Finance and the Mafia State

The argument advanced by the historian Philip Bobbitt that a transition is occurring in world politics from the nation state to the market state has long appealed as a snapshot of what is occurring in world politics. It is, as with any thesis about a large subject, far too simple to reflect accurately all that is happening, but it is nevertheless a fine starting point. As we witness the political travails plaguing southern Europe, it gives us a useful analytic to trace the outline of what is happening.

That, at least, is what I used to think. I am starting to wonder if something very different is happening. Several tensions seem to be occurring that suggest that the transition to a “market state” is problematic at best.  The first, and most obvious, is the resilience of nationalism, or at least approximations of it. Max Walsh commented in the AFR that the Europe experiment was designed to mitigate the effects of nationalism:
The EC is about buying time. This was the strategy originally favoured by Jean Monnet, the “founding father” of “modern” Europe. Monnet judged that unification between the previously hostile nations of Europe would never be delivered through the ballot box. Instead, he advocated, it could be achieved by incrementally transferring more and more government functions from national to European administrations.

The EC has been successful in increasing its writ by stealth.

The delaying is just papering over the absurdity of enforcing a union that does not have underlying cultural support, yet purports to be “democratic”. As the historian Anthony Beevor points out the rise of nationalism in Greece  — anti Nazi slogans against Merckel, for example — is a gloomy portent. Europe is already falling apart and likely to revert to nationalism of some sort:
“The great European dream was to diminish militant nationalism,” he says. “We would all be happy Europeans together. But we are going to see the old monster of militant nationalism being awoken when people realise how little control their politicians have. We are already seeing political disintegration in Europe.
Meanwhile, the nationalism of America, Russia and China is much as it has been. Military systems are national, and will remain so. The current geo political battle is over Central Asia, both for reasons of military positioning and for its economic significance, the reserves of gas. There is no sign of a fading nation state, as John Chan reports:
“In Beijing, Russian and Chinese leaders publicly stated their opposition to the drive by the US and its allies towards military intervention in Syria. In a joint statement, Putin and Chinese President Hu Jintao declared: “Russia and China are decisively against attempts to regulate the Syrian crisis with outside military intervention, as well as imposing… a policy of regime change.”
Writing in the official People’s Daily, Putin declared: “Without the participation of Russia and China, without considering Russia and China’s interests, no international matter or issue can be discussed and implemented.” Russia and China have blocked UN resolutions for sanctions against Syria.
Both Russia and China have a great deal at stake in opposing US machinations in the Middle East. Russia has longstanding ties with Syria. Moreover Putin and Hu are well aware that the drive for regime change is also directly against Syria’s main ally, Iran, that is confronting threats of war from the US and its allies. China and Russia have significant economic interests in Iran.”
It could be argued that this is just transition, but the problems of the “market state” go much deeper. Bobbitt’s argument is largely justified with reference to commerce: international trade and globalisation, altthogh he does mention the capital markets. But what is evident with the series of financial crises over the last 15 years, which used to occur mainly in developing countries but which are now consuming the developed economies, is that the markets that have the real power are financial markets. And these are stateless.
Worse, they have taken over the role of the state to set the rules of money in a deeply pernicious fashion. Indeed, we can go further. Global financial markets have become destroyers of states, not a new kind of state. That the traders rely, as citizens, on some sort of state structure to live, is merely an irrelevance, an inconvenient aside.
As I have argued before, it is impossible to deregulate financial markets because money is rules about value and obligation. So what happened instead when financial markets were “deregulated” is that the governments’ role as the setter of rules was handed over to traders, who made up their own rules: more than $700 trillion of derivatives, intense high frequency trading and so on. It results in a weird contradiction: governments trying to save their systems from the new rules being created by the traders, yet the traders relying on the state’s rules about finance to overlay their games of meta money. Meta money traders have to have conventional share trades between buyers and sellers to apply algorithms to manipulate the markets at high speed.
You need conventional commerce in commodities to use derivatives to play commodity futures, for example. It is why governments are constantly attacked by players in the financial markets who are simultaneously hard at work exploiting those “errors” to make money. Meta hypocrisy to accompany the meta money, I suppose.
The tsunami of this meta money, which is borderless, stateless and has no thought for its effect on governments or polities, still relies for its very existence on the rules set up by governments. And as has been obvious since the GFC, governments and tax payers are expected to clean up the mess when it inevitably all goes wrong. That can be done once. When it goes wrong a second time, the firepower will not be there, as is increasingly evident in Europe. The conventional rules will have been weakened too much by the rules invented by the traders of meta money.
It represents a comprehensive failure of government, and will not lead to the creation of a new type of state. It is rather a new type of chaos. It is especially pernicious when governments start to dabble in the meta money, as Greece did when the government covered up its debt by using derivatives. That is wholly unforgiveable. It is bad enough that governments have allowed traders to make up their own rules with money, in effect playing Russian roulette with money itself. But when they, too, start using the same tricks, then the road back to sanity becomes long indeed.
The danger is that it is a road to anarchy, no matter how often one quotes Adam Smith and fantasises about the invisible hand. Even Alan Greenspan eventually figured that out: that letting self interest and greed run rampant is not a sure fire route to an altruistic result. Such liberalist logic can be defensible in commercial markets; it is nonsense in finance.
Rather than Bobbit’s market state, the breakdown of rules, the capturing of policy and the utter mess that is confused public and private interests suggests something more redolent of Moises Niam’s “Mafia State”.
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  1. “Monnet judged that unification between the previously hostile nations of Europe would never be delivered through the ballot box. Instead, he advocated, it could be achieved by incrementally transferring more and more government functions from national to European administrations.”

    That is to say, the plan was to substitute bureaucracy and limited delegation of power for democracy itself. Monnett was quite right in one sense: the people of Europe have refused to cede their local/national rights to a pan-European Mega-State. The current confusion simply proves that it was mistake to act as if this could happen by stealth – that a legally constituted Euro State could be constructed without anyone noticing or without the consent of the peoples of Europe.

    I also think the present problems in Europe can be traced to the crisis and collapse in the Soviet Union and the failure of the Europeans to carry out a thorough-going review of the post-war settlement. Post-war politics – and all its attendant institutional structures, including the European Economic Zone – were shaped by the need to secure the West in the context of strategic competition between the US and the Soviet Union. Once this contest had been resolved in favour of the US, the political and economic dynamics in Europe were bound to change as well. Instead of recognising this, people assumed that more of the same would work as well in the future as it had during the post-war past.

    The States of Western Europe were bound together by the fact of an existential threat – the presence of the Soviet Army and the deployment of the Soviet nuclear arsenal. Bound together by a threat from the East, and protected by the supreme power of the US, the petty-states of Western Europe were able to focus on reconstruction, free commerce, coextistence and on creating social stability, which included the acceptance of a social-democrat welfare agenda. This was all essentially a product of the need to achieve cohesion and prosperity in the face of external threat.

    In so doing, the Europeans may have changed the idea of national frontiers – replacing the thick red borders of national political separateness with the feint-grey-dots of both social mobility and liberal markets – but they certainly failed to create a new source of political legitimacy and sovereignty.

    This failure is the source of the dysfunction in Europe today.

    The problems in European banking and public finance are problems of institutional design – of law, of the operation of constitutional limits, of political authority – and essentially are not problems of scale or even of morality or culture.

    They have failed to think through and be candid with themselves about the elements of their political economy and the preconditions for peaceful and prosperous co-determination. Until they do this, everything they have achieved since 1945 will be at risk.

    • The period of apparent cohesion in Europe is founded on an abundance of resources. IMO disputes that have been labelled as sectarian, for example are in all cases about resources.

      The strong hand of Tito in Yugoslavia, Saddam in Iraq, myriad troubles in Africa are examples of the natural ‘hard wired’ human response to revert to family – clan – tribe – race / religion as a means of having better access to resources.

      What has been written here is hard wired in the brains of man. Its hard to be optimistic about the outcome

  2. davies_robert

    The financial system has broken because debt can no longer be inflated. Why? Because gold is now a free market, savings is more and more being recycled into gold, not usd debt. Dont believe me? Look at the 10 yr gold price chart. Why gold? As a saver if you know the supply of dollars increases by 10%+ per year and the supply of gold increases by 2%, and gold has been money for thousands of years, where are you going to put your savings? Now, if govt cannot convince citizens to recycle savings into paper money, then the welfare state is finished, finito, gone, dusted. This is what europe is trying to deal with, the end of the welfare state

    • You’re right, the entire system is broken and can only end in its collapse and exists now only to enrich the few. Till then don’t expect anything meaningful to change.

  3. Will come back to this post – this is a sensational headline.

    I did a Masters Thesis on almost this very topic and am considering it to be my PhD.

    Corporate control by stealth is very much where the world is headed – I had a run in with Prof John Keene on this topic at his book launch “Democracy” a history.

    There is no doubt that there already exists a supra-national corporate class with altogether different laws regarding work, travel, finance, there is already a supra-national legislative institutional layer based on WTO, WB, IMF, IP, etc.

    The shift to institutional neo-classical, POST CONFLICT international relations has pronounced with Bush Senior and instituted with Clinton. The deal is already done we are simply wrapping up the pieces.

    The problem the world faces is that no one realised that China would enter the scene in such a powerful nationalistic financial powerhouse. Threw all the structures out the window.

    Now the only way to deal with the wealth transfer of workers is by debasing western labor standards and creating a global corporate (corporate / political) class of non-sovereigns. In other words, a complete betrayal of domestic citizens.

    Its all fine and dandy in theory, but the reality is it will lead to revolution – a absolute fact of life, business, politics is that you must put the interests of the consumer and citizen first, they are one and the same.

    “The only place you can rule and empty kingdom is the asylum, and even then, you have to answer to the people in your head.” – Aristophrenia.

    • What you say seems very true.
      One thing I would add is that China entering the scene as “a powerful nationalistic financial powerhouse” is part of how one could look at China’s role.
      China could be seen, up until say 20 years ago say, as a cheap source of labor for Western corporations.
      Now China owns itself, and the West is seeing an accelerating out-flow of wealth. The result must be that our stanadard of living falls, and far.
      China, as a socio-economy, is one potential future of the world.
      Call it neo-feudalism or Chinese democracy, it is just an exaggerated version of where the West is heading.
      Who but a fool would wish it on another?

      re your further research, I recommend: Naomi Klein (Disaster Capitalism) and Prof. Michael Hudson (Brazil’s Debt Crisis)

  4. It is called an “ah ah’ moment. When the distorting glasses come off and you see the world as it really is.

    If you look at what is happening in finance, plus the endless attack on basic rights and the growth of the ‘national security state’, alongside what is happening worldwide on the military/geo-political level then it is all pretty obvious what the trends are. And how long they have been running that way.

    “Rules and laws”, like taxes, are now for the “little people”.

    It is not just that an elite level is free of any controls or limits, but that the entire ‘national security’ apparatus is reorienting itself towards focusing on anyone who objects to that.

    Recent leaks from the Federal Govt about “anti-coal protesters are a bigger threat than terrorists” are just a another logical step onwards from what happened to the anti-Port Philip Bay dredging and anti-desal plant protestors.

    So if you are above a certain level, no rules or laws apply. Under that level a very large boot will come down on you real hard if you object to it. That is a true mafia state.

    With the added irony it is the ‘little people’ that will pay the dollars in their taxes to create and run it, since the top levels wont pay a cent.

    Australia is not as far down that track as some other countries (eg US and UK), but we are well on that direction now.

    • “.. if you are above a certain level, no rules or laws apply..” How absolutely true !! And here’s the thing. That ‘certain level’ requires regular, selected replenishment (the older cohort dies off or otherwise becomes dispensable) and newer, often younger recruits are needed. The ‘chosen ones’ are given a glimpse of what is possible, and can either embrace the system, or reject it (morality does still exist in some). If the path of rejection is chosen, ‘promotion’ out of harm’s way occurs; followed by a quiet extinction at some discrete distance in time. Maybe it’s always been that way; and maybe it’s just obvious today, because of the arrival of internet based information.

    • I disagree the rules applying to the rich until society breaks down then the rich are the targets and no law will protect them from that, and that is the law of the mob

  5. Interesting points. Certainly at a practical level, we are finding that Asia and particularly China, have rejected the established western corporate power and capital flow rules.

    Shifting capital and profits out of China is ridiculously hard by western standards – and in my view this comes down to the view that the nation state and not the corporate has the power. Something we are not used to in the west.

    The sort of covert rejection of the transfer pricing rules the western nations had come to love, and upon which some of the corporate power to threaten withdrawal of capital has been based, does foreshadow a breakdown of the new found ‘supra-national’ power the corporate classes had grown used too.

  6. Thankyou SON. You and the people above give me some reasurance that I am not totaly crazy and antisocial. The questions you raise and the injustice you expose needs answers. I cant come up with any except to widthdraw my support and work on my own awareness.

    • Yeah I have the crazy and anti social tag too. Hang in there buddy. Keep rocking on that porch, with the rifle handy and a big supply of baked beans in the garage.

      A good reag this thread.

      The interesting thing for me is how the Australian media have completely missed what is happening in the rest of the world – there is little coherent discussion of things like this thread or of the actual state of the Eurozone financial mess, or the the US fiscal imbroglio (which could easily be visited during the runup to the US presidential election), or the state of Japan’s economy/debt environment.

      All we seem to get is the China buys iron or and coal so we should do nothing else but that line of thinking…..

  7. “Give me control of a nation’s money and I care not who makes it’s laws — Mayer Amschel Bauer Rothschild”

    Maybe it’s always been like this, but 99% of the financial criminality either goes undetected, or the real architect gets off with an occasional broker getting setup. These people can essentially do what they like, and if you look at MF Global, and JPM of late they don’t even need to be licenced.

    Have a read of this on JPM’s whale trade, and you see how the industry mostly better off gambling rather than lending.

    Mafia state, maybe more a police one as well. Why does the state now take the stance that they have to monitor, and regulate every part of every citizen’s private life? Anyone trying to start a business needs significant capital just to comply with rising regulation; ask anyone who’s done it. And this list goes on..

    Top post SoN.

  8. Always was a fan of the Sopranos…

    Successful modern capitalist democracies are the minority. Regimes and governments of various forms, most unsavoury to our cosseted Western ideals, have the upper hand. Always have.

    The view presented here is more dystopian than my own, but is no doubt a reality at various levels for many countries and peoples around the world. At core all is a variation on the theme of power and greed, basic human traits, expressed with a surprising degree of variety, conflicting with ideals of fairness and the rule of law. From blatant criminal activity, to corporation manipulation, to crony capitalism (in modern social democracies), to manipulation of the welfare state – the widespread thwarting of the values of justice and honour appear in every society. It is all a question of degree.

    The hard copy essay in Foreign Affairs is more detailed and worth a look. Ironically it is contained within the edition containing an essay on ‘How to win votes (or favor)’ based on the writings of Quintus Tullius Cicero – many of which are embraced by those seeking power, including the so-called narco/mafia states. The disintegration of the Russian State and the subsequent integration of vital resource riches into the ‘mafia’ state is well understood. Just ask any Russian oligarch in Belgravia. Another point raised in the essay to note is that the currency for much activity – illicit drugs. The ‘war on drugs’ an abject failure, only ensuring the rise of cartels and consequent corruption of the policing, judiciary and even government. The death of thousands via violence must far outweigh the deaths arising from use.

    The questions raised in this post are age-old and solution an ongoing process of revision and refinement – lapses to be expected.

  9. There’s nothing so constant as change!

    You’ve got a 500M population being taxed to pay for 27 national governments, there is simply too much tax overhead and too little EU federal planning and control.

    A looking at the Kleptocracy ‘heat map’ on this page is very interesting when compared to a list of those EU states currently suffering possible defaults. It suggests the more corrupt national governments tried to game the system and have simply failed.

    IMHO I don’t think it’s the resilience of nationalism at a citizen level that is the root of the problem, I think it’s more a need for bureaucratic consolidation where former national governments must transform (reduce in size/cost/authority) into smaller state governments, but they simply haven’t done so fast enough and politicians have made use the childishly simple political tool of nationalism to retain as much power as possible for as long as possible.

    Now the more corrupt state governments are getting sacked and are having downsizing forced on them economically in the form of austerity conditions.

  10. SNC, Rarely honest analysis of the current global situation. The root of this disease seems obvious. When the markets were really free and with countless competitors, the governments had to play in the interest of all then small business and none of them was strong enough to completely corrupt the whole government. Today the government can play in the interest of a few big players – corporations, without any problem, because all finance for the election campaign are coming from the same corporations regardless of the political party. The new grandiose quantity of wealth concentration has changed the quality of its political representation, e.g. in a “mafia-state”.

  11. Superb post SoN.

    Your observations regarding the role of “financialisation” viz derivatives, is extremely pertinent.

    With apologies to those who may have seen the following links in another thread today, I would reference the above article and draw attention to the following as sufficient reason *alone* to strongly oppose the carbon “tax” aka “emissions trading scheme with an initial fixed price period” (or whatever the latest marketing line is) –

    Clean Energy Future legislation, Part 4, sections 109a and 110

    Explanatory Memorandum 3.36

    and from AFR via Dad’s Army