October 2023: Markets are now battlefields

but they are also markets. Therein lies the problem

The new issue of Foreign Affairs is out, and it has two long pieces with overlapping arguments. One is by Jake Sullivan, the National Security Advisor. The other is … well by me and Abraham Newman. In the most obvious and important sense, one of these things is not like the other. People will be poring over Sullivan’s article for information about how the Biden administration sees the world, and what it is likely to do or not to do, in a way that they won’t be poring over Abe’s and mine (we are doing just fine in our own way - but we are idea-slingers, not decision-makers). Equally, because we don’t have political constituencies to worry about, we’re able to talk more directly than Sullivan does about some of the problems that the Biden administration faces, and how difficult it will be to solve them.

Neither Abe or I knew that Sullivan’s article even existed until it came out this morning, so the amount of overlap might seem weird. Both pieces stress that we’re in a new era different from both the Cold War and the grand age of globalization. Sullivan describes how the “Cold War … was waged between two superpowers that had very low levels of interdependence,” and now the U.S. has to “adjust to the main challenge it faces: competition in an age of interdependence.” We talk about how the “Cold War version of the U.S. state sought to limit economic exchange with adversaries, and … now policymakers have to grapple with interdependence, a vastly more complex task than that faced by U.S. officials in the past.” Both pieces discuss how the U.S. is looking to “derisk” rather than “decouple.” Both emphasize how economics and national security have become so intertwined that it is hard to see where the one begins and the other ends. But then, in another sense it isn’t weird at all. We begin our piece with a Sullivan quote, and go on to talk about how Biden administration officials are looking to respond a dramatically changed world. And our own work on interdependence in a world of great power competition is one part (but just one part) of the mix of ideas that the new administration is likely drawing upon.

But there are important differences. Sullivan’s article largely dwells on the successes of the administration, arguing that they provide a sound basis for revitalizing U.S. policy. He draws together various policies, presenting them as part of a unifying vision. We, instead, being academics, focus on the problems, and in particular the difficulties of sound policy making. Our argument is that if the Biden analysis of the world is right, we need a quite dramatic transformation of the US government and how it makes global policy. “Derisking” sounds nice and innocuous. But doing it well is really, really hard.

The logic is as follows. We agree with Sullivan that older policy approaches are poorly suited for the world we live in. Back in the Cold War, the U.S. devoted a great deal of effort to cutting itself off from its adversary’s economy, and cutting its adversary’s economy off from it. From Kennan’s famous telegram on, trade with the USSR was seen as a source of vulnerability. You didn’t want to rely on your enemy if you didn’t have to. Nor did you want your enemy to get their hands on technologies they could use against you. Hence, the US created an enormous machinery of export controls, with drastic implications for what businesses could or could not trade in. These were complex, ever proliferating means applied to a relatively simple and clearly defined goal - minimizing trade with the enemy to that which you absolutely couldn’t do without. Of course, the ways to achieve that goal varied, and different administrations were stronger or weaker in their commitment (there were periods of greater openness) - but that was the broad story.

When the Cold War ended, many of these controls dwindled, as, for example, the U.S. allowed the export of strong cryptography (previously closely held) so that the Internet and e-commerce could blossom, and began to rely on global markets and supply chains for semiconductors. The U.S. military didn’t go away. Nor did export restrictions disappear (for example, the U.S. still sought to keep China a couple of generations behind the cutting edge of semiconductor production). But in general, U.S policy makers were far more willing to let free markets blossom, without trying to guide or control too much, on the assumption that they would eventually liberalize authoritarian countries like China. The presiding spirit was Hayek rather than Kennan - markets, together with a minimal framework of rules, were far better suited to coordinating economic actors, with their myriads of competing and complexly interacting goals, than state guidance and intervention. As Hayek had famously argued, the price mechanism was far better capable of dealing with complex relations of supply and demand than centralized government could ever be.

That was then. Now, far fewer people are willing to put their trust in markets as a universal solution for the complex problems of the world. Sullivan and his colleagues like Gina Raimondo and Katherine Tai have to confront a twofold problem.

First, that national security and markets have become increasingly entangled. Most obviously, semiconductors are both a critical part of how the economy works, and an important component of military success. For decades, policymakers didn’t pay much attention to these entanglements, assuming against the odds that markets would somehow magically make the security problems go away.

But the second part of the problem is that there are some complex goods that markets are quite bad at providing, and they include national security (see e.g. Adam Smith). The result is that government officials now have to take a welter of decisions that involve both national security and the detailed workings of markets. Such decisions are even more complex than the decisions of supply and demand that were delegated to markets until the recent past. The tradeoffs between national security and economic growth are difficult even to envisage, let alone to calculate, all the more so as security and growth are themselves deeply intertwined (it is very hard to get the one without the other). Markets are becoming battlefields. But they are still markets.

What this all means is that government now needs to solve incredibly complex problems that involve both economics and security while recognizing that the traditional approach to solving complex issues - fobbing them off to market mechanisms in the hope that things will work out - is unfit for purpose. The term “derisking” implies both that you are able to understand the risk, and that you are able to take actions that will address it, without doing too much harm to other aspects of economics and security. That is actually a pretty tall order, even in principle. We don’t have a good understanding of the security risks of a global economy. We don’t have a good understanding of the tools we can use to address them, or what the unexpected consequences of using those tools might be.

And it is much worse than that again. As we discuss in the article, many of the parts of government that had expertise have shriveled away during the globalization boom. Some of the parts that didn’t wither - the traditional security apparatus - are poorly suited to solve these kinds of problems, and likely to prioritize a narrow version of security over innovation. And even if the government had the expert institutions and personnel, it still needs information. Supply chains are a huge source of security worries - but neither the government, nor even the businesses that use them, have a clear map of how they work, or where many of the vulnerabilities are. Decentralized Hayekian market mechanisms have their strengths in creative adaptation, but they also have weaknesses. Hayek hated the notion that you could have, or want a synoptic vision of the economy. But sometimes a synoptic vision is just what is needed.

So that implies that we need a pretty radical transformation of the state. If the state is going to do the kinds of things it is supposed to do, it will need far greater capacities to analyze information and to gather it (yes: if you are familiar with the arguments about state capacity, this is another justification for it). Furthermore, it will need to implement policies in different ways. It is going to have to experiment - and revise policies quickly, when they don’t work, or when they turn out to have unexpected benefits that can be capitalized on quickly. That, then, is the main argument of our piece. While we only use the word “cybernetics” in passing, we are making a cybernetic argument. We need government institutions that can come up with reasonable representations of complex problems involving both economics and security, take actions that look to solve those problems, and have feedback loops that allow policy makers to revise those actions when they turn out to have unexpected consequences.

This is, of course, the other difference between academics like us and policy makers like Jake Sullivan. We can identify the problems - which is the easy bit. We don’t have to outline very specific solutions (we do gesture towards some in the article - but they are at most a start), let alone to implement them. It’s the latter that is the biggest challenge. And it is a particularly horrendous problem, given the current problems of US administrative decision making (we mention Jen Pahlka’s great book in passing) and the impossibility of building political consensus around small solutions, let alone big ones.

But this is the great challenge that we face - not just in national security, but in climate change and the myriad other complex problems of what Adam Tooze calls the polycrisis (not his coinage; but he has made it his term). We face a huge variety of interlocking complex problems - but they do not have the right kind of complexity for markets to address on their own. Markets, of course, are still going to be enormously important - but they can’t solve many truly collective problems, or provide synoptic knowledge where synoptic knowledge is needed. Our governmental institutions need to step in - but they are not fit for task. And we don’t have anything that even vaguely approaches the political consensus that we need, in order to make the big changes that have to be made.

These seem like impossible challenges - but this isn’t a counsel of despair. Improvised partial solutions can help build up towards bigger ones - if we try to keep some broad understanding of the bigger ones in our heads as we tackle the more immediate challenges. And from one perspective, a lot of what the Biden administration has been doing could be read as throwing out lots of different smaller partial solutions in the hope that some will stick and grow. That is at best an imperfect approach - but for the moment, it may be the best we have, and it may point the way, in time, to better ones.