Birth of Hegemony: Crisis, Financial Revolution, and Emerging Global Networks

By Andrew C. Sobel

With American leadership facing increased competition from China and India, the question of how hegemons emerge—and are able to create conditions for lasting stability—is of utmost importance in international relations. The generally accepted wisdom is that liberal superpowers, with economies based on capitalist principles, are best able to develop systems conducive to the health of the global economy. In Birth of Hegemony, Andrew C. Sobel draws attention to the critical role played by finance in the emergence of these liberal hegemons. He argues that a hegemon must have both the capacity and the willingness to bear a disproportionate share of the cost of providing key collective goods that are the basis of international cooperation and exchange. Through this, the hegemon helps maintain stability and limits the risk to productive international interactions. However, prudent planning can account for only part of a hegemon’s ability to provide public goods, while some of the necessary conditions must be developed simply through the processes of economic growth and political development. Sobel supports these claims by examining the economic trajectories that led to the successive leadership of the Netherlands, Britain, and the United States. Stability in international affairs has long been a topic of great interest to our understanding of global politics, and Sobel’s nuanced and theoretically sophisticated account sets the stage for a consideration of recent developments affecting the United States.

• Language: English
• Publisher: Open Road Integrated Media
• Release date: Sep 3, 2012
• ISBN: 9780226767611

Book preview

ANDREW C. SOBEL is associate professor of political science at Washington University in St. Louis. He is the author of several books, including, most recently, Political Economy and Global Affairs.

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2012 by The University of Chicago

All rights reserved. Published 2012.

Printed in the United States of America

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ISBN-13: 978-0-226-76759-8 (cloth)

ISBN-13: 978-0-226-76760-4 (paper)

ISBN-10: 0-226-76759-0 (cloth)

ISBN-10: 0-226-76760-4 (paper)

ISBN-13: 978-0-226-76761-1 (e-book)

Library of Congress Cataloging-in-Publication Data

Sobel, Andrew Carl, 1953–author.

Birth of hegemony : crisis, financial revolution, and emerging global networks / Andrew C. Sobel.

pages cm

Includes bibliographical references and index.

ISBN-13: 978-0-226-76759-8 (cloth: alkaline paper)

ISBN-10: 0-226-76759-0 (cloth : alkaline paper)

ISBN-13: 978-0-226-76760-4 (paperback. : alkaline paper)

ISBN-10: 0-226-76760-4 (paperback : alkaline paper)   1. Hegemony.   2. International relations.   I. Title.

JZ1312.S63 2012

327.101—dc23

2011047459

This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

Birth of Hegemony

Crisis, Financial Revolution, and Emerging Global Networks

ANDREW C. SOBEL

THE UNIVERSITY OF CHICAGO PRESS

CHICAGO AND LONDON

FOR PAM, WHO HAS BEEN THE MOST IMPORTANT PART OF MY JOURNEY

Contents

Acknowledgments

CHAPTER 1

A Framework for the Development of Hegemonic Capacity

CHAPTER 2

Key Collective Goods for Hegemonic Capacity and Their Microfoundations

CHAPTER 3

The Dutch Revolt and Rise of Dutch Leadership in the 1500–1600s

CHAPTER 4

Creating a Financial Foundation for British Leadership in the Global Arena

CHAPTER 5

The Interwar Years, 1920–1930s: Was the United States Capable?

CHAPTER 6

US Leadership after World War II

CHAPTER 7

The Future of US Leadership in the Twenty-First Century and Potential Successors

Epilogue

Notes

References

Index

Acknowledgments

This project connects the different phases of my academic life and research. There is a chain grounded in the political economy of global finance and microfoundations of social behavior that links together my research over twenty years—hopefully a coherent research program. I owe thanks to many people and institutions for their assistance, advice, and critical input at each stage of my academic training and career. They helped build the foundations that enabled this project. As mentors and teachers, Ken Organski, Harold (Jake) Jacobson, and Bob Axelrod at the University of Michigan exposed me to the academic study of international relations and different interpretations of hegemony and the importance of global leadership for cooperation, stability, and the improvement of the broader social welfare. Moreover, they were incredibly supportive of my research agenda in the political economy of global finance, even though most of my dissertation research fell beyond the boundaries of their research agendas. Gunter Dufey from the University of Michigan’s School of Business and John Jackson from the University of Michigan’s Political Science Department helped fill in the substantive guidance with their expertise in international finance and political economy, respectively. I cannot imagine a better group of mentors for an investigator in training, as they provided superb criticism and advice on my research agenda. They taught me much about becoming a substantive and rigorous political scientist in my field, and by their actions and examples they were role models about how to treat, respect, and help undergraduate and graduate students.

The 1980s was an exciting time in political science for research and discussions about global leadership. This was the period when investigators and pundits began to question the stability of US hegemonic capacity. Stagnation in the US and global economy, along with Japan’s economic success, caused many to wonder about the future of US leadership. This period spawned stimulating and influential work by investigators such as Paul Kennedy, Robert Keohane, Charles Kindleberger, and others about the prospects for US decline and continued cooperation necessary for liberal economic exchange absent a clear leader in the system. During my research interviews with Japanese bankers, government bureaucrats, and legislators, I kept noticing Paul Kennedy’s Rise and Fall of Great Powers on bookshelves.

After Michigan, I moved on to a post doc at the Center for Political Economy and the Department of Political Science at Washington University in St. Louis. The center and the Political Science Department were extremely influential in my academic evolution. Trained in the University of Michigan perspective, I did not know much about the program in St. Louis before I went there, but Jake told me I should embrace the opportunity because my intuitions about political behavior fit with that approach. As always, his counsel was on the money. My intuition about political behavior and strategic behavior overlapped with much of the Washington University agenda. Intensive interaction with colleagues and weekly seminars in the center furthered my academic development and helped me build a toolkit and a theoretical approach that appears throughout my research. Soon I was a qualitatively different political scientist. At the center I was fortunate to become a colleague of Doug North, Jack Knight, Gary Miller, Murray Weidenbaum, Art Denzau, and others from political science, economics, business, law, and anthropology. The input of these and other investigators at the center could not have been more supportive for an evolving young academic. The center, and its director, Doug North, had an incredible influence on my thinking and research.

During my years at Washington University, others were extremely helpful. John Sprague—his intellectual curiosity, endless enthusiasm, and moral compass—reinforced the lessons I learned from my mentors at Michigan. He was, and continues to be, extraordinarily helpful in overcoming barriers to empirical analysis. His analytical creativity helped me time and time again. His enthusiasm was infectious. Gary Miller, Bill Lowry, and Itai Sened became fast friends and great colleagues. I enjoy going to work every day looking forward to conversations with Gary, Bill, and Itai. Some of these conversations are academic, others social, but they are always fun and interesting. I must mention the students at WU, both graduate and undergraduate. They are creative, smart, fun, and entertaining. They’ve kept me on my toes and made significant contributions to my research over the years. I try not to complain about my job, as it would be rude to others who are not as fortunate to work in such an environment with such colleagues and students.

Financial assistance from the Weidenbaum Center on the Economy, Government, and Public Policy ensured this project had sufficient resources. Steve Smith and Steve Fazzari, as director and associate director, provided aid to this and other projects. I relish my conversations with Murray Weidenbaum. They are always enlightening, thoughtful, and civil even as we approached many of the topics from very different parts of the political spectrum. Those conversations always brought me back to the implications of our research as social scientists for the policy arena. Gloria Lucy, Christine Moseley, and Melinda Warren, as the staff at the Weidenbaum Center, provide an infrastructure that enables investigators to focus on their substantive research agendas without getting sidetracked by the nuts and bolts of administrative affairs.

Itai Sened and the Center for New Institutional Social Sciences at Washington University and John Drobak and the Center for Interdisciplinary Studies at the Washington University School of Law also provided financial resources for research at one time or another during my career. By now, it should be apparent that WU is a productive place to be an investigator with research interests that cross disciplinary boundaries. The centers provided a fertile environment for the exchange of ideas and feedback across disciplines. Many universities make such claims for their centers, but often those centers are essentially shells for rewarding particular investigators. At WU, the centers with which I have been fortunate to be involved actually walk the interdisciplinary talk.

A postdoc at the Wallis Institute of Political Economy at the University of Rochester furthered my intellectual evolution, reinforcing and adding to the changes begun at WU. Frequent conversations with David Austen-Smith, Jeff Banks, and Larry Rothenberg challenged my ideas and advanced my thinking about political economy in general and the microfoundations of strategic and social behavior more specifically. Peter Lange became a friend, mentor, and colleague following a summer institute at the Center for Advanced Study in the Behavioral Sciences in Palo Alto. Even though he moved into administration at Duke, I have continued to turn to Peter for advice and criticism. He is a mensch in the finest Yiddish sense of the word. I understand why his former graduate students relish their relationships with him.

Others have played a significant role in my academic life. Bill Bernhard, Scott Gates, Nate Jensen, David Leblang, Beth Simmons, and several others have been great colleagues and friends over the years. Nate’s office is just around the corner from mine, so I have the great pleasure of seeing him often. The others I see too infrequently at conferences, but when I do they help charge my batteries.

I cannot thank the editorial staff at the University of Chicago Press enough. David Pervin is a fantastic political science editor with great judgment and the ability to help an author. He provided valued guidance whenever I hit a glitch. Shenyun Wu kept the project on track and guided it throughout the publication process. Mary Corrado, the manuscript editor at the press, managed the entire process once the book entered copy editing. Jean Eckenfels did a fantastic job as the copy editor. A great copy editor makes a book read so much better. Even though I did the research and wrote the manuscript, her recommendations and edits made it far more readable.

Finally, I want to recognize the contributions of Robert Hart, Tim Fuhrman, and Pam Lokken. My best friend from my college days, Robert is not trained as a social scientist, but his insightful questions about the project—many while at the seashore—helped make the text more readable for those not narrowly trained as investigators in international relations. Since I think research in political science should contribute to policy debates and address societal challenges, being able to communicate without too much jargon to those beyond a small research community is important. Tim played a similar role by asking challenging questions and pushing me to explain concepts and ideas that are familiar to specialists in international relations and international economics in language accessible to lay people. I cannot thank Pam Lokken enough. She has been an incredible friend, confidante, and partner for over thirty years. She has read and reread draft upon draft of this book and all my other projects. She has been an influential critic of every piece of my research. My work is so much better for her input, and so is my life. She has provided tremendous encouragement over the years, and I look forward to more of the same. She is the ideal role model for any professional woman and has a deft touch with people. To all those named here and those who remain anonymous, I extend my thanks and appreciation. As always, any problems are solely the responsibility of this author.

CHAPTER ONE

A Framework for the Development of Hegemonic Capacity

History is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily.—Martin Luther King, Letter from Birmingham City Jail, April 16, 1963

Introduction

For the past four hundred years, the rules of the global game have tended, with some interruptions, to reflect a growing preference for liberal exchange and increasing openness to the flow of goods, services, capital, and sometimes labor across national boundaries.¹ This has unleashed the power of comparative advantage, spurred specialization across political economies, prompted economic expansion, led to improvements in overall social welfare for many communities, and advanced the globalization of economic and social relations. A major contributor to this dynamic has been the presence of a political economy, a liberal hegemon, with the capacity to promote and manage a system conducive to such relations. Examining the processes of such leadership and how it emerges to establish and maintain the rules of the game for international affairs has tremendous implications for our understanding of global political and economic relations. Such knowledge can inform policy debates, help policy makers avoid pitfalls that produce dislocations, and perhaps aid those same policy makers in adopting policies that engender cooperation in the global arena to improve the social welfare of their societies.

How does a liberal hegemon emerge? How does such a political economy exercise its influence and support rules that promote capitalist exchange and cooperative behavior across borders? A liberal hegemon fosters an environment in which cooperation and liberal economic exchange are incentive compatible for national policy makers and their selectorates. By incentive compatible I mean that such an environment and the choice to cooperate in liberal economic exchange are consistent with the preferences of the hegemon’s policy makers and the preferences of policy makers and their societies in other political economies. To create such an environment, a liberal hegemon provides a handful of collective goods that influence the cost-benefit estimations of a nation’s policy makers. These goods increase the gains of cooperating around liberal market exchange across borders, raise the costs of defection from such policies, reduce temptations for national policy makers to adopt policies that shift costs of adjustment to economic dislocations abroad, and help manage crises that could threaten stability and growth in the global economy.

In this book I use political and economic history to explore the foundations of such liberal hegemonic leadership in the global political economy. Questions of leadership and hierarchy have long captured the attention of social scientists interested in international affairs. The list of investigators who have poked, probed, and prodded the role of hierarchy in international affairs reads like a Who’s Who of prominent social scientists.² Given the importance of hierarchy to international affairs I am sure that many of the best investigators in the future will spend some of their energy extending and challenging the state of knowledge about hierarchy, how it works, and why it is important. Here, I limit my focus to liberal economic leadership, because that is what has dominated for the past four centuries. The Dutch from 1500 to 1700, the British from 1700 to 1900, and the Americans in the twentieth and twenty-first centuries provide the grist for this study. Each acted as a commercial and financial hegemon during an era of expanding globalization, dominating international trade and financial affairs in the global arena and supporting the scaffolding for global capitalist exchange.

Understanding hegemony and hierarchy in international affairs is far more than academic musing. In the modern nation-state system, national boundaries define the dominant political geography. Yet, the geography of economic activity has increasingly crossed and challenged political geography to produce a global political economy dominated by liberal market exchange or global capitalism. States and markets are two fundamentally different strategies for distribution of gains and losses—one centralized, the other decentralized. The two geographies, political and economic, can create frictions and traps that often require inter national cooperation in order to achieve productive economic and political relations. Such cooperation is difficult to build and hard to sustain with a political geography dominated by relatively autonomous nation-states. National policy makers encounter substantial obstacles to cooperation—temptations to free-ride, uncertainty and distrust, short-term electoral pressures, incentives to engage in predatory or beggar-thy-neighbor activities, and problems of monitoring and accountability to mention just a few.

Liberal hegemonic leadership has been viewed as essential for cooperative international relations that enhance social welfare and limit economic, political, and social dislocations.³ A liberal hegemonic state establishes rules of the game for global political-economic affairs. Such rules guide choices and help overcome barriers to the cooperation essential for productive market exchange across borders. They act as constraints on choices in the hope of limiting damaging actions and increasing incentives for more socially productive choices. A liberal economic hegemon creates such rules by providing scaffolding that reduces uncertainty and risk in cross-border market exchange and interaction. This scaffolding includes collective goods that help lubricate and sustain international cooperation and socially productive economic interactions during good times and manage and limit dislocations during bad times, which can lead to instabilities that undermine cooperation in the global political economy. A hegemonic state is that political economy with the capacity and will to bear a disproportionate share of the responsibility for providing such key collective goods.

Hegemonic Leadership: Coercive vs. Benevolent, Positive vs. Normative, Stability vs. Instability

For some the term hegemony carries pejorative connotations, though I use it quite differently in this book. Some argue that a hegemonic state leads by coercion whereas others make a case for benevolent hegemony. I find this distinction more semantic and confusing than helpful. Whether a hegemonic state that dominates the rules of the international game of political economic exchange is coercive or benevolent likely depends upon where you sit in the system, your preference for some rules of the game and not others, and how you do or do not benefit from those rules. Rather than dwell on normative distinctions between coercive and benevolent hegemony, I focus primarily on the positivist and behavioral perspective of a hegemon: what a hegemon does and how. Nevertheless, one cannot ignore the tremendous normative implications of hegemonic leadership, be it stability, cooperation, productive mutual economic relationships, growth of interdependence, expansion of asymmetric mercantilist relations, excessive rent extraction, or manipulation. These drive much of the debate over hegemonic leadership—who has it, whether it is good or bad, and if it is good, whether such leadership is essential for the overall social welfare of the international system.

Independent of the benevolent-coercive debate, many political scientists equate a dominant state overseeing a clear and stable hierarchy among states with peace and economic expansion and, conversely, periods of uncertain hierarchy with periods of conflict and unrest.⁴ This argument about the importance of hegemonic leadership for cooperation, peace, and stability has become known as hegemonic stability theory (HST). Kindleberger,⁵ one of the strongest proponents of HST, viewed a successful leader as one that could unilaterally establish and support rules of the game that stabilize expectations, manage risk, and promote cooperation and mutually beneficial exchange across national borders in good and in bad times. Preferring the term responsibility to hegemony, he argued that during uncertain times, when the system hit significant shocks, for the world economy to be stabilized, there has to be a stabilizer—one stabilizer.⁶ Kindleberger used the variation in hegemonic capacity from Pax Britannica during the 1800s, to the interwar years, to the Pax Americana of the post–World War II period, to test his conjectures about the role of hegemonic leadership and its contributions to productive globalization, economic growth, and relative peace.

During Pax Britannica the British used their wealth, markets, and capabilities to provide key collective goods, which endowed the United Kingdom with leverage to exercise global leadership, set the rules of the game, and promote a stable liberal international economic order. Kindleberger blames the collapse in hegemonic leadership following World War I for a breakdown in cooperation, reversals in globalization, and the traumatic interwar years. Under Pax Americana, the ability of the United States to establish rules of the game and provide collective goods (militarily and economically) to its bloc during the Cold War reduced uncertainty, encouraged exchange and cooperation, and advanced a liberal international economic order that enhanced stability and growth in the postwar era.⁷

Using such evidence, Kindleberger and other proponents of HST noted that periods of sustained liberal hegemonic leadership—when a political economy exists with the capacity and will to provide important collective functions—are marked by increased international cooperation, beneficial cross-border exchange, economic expansion, accelerating globalization, and improved social welfare. Absent hegemonic leadership they questioned whether states would cooperate sufficiently to ensure stable rules of the game that promoted mutually beneficial exchange and cooperation in the global arena. Policy makers across states would face heightened instability in expectations, increased concerns that their counterparts in other states would defect and adopt beggar-thy-neighbor policies, and a calculation that by unilaterally adopting cooperative policies they could not change the dynamic leading to destructive economic outcomes and only increase the magnitude of the potential costs to their societies. National policy makers would encounter expanding pressures to defect for short-term gains or temptations to free-ride on the cooperative activities of other states. They would face increasing incentives, and decreasing disincentives, to adopt policies that might enable their societies to gain at the expense of others by shifting the costs of economic, political, and social hardships abroad. After all, political leaders will almost always prefer that someone else’s constituency bear the costs of adjustment during economic downturns. Such policies can spiral into a vicious cycle of tit-for-tat retaliation across national borders.⁸ This could unravel cooperation and undermine rules of the game critical to socially productive economic exchange across borders, producing greater economic volatility, heightened international social and political unrest, and perhaps even war.

This describes a classic social trap where the rational calculations of decision makers aggregate to produce socially suboptimal outcomes. These suboptimal outcomes can be avoided if decision makers can be induced to make other choices. From the perspective of HST, only a hegemon can induce such cooperation by being able and willing to overcome the free-rider problem and willing to bear the costs unilaterally of providing key collective goods that promote cooperation and exchange across borders—collective goods that constrain the proclivities of policy makers toward destructive economic nationalism.

Importance Today

Questions of hegemonic capacity and will have been important throughout the history of globalization and capitalist expansion. From a policy perspective, understanding such processes is never more important than when the global political economy slows and faces heightened uncertainty about future prospects for economic growth and vitality, when national policy makers entertain notions of transferring the costs of economic adjustment to other nations’ populations, and when those at or near the top of the global hierarchy begin to wonder about hegemonic decline or replacement. The early twenty-first century just might be such a time as a financial crisis rooted in the United States spread across national borders. We observe a growing global dissatisfaction with US foreign policies related to the war on terror. Concerns are rising about the growing fiscal exposure of the United States because of expanding trade and budget deficits and a declining dollar. Moreover, the rapid economic expansion of China and India are prompting questions about possible hegemonic replacement.

In the wake of financial market distress, severe recession, and the rise of unemployment, national policy makers face increasing temptations to protect their domestic constituencies at the expense of others. Such pressures appear in policy debates over trade and protectionism, currency valuation and financial cooperation, international burden sharing, and the ever-changing balance between states and markets. Succumbing to such pressures threatens to dismantle the cooperation that has driven global economic expansion and improvements since the end of World War II. Does the United States have the capacity and the will to continue its support for rules of the game that promote the cooperation underpinning globalization and liberal market exchange? Is there another political economy with the capacity and will to step forward and provide key collective goods if US leadership falters? Such questions about change in the international hierarchy are not questions about competition or conflict as posed by pundits and analysts fearful of such change but about the prospects for continued international cooperation.

Since the 1970s, fears of hegemonic erosion and its potential consequence for disruption emerged, disappeared, and reappeared. In the 1970s and 1980s the growth of interdependence and its concomitant trade-off for state policy autonomy,⁹ the emergence of persistent US trade deficits and expanding public deficits, US economic stagflation, weakness in the dollar, and the rise of Japanese economic prowess fueled a discussion over the possibility of US decline and the ability of the United States to act as the commercial hegemon in the global arena.¹⁰ Some looked to the future with trepidation over the prospects for continued economic cooperation absent hegemonic leadership.¹¹

Much of this discussion subsided by the early 1990s. From 1980 onward, the US economy recovered and grew at a rate that exceeded historical expectations, outpaced growth in other advanced industrialized nations, and spilled over to promote an economic boom worldwide. Political upheaval and economic liberalization within the Soviet-dominated Eastern bloc, the disintegration of the Soviet Union, and the bursting of the Tokyo real estate bubble that led to Japanese economic stagnation, left the United States unchallenged economically and as the sole political-military superpower. Global capitalism fostered by the United States prevailed as the only game in town. The tarnish on the US position as commercial hegemon disappeared, and US dominance over the rules of the game seemed stronger than ever.

Some attributed US hierarchical persistence to its soft power, defined as the implicit acceptance of institutions and ideas fostered by the United States, the central position of US markets and consumers in global exchange, the influence of US multinational corporations on global business, and the tremendous externalities generated by US monetary and fiscal policies.¹² According to the logic of these arguments, US influence was less a consequence of rational and explicit manipulation to engender cooperation and promote liberal exchange and more a result of embedded processes, networks, and institutions of global exchange that structured the incentives of political-economic actors around the world—the rules of the game.

Over a period of some years, beginning at the end of World War II, ideas and institutions within and across nations in the US sphere of influence converged to promote liberal exchange and to manage coordination and cooperation dilemmas that could hinder such exchange or feed damaging mercantilist inclinations and destructive tit-for-tat policy cycles.¹³ Ruggie labeled these phenomena as embedded liberalism.¹⁴ Policy makers and their selectorates in many countries found that their need for political survival and their dependence upon resources from international organizations led them to support choices and policies consistent with the global system of liberal exchange, which US policy makers had sought to build since the end of World War II.¹⁵ The preferences of US policy makers from the Bretton Woods era became incentive-compatible for many other nations’ policy makers and selectorates. With the collapse of the Soviet Union and its sphere of influence more states moved toward adopting the practices of global liberalism. By the 1990s the ideas, institutions, and organizations supporting global liberalism became known as the Washington Consensus. Essentially, US leadership became self-sustaining, grounded in the decentralized deliberations and choices of policy makers and publics in other nations, often without any need for explicit manipulation by US policy makers. Fukuyama viewed this as a golden age, an end of history, where the major political-economic debates were resolved and disputes were confined to more mechanical and less fundamental questions.¹⁶

Perhaps those who declared an end of history spoke too soon. This golden era of unquestioned US leadership may yet prove short-lived. The question of who sets the rules of the game in the global political economy seems relevant again at the beginning of the twenty-first century. A growing global discomfort with US foreign and economic policies, questionable US public and private economic behavior, expanding US budget and trade deficits, and financial crises that begin in the United States but spill across borders to impose costs on other societies prompt questions about US stewardship and its ability to provide important collective goods and responsible leadership.

Public opinion data show growing global disenchantment with US foreign policies since the invasion of Iraq. A lack of progress in the World Trade Organization’s Doha Round of negotiations and growing protectionist pressures in the United States and other states raise doubts about US policy makers’ commitments to a liberal economic system. Critics around the world use a host of problems such as growing income inequality, extreme poverty, migration pressures, and food and energy costs to raise questions about the merits of globalization and a global liberal economic system. Protests at International Monetary Fund (IMF), World Trade Organization (WTO), World Bank, World Economic Forum, and other global economic conferences demonstrate a potential for those concerned about globalization and liberal economic exchange to marshal opposition to the US-dominated rules of the game.

In the context of hegemonic replacement, some pundits and academics are raising the prospect of China, or perhaps India, as a potential successor to US leadership.¹⁷ By mid-2008 public opinion surveys showed that a majority of Americans believed that China had surpassed the United States as the preeminent economy in the global system. Some have gone so far as to contemplate whether US policy makers should employ mercantilist strategies to limit the success of potential successors. The implied threat in this literature is that a successor would be detrimental to the United States. This forecast is questionable, misrepresents the role of a liberal hegemon, and is based on a zero-sum logic where if I win, you lose. Even if such a transition should occur, we must ask why a new hegemon that attains its position within the current rules of the game would dramatically change the rules that brought such success? If a liberal hegemon is instrumental to socially productive globalization, then hegemonic succession is not about competition and conflict but about achieving international cooperation. Overreaction to the possibility of hegemonic transition, through the use of mercantilist commercial and financial strategies, could bring the very competition or conflict that policy makers hope to avoid, potentially leading to economic warfare that could make everyone worse off.

This litany of issues raises questions about continued US leadership, questions that are similar to those raised in the late 1970s and 1980s. Will others continue to play by, and support, US-fostered rules of the game that promote globalization and liberal economic exchange? Does the US political economy still enjoy the capacity to provide the collective goods that underpin such rules and place US public and private policy makers at the center of a network of relationships that can mobilize cooperation and manage downturns or crises? Are US policy makers today and in the future even willing to continue to play by the rules that previous generations of US policy makers advanced following World War II?

These are critical questions not simply for Americans but for others around the globe if hegemonic leadership is critical to providing key collective goods that help reduce uncertainties involved in cross-border exchange, to managing the risks involved in such exchange, to extending the time horizons of economic actors, to encouraging those actors to risk exchange and investment across national geographies, and to supporting a network of relationships that can mobilize cooperation and manage countercyclical downturns or crises. The answers to these questions have significant implications for the future. They inform us about the prospects for severe economic disruptions, destructive economic nationalism, peaceful adjudication and resolution of international disagreements, competition turning to conflict, maintenance and expansion of productive exchange across borders, stimulation of growth and development, and reduction of obstacles to cooperation and coordination in the global arena.

Concerns about US leadership may or may not be warranted, but we can only determine which by understanding what hegemony is, its source, how it changes, and the implications of change in global leadership. Without better understanding, responding to such concerns might easily prove to be an overreaction if policy makers miscalculate the prospects for, and meaning of, US decline or the rise of another state to hegemonic capacity. An overreaction could damage cooperation, limit the willingness of governments to coordinate their policies to constrain activities detrimental to productive economic activities, and even produce the very outcome policy makers sought to avoid with their policy choice.

An Explanatory Framework

Kindleberger suggests that a political economy, acting as the system leader, provides five key collective goods: maintaining a relatively open market for distress goods; providing countercyclical, or at least stable, long-term lending; policing a relatively stable system of exchange rates; ensuring the coordination of macroeconomic policies; and acting as a lender of last resort by discounting or otherwise providing liquidity in financial crisis.¹⁸ I discuss each of these extensively in chapter 2. These collective services are relatively nonexcludable to any society that wants to participate in the global economy and follow the rules of the game. The historical record appears consistent with Kindleberger’s explanation that the provision of such collective goods creates the essential scaffolding for productive liberal exchange and globalization. These key collective functions underpinning liberal hegemonic leadership are to a great extent financial, fiscal, and monetary mechanisms to provide capital to support consumption and growth, establish a means to settle payments, and create tools to manage