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Annals of American Decline Regulation World

Markets and American Decline

Operating from headquarters in a hilltop villa in the capital city, protected by government soldiers, a businessman with strong ties to his own government back home, a belief in his own manifest destiny, a desire to go down in history as a bringer of industrial development, and deep experience in completing hydropower and mining projects, submits a bid to the country’s leaders to build them a new oil refinery. The bid is backed by a loan guarantee from one of his country’s largest banks, provided as part of an initiative by his country’s government to win the friendship of other nations by providing development support.

Lacking an office in the country in which the refinery is to be built, a former mid-level government official with no experience building anything tries to cobble together a bid of her own from shared office space in her own country. She finds an investor — not at home but in a third country — gets an expression of interest from some executives from a firm in her own country with refinery construction experience, and places a bid in which she promises to secure the rest of the funding for the project by selling shares in the venture on capital markets. When ministers visit her country as part of consideration of her bid, they are shocked to be shown around shared office space, and insist that she line up a more secure source of financing. She begs her government to sign on, but the most she gets is a letter from a government lender saying that it would considering lending a fraction of the project cost.

Once upon a time, this would have been a tale about American power. The first person would be a TR, say, supremely confident about his place in history, carrying out a Marshall Plan (if you will forgive the anachronism) reflecting the ambition of the U.S. government to use aid to secure the allegiance of the world. The second person would be some luckless underfunded competitor operating out of a backward country with a weak state lacking the vision to promote its businesses and interests abroad.

But of course the first person in this story is Chinese and the second is American. As the article in today’s Times strongly suggests, the American won the bidding only because Uganda’s leader hopes to encourage American competition, and thereby to improve the terms he gets from the Chinese in the future. Indeed, the American project may well fall apart, as GE — the firm with expertise in refinery building that had shown interest in the bid — has started to exit that line of business.

How did we get here? The answer is our decades-long obsession with market magic. There has been much talk in some circles about the “fissured workplace,” the converting of many jobs into “independent contractor” positions that allow employers to treat their employees as temp staff with no job security and few benefits. Firms no longer have employees, but instead simply tap contractor markets, buying labor hours when they are needed and not when they are not, much the way you make a run to the supermarket for lemons when you need them and not when you don’t, instead of tending your own lemon tree.

Well, more than just labor markets have fissured. Everything has fissured, as our obsession with markets has spread to every corner of the economy since the 1970s. Just look at how the American bid for the refinery came about. Not at the instigation of our government, despite its recognition that China’s dominance in African business is putting us at a great strategic disadvantage, but because a mid-level foreign policy official, thrown out of work by the exit of the Obama Administration, saw a market opportunity. She then went into a set of different markets in order to try to cobble together a bid. She rented shared office space, tapping the fissured commercial real estate market, in which businesses no longer own their own space, let alone build their own custom spaces, as they once did. She also had no funding of her own, but promised to tap the fissured funding markets by selling shares in the project. And she had no experience building refineries, so she also promised to tap the fissured project market, potentially by bringing GE into the project. Markets, market, markets.

All these markets are supposed to make our economy and nation stronger, by ensuring that everything is allocated to the people who need the things the most. Workers can be repurposed via the market from one job to another at a moment’s notice, office space can be saved for the most important projects, cash can flow to the most important projects, and so on.

But what market excess really does is expose our economy and nation, to risk. The trouble with markets is that they are risky. At the end of the day the Ugandans got a bid that was worth little more than the paper it was written on. It was in effect a commitment from an amateur to use acceptance of the bid by the Ugandans to convince investors to invest, refinery builders to build, and so on. What the Chinese offered, by contrast, was a government-backed commitment to fund construction of the refinery by an experienced firm. The parts of the Chinese offer were so well integrated — so unfissured — that the Chinese even insisted on importing 60% of the labor and materials from China to complete the project. That’s right, the Chinese would bring in their own laborers to complete the work.

No wonder the American bid was at a severe disadvantage. If you were taking bids to have your floors redone, would you go with the man off the street with no experience, no operations, and no money — even if he offered the lower price — or the experienced flooring operation that’s ready to get to work as soon as you sign on the dotted line?

When you do business with integrated operations, instead of markets, you carry less risk, because integration reduces risk. It makes sure that the money is there, the expertise is there, the workers are there. You may still bear the risk of non-completion, but that risk is lower. And when the state gets behind its businesses in these deals, as the Chinese government has via its Belt and Road initiative, risk is reduced further. The Chinese drive a hard bargain, using the infrastructure they build to secure repayment of the loans, but they can do that because they have something credible to sell.

If the story of a businessperson trying to get along in an international deal — one that forwards the President’s own policy of going head to head with China — without government support, without expertise, without financing, without even an office, sounds the story of a failed state, that’s because a fissured economy — an economy in which everything, at every level in the supply chain, has been turned into a market — is a failed state. It’s a country that can have no vision or unity of purpose because its government is paralyzed by the need to respect market boundaries, unable to direct the economy according to any vision, and in which every individual and private firm is paralyzed too, at the mercy of markets in everything that they do. Therein lies the state of nature.

Of course it was not always this way. Until market dogma took over the country in the 1970s, American industry looked a lot more like Chinese industry does today. Long-term commitment to workers and suppliers was the norm. Indeed, in America’s many regulated industries, the government required firms to provide packages of services, instead of fissuring the services into the a la carte menus that have proliferated today. The government promoted international development as a strategic goal, most famously in the Marshall Plan.

And, perhaps most importantly, America had a taste for greatness. It would not have thought that “the threat posed by the Belt and Road Initiative to American interests is debatable.”