “not by anarchy but by the invisible hand of competition” (p. 146).7 For scholars raised on a steady diet of IR theory, this will be the one awkward moment of the book. For while markets may be socially constructed, once formed they do create an anarchic environment—that is, an environment that lacks central authority. In its purest form, while “the market” is the result of the sum of actions taken by individual actors, those actions combine to create constraints on each one that no single actor can affect. It is this very market analogy and the appeal to anarchy that was the foundation of Kenneth Waltz’s defense of systemic theorizing in international politics.8 Additionally, the implicit appeal to Adam Smith in this argument is also problematic, because Smith did not believe that all monetary matters should be left to the market. He supported, for example, regulations to control interest rates.9 Thus, despite Cohen’s thoughtful ruminations on the nature of “governance,” it is hard to avoid the conclusion that as state power erodes, we are left increasingly to anarchic (though not necessarily chaotic) market forces. As noted, Cohen sees political consequences flowing from this change; such an arrangement, he states, faces a “crisis of legitimacy” (p. 147). But ultimately, a basic faith in the market underpins Geography and that branch of the subfield which it ably represents. A MAD, MAD WORLD Susan Strange’s Mad Money, like Cohen’s volume, is a major statement that integrates the accumulated knowledge of a foremost scholar of the IPE of money. But beyond that, the similarities end. Even as Cohen re- fines themes and applies them in different contexts, Geography nonetheless reflects more continuity than change. Mad Money, by contrast, completes a transition in Strange’s work. Her early efforts, such 416 WORLD POLITICS 7 In a parallel argument to his oligopoly metaphor, Cohen argues, with an appeal to Alfred Marshall, that governance that emerges from the market reflects the outcome of both demand and supplyside forces. But, following Marshall, it is the shape of the curves that is determinant. If the demand curve takes the shape of a flat line (is infinitely elastic), then supply has no voice in determining the equilibrium price. 8 Waltz, Theory of International Politics (New York: Random House, 1979). Interestingly, an outstanding application of systemic theorizing that illustrates the consequences of anarchy can be found in Benjamin Cohen, The Question of Imperialism (New York: Basic Books, 1973). 9 Smith, The Wealth of Nations (1776; Chicago: University of Chicago Press, 1976), 379–80