Over a short generation, digital technologies have radically reduced the frictions that inhibit the movement of goods and services, people, and capital. As defined by Dani Rodrik of Harvard’s Kennedy School, the result is a Political Trilemma: we can choose to maintain national autonomy, representative political institutions or deep economic and financial integration.
Dani Rodrik, The Globalization Paradox
Rodrik spells out the conflicts:
“If we want to push globalization further, we have to give up either the nation state or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation state and international economic integration. And if we want to keep the nation state and self-determination. we have to choose between deepening democracy and deepening globalization….
“Even though it is possible to advance both democracy and globalization, the trilemma suggests this requires the creation of a global political community that is vastly more ambitious than anything we have seen to date or are likely to experience soon….”
The extreme stress of the EuroZone, trapped between economic and financial integration while still struggling to maintain national autonomy with policy formulated by representative governments, is today’s paradigm example of the trilemma, with the status of Greece evidence of its immediate relevance.
For a long generation prior to the 1930s, the international gold standard had locked governments into a policy straight jacket, requiring action to punish the domestic economy whenever international movements of capital threatened to break the fixed exchange rate linking the local currency to gold. Thus, economic and financial integration trumped national autonomy during the first epoch of technology-driven globalization when the signal drivers were the railways, the telegraph and the steamship. Under the impact of the Great Depression, the gold standard collapsed and national governments — both representative as in the US and the UK and authoritarian as in Germany and Japan — chose autonomy in order to respond to the domestic impact of the world crisis.
During the first 30 years after the end of World War II, reflecting the hard-earned lessons of the 1930s, the “Bretton Woods Compromise” enabled both independent domestic economic policy and progressive reduction in restrictions on trade in goods and services by sanctioning government controls on the flow of capital. A measure of economic integration proved compatible with substantial autonomy in policy-making by representative governments.
But in the early 1970s, the Bretton Woods system broke down under the dual impact of the first oil crisis and the inflationary consequences of state underwriting of low unemployment. The open ground was seized by neoliberal advocates of market freedom as the overriding imperative, both economists (Milton Friedman) and politicians (Ronald Reagan and Margaret Thatcher). They ushered in a new regime of free capital movements and general deregulation, accompanied by floating exchange rates intended to preserve space for national autonomy in economic policy. But the result was an unsustainable acceleration of international flows of trade, people and money.