Capitalism and the Future of Nation States
European Straits #150
Hi, it’s Nicolas from The Family. Today, I’m pursuing a conversation initiated on Twitter about the future of nation states—and why ambitious capitalists need them more than ever.
Stefano Bernardi, an angel investor and scout for Atomico, recently tweeted about the idea that nation states could disappear. He asked which books were worth reading to get an idea of what’s next. My first answer was that maybe nation states would be replaced by city states, and so these are the books I suggested:
City of Fortune: How Venice Ruled the Sea (Roger Crowley, 2013)
The memoirs of Lee Kuan Yew, the founding father of Singapore (published in 2000).
Then I had another idea, which was that maybe nation states would be circumvented by networked communities connected by trade, finance, religion, or a given mission rather than citizenship. On this hypothesis, I find these precedents worth studying:
The New Knighthood: A History of the Order of the Temple (Malcolm Barber, 2012)
The Hansa Towns and the Hanseatic League (Helen Zimmern, 1889)
Under the Black Flag: The Romance and the Reality of Life Among the Pirates (David Cordingly, 2006)
The House of Rothschild (Niall Ferguson, 1999)
The Catholic Church and missionaries (book suggestions welcome!)
Ultimately, I realized that one thinker in particular could help us find answers to Stefano’s question, notwithstanding the fact that he died in 1985: I’m thinking about Fernand Braudel, a well-known French historian, social scientist, and author of one notably thorough work on the history of capitalism, Civilization and Capitalism, 15th-18th Century. Read along 👇
1/ Even though I’m French, I must admit I had never really read Braudel until now. I knew of his ideas and concepts, of course (we Sciences Po students are trained in the art of quoting authors we haven’t read 😉). But Braudel burst into my intellectual universe recently in no small part thanks to venture capitalist and economist William H. Janeway. Bill quotes Braudel extensively in his book Doing Capitalism in the Innovation Economy, and he has (rightfully) declared Braudel one of the most enlightening thinkers when it comes to understanding venture capital:
I found an unlikely guide in the great French historian Fernand Braudel… [His] meditations on what capitalists do generated a shock of recognition that I can still feel. Although the domain and context in which Braudel’s financiers operated is vastly different from the world of today’s working venture capitalist, the activity remains recognizable: putting surplus cash to work, again and again, wherever the potential return is unlimited by either institutional structures or competition.
2/ For Braudel, the economy can be subdivided into three categories. The first, which he calls “material life”, is made up of the infinite, informal transactions that form our daily lives. The second, the “market economy”, is where individuals conduct business, establishing a link between production and consumption. The third, finally, is “capitalism”. As Bill explains above, Braudel sees within capitalism an ensemble of processes that allow one to extricate oneself from the trivialities of commerce and pursue increasing returns to scale. The market economy is the world of merchants, those who buy and sell while taking a small margin as items pass through their hands. Capitalism, on the other hand, is the world of the financiers, and entrepreneurs who have understood that they can attenuate the rigorous competition in the market economy by “inserting” capital into the production process.
3/ For a long time, capitalism was at the margins of the economy. Its first iterations were what Braudel called the “faraway trade” (after the German word Fernhandel), for example that involving spices, silk, precious metals. In these sectors, where the goal was trading rare, non-perishable goods, lengthening the routes of commerce weakened the competitive dynamics between various economic agents. Few organizations were effectively able to trade from one end of these long routes to the other. The reward thus wouldn’t go to the best merchants, those who were most skilled in the art of buying and selling. Rather it went to those organizations which could invest in a financial, informational, and logistical infrastructure that could operate at the largest scale and secure a long-term competitive advantage.
4/ Capitalism then started to spread throughout the economy. Technological progress allowed capitalists to arrive in all sectors, setting off a race for scale. Today, there are few markets where businesses are simply content to buy and sell. Almost all sectors, even those that do not require large amounts of capital, are dominated by capitalistic businesses that utilize assets to avoid the difficulties caused by perfect competition. And so the history of capitalism is that of capitalists evicting merchants from a growing number of sectors of the economy. As I wrote in a previous issue more than two years ago, “Capitalists mostly care about return on assets (RoA) and return on equity (RoE), which enables them to take the larger view. As they’re focused on capital asset velocity, they tend to beat...the ‘merchants’, who obsess primarily about net operating margin.”
5/ Capitalism played an extraordinary role in progress. The increasing returns it generated through scale created an economic surplus that allowed, depending on the context, for lower prices for consumers, higher salaries for workers, and/or better returns for investors. It’s for this reason that both the right and the left have always encouraged capitalism in the West. It was necessary, of course, to curb its excesses, but it was always counted on to develop the economy. Case in point: Mariana Mazzucato doesn’t like when “leftist economists” like her are depicted as anti-capitalists. As she’s argued on Twitter, you can be both for capitalism and for more state intervention. Indeed, the most prosperous countries were always those where capitalists benefited, according to Braudel, from a certain “goodwill” on the part of the state. Or, as Dani Rodrik puts it, “capitalists need the state more than the state needs them”.
6/ How, exactly, does capitalism contribute to economic development? The process happens in two stages. First, you need to create and capture more value, and this is where capitalism makes a difference. Then you need to realize that value (that is, turning it into wealth) and it really matters where that happens. The whole point of having local capitalists is that value is realized locally and the resulting wealth spills out locally, enriching everyone around in the process (which might require some redistribution through taxes, benefits, and public services, but that’s another story). This two-stage process is why every state has an interest in supporting local capitalists with access to a supportive domestic market and various forms of industrial policy. The goal is to have capitalists create and capture even more value that will then be realized locally. In exchange for this support and “protection”, capitalists have to contribute to local development through consumption, investment, and redistribution. The state contributes to capitalists succeeding; capitalists, in turn, contribute to lifting up the local “material life” and “market economy”, thus strengthening the state.
7/ Like all technological revolutions, that of computers and networks allowed capitalism to escape even further from the market economy by intensifying the race for increasing returns to scale. In the 20th century economy, numerous countries succeeded in positioning themselves well on the chessboard of the world economy, turning industrial capitalism and the resulting increasing returns to scale into the motor for their local development. But now that capitalism is driven by computing and networks and thus plays at an even larger scale, the resulting economic surplus is becoming more and more concentrated within just a few “economic worlds”, to use Braudel’s term (économie-monde). One economic world is centered on Silicon Valley; another one is centered on China. Today’s version of capitalism gives birth to even larger organizations and a greater geographic concentration of wealth.
8/ What about the future of nation states? Braudel reminds us that the center of our Western economic world has changed several times since the Middle Ages. Venice, Antwerp, Genoa, and Amsterdam were effectively city states. But then London and New York came along, and they were more accurately large cities within nation states. There were two reasons for the rise of a nation state (Great Britain) as the dominant economic center of the day, as opposed to a mere city as was the case before. One was the end of the Napoleonic Wars and the aftermath of the Congress of Vienna. The other was the Industrial Revolution. The growth of textile manufacturing meant that there were less domestic land and labor to grow crops. Only a nation state could compensate for that fact with a navy able to master the sea, a vast colonial empire to grow cotton and tea, and the strength to negotiate favorable trade agreements with other nation states. You needed a nation state to support capitalist enterprises at the scale enabled by the Industrial Revolution. Sovereign entities had to scale up at the same pace as capitalist ones so that their mutually beneficial alliance could bear fruit.
9/ This doesn’t mean that cities couldn’t prosper. The remaining city states (like Singapore, Vatican City, Monaco, and, to a certain extent, Luxembourg), all found a niche which permitted them to thrive. But cities that were on their own in the 20th century also had difficulties securing critical resources such as oil, gas, food, even water. If you’re surrounded by friendly neighbors in a stable part of the world, like Luxembourg or Vatican City, everything is fine. But if you depend on hostile or hegemonic neighbors for access to resources, you need to be careful. Hong Kong was retroceded in 1997 not because China asked, but because the 99-year British lease on what is known as the New Territories (and Kowloon) was about to expire, and Hong Kong itself (that is, the island) simply cannot survive without its hinterland. Singapore, on the other hand, is sovereign indeed, but it has to overcome perpetual uncertainty when it comes to securing its water supply from neighboring Malaysia.
10/ What about today? You don’t need land and labor to run today’s businesses with increasing returns to scale (that is, tech businesses rather than manufacturing businesses). This is probably why some large cities in the West are feeling tempted to recover their independence. Yet just like my friends David Galbraith and James Crabtree, I don’t think we should conclude that nation states will disappear:
Today’s capitalist organizations still need states to support their expansion—and since they’re larger than in the past thanks to computing and networks, the corresponding states need to be able to match that scale with more resources and superior strategic power. This is why we’re seeing wealth concentrating within very large and populated countries such as China and the US, with mid-size countries bound to become mere “intermediate” regions (Braudel’s word).
There is still an opportunity for smaller sovereign entities to prosper, but just like in the 20th century you need to be creative when it comes to positioning and absolutely ruthless when it comes to implementation. Singapore’s Lee Kuan Yew is the definite model here. (And I don’t think that current leaders in countries such as France, Germany, and the UK rise to that bar.)
Finally, it’s true that the rise of computing and networks makes it easier for communities of networked individuals to circumvent nation states. But I don’t think it’s the case for every nation state. Sure, a sovereign collective can escape nation states if they’re mid-size countries deprived of thriving capitalist entities. However, whenever that solid alliance between local capitalists and the state exists, like in the US or China (but not Europe!), it will always prevail over any contemporary version of the Knights Templar or the Hanseatic League.
In conclusion, Europe’s position within this new phase of capitalism isn’t yet clear. The Old Continent could remain an “intermediate” region supplying ancillary services to an economic world dominated by Silicon Valley and the US. But perhaps it could also become an economic world in its own right. I think the latter scenario can only happen if sovereignty is enforced at the continental level rather than at the national one, and if the EU finally gets serious about supporting local tech-driven capitalists.
Please scroll down for a comprehensive reading list expanding on this discussion.
🛴 Some entrepreneurial topics are more affected by public policy than others. Mobility is definitely one of those, and so we were happy to have some of the key players in both urban and intra-urban mobility at The Family a few weeks ago to talk about the current state of things. Zineb wrote about some points that stood out here: “Round, round, get around, I get around…” 🏄♂️🏄♀️ (also a version in 🇫🇷)
🚀🚀 With literally millions of apps out there, it’s hard to break through. We’ve been enjoying watching as one of our recent startups, Vybe, has pushed their banking app for teens up to #3 on the French App Store—a great example of the momentum you can generate when you target the right problem for the right niche. I already mentioned them last week, but the progress they’ve made in just the last few days is just incredible! Also, check out their Instagram account.
🎙️ A while back, I sat down with Sandro Gianella, head of European policy at Stripe, to talk about how to build a new safety net for the Entrepreneurial Age. That discussion is now available as a podcast, and of course you can still buy a copy of my book Hedge, going in depth on that topic.
🦁 Finally, my cofounder Oussama was on stage a few weeks ago speaking about the realities of entrepreneurship during Goldup, The Family’s program to help women launch their own online businesses. It has apparently struck a chord, as it’s up to almost 60K views on YouTube! It is in French 🇫🇷 though: Se confronter à la réalité entrepreneuriale.
Here are more readings about nation states, city states, and capitalism:
The Hanseatic League and its Decline (Rainer Postel, Bundeswehr Universität, November 1996)
The Fragility of Thalassocracy, Pericles to Heinlein (Kelley L. Ross, The Proceedings of the Friesian School, Fourth Series, 2003)
A Brief History of the Corporation: 1600 to 2100 (Venkatesh Rao, Ribbon Farm, June 2011)
Meet the Visionary Venture Capitalist [Bill Janeway] Inspired by Marx and Keynes (Lynn Parramore, Alternet, December 2012)
Silicon Valley’s Ultimate Exit (Balaji S. Srinivasan, Startup School, October 2013)
Software Is Reorganizing the World (Balaji S. Srinivasan, Wired, October 2013)
End of nations: Is there an alternative to countries? (Debora MacKenzie, New Scientist, September 2014)
The Rebirth of the City-State (Corin Faife, Next, April 2016)
The Most Disruptive Transformation in History (Richard Florida, Medium, December 2016)
How Markets in Europe Opened Up as Guild Monopolies Declined in the Sixteenth Century (Prateek Raj, ProMarket, July 2017)
Why The Future Will Be Dictated By Cities, Not Nations (Ben Schiller, Fast Company, September 2016)
Return of the city-state (Jamie Bartlett, Aeon, September 2017)
Capitalists Beat Merchants Everytime (me, European Straits, September 2017)
The Network State (video—Balaji S. Srinivasan, Startup Societies Summit, September 2017)
Capitalists need the nation-state more than it needs them (Dani Rodrik, Aeon, October 2017)
The role of trade and information technology in the decline of merchant guilds (Prateek Raj, Vox CEPR Policy Portal, January 2018)
Nation State At the Crossroads (Azeem Azhar, NewCo Shift, April 2018)
The Key to Everything (Freeman Dyson on Geoffrey West’s Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies, The New York Review of Books, May 2018)
What To Do About the Rise of Mega-Regions (Richard Florida, CityLab, June 2018)
Paul Romer on charter cities and what we’ve learned since (Mark Lutter, Charter Cities Institute, October 2018)
China, India and the rise of the ‘civilisation state’ (Gideon Rachman, The Financial Times, March 2019)
Can Capitalist Democracy Survive? (Bill Janeway, Project Syndicate, September 2019)
The Return of Geoeconomics (Michael Lind, The National Interest, October 2019)
The climate crisis in 2050: what happens if cities act but nations don't? (John Vidal, The Guardian, October 2019)
India and China push a new age of Asian nationalism (James Crabtree, Nikkei Asian Review, October 2019)
Antifragile states and global cities (Branko Milanović, IPS Journal, November 2019)
New Types of Organization and the Myth of the Return of the City State (David Galbraith, November 2019—also a video here)
From London, UK 🇬🇧