Globalisation and The Crisis of the Nation State

Political elites have yet to grasp that voters will soon demand protection from the harsh impact of the Second Machine Age

Features Politics
Before the Big Bang: Margaret Thatcher visits the London Stock Exchange in 1979. The City had yet to embrace globalisation (credit: Steve Burton/Getty)

When Nigel Farage left school in the early 1980s, he went to work in the City as a commodities trader. London was rather different back then. Those were the sleepy days before the Big Bang, the computerised revolution which modernised the ancient City and made it once again one of the world’s leading financial centres. When Farage arrived the revival was still to come. Long lunches were compulsory and the market was lubricated with copious amounts of alcohol.

Farage was a natural. Not just because he could — and still can — consume a lot of beer, wine and nicotine while remaining alert and on top of his game. He was, say contemporaries, good at trading. The pin-striped youngster had an instinctive feel for buying and selling, pricing commodities, spotting the opportunity for margins and making money by oiling the wheels of global trade.

These skills — practised by generations of City traders — were what had helped make outward-looking London the dominant financial centre, before the First World War destroyed Britain’s finances and hastened the transfer of power from the fading imperial capital to Wall Street.

By the early 1980s, when Farage arrived, London was in a curious position. On one hand, the City was a closed society, dominated by a web of old-boy networks that were conservative and slow to react to technological change of the kind that was by then making financiers in America so much more dynamic and acquisitive. But the sleepy old City had also shown that it was still capable of open thinking and of exploiting opportunities. It had come to dominate the Eurobond market, which from 1963 governments and companies used to issue bonds denominated in a currency other than their own.

Margaret Thatcher’s ministers and advisers diagnosed the problem as follows: unless the City was modernised, with more innovation encouraged, it would be dragged down by hidebound traditionalists operating cartels and eclipsed all over again by foreign rivals. Long before the term entered popular usage, the Thatcherites decided that what the City needed to become more competitive was a strong dose of globalisation.

Through the reforms of 1986 (which ended the old distinctions between stockjobbers and stockbrokers), through the rise of electronic trading and by changes made to banking which enabled big foreign firms to move in, the City was transformed. By the time the euro was launched, resurgent London was so dominant that it could control much of the trade in the single currency, even though the UK had declined to join. Openness to free trade, foreign investment, disruptive technology, the importation of talent and rapid wealth creation had remade the City. Globalisation had worked.

From the mid-1980s onwards, the reinvention of the Square Mile was good news for traders, including Farage and his friends, who found they could make spectacular amounts of money by buying and selling. But Farage had another preoccupation. While many of his contemporaries stayed and became rich in the long boom that preceded the worst crash in seven decades, he decided to go into politics.

Farage did not opt for a conventional route. When his heroine Mrs Thatcher — liberator of the City and the Falklands — was removed in 1990 he was shocked. Then her successor John Major signed the Maastricht Treaty which extended the reach of the European Union. Farage felt so betrayed by the Conservatives that he left them to become one of the founders of the United Kingdom Independence Party in 1993. He is now its leader for the second time.

Breakaways tend not to work in Britain’s party system. But Farage has had considerable success. Under his leadership, UKIP has prospered, winning the recent European elections and leading a populist insurgency in the Tory shires and beyond. The Eurosceptic, withdrawalist, anti-immigration party is now poised to do the Conservatives serious harm in next year’s general election. Even if it wins not a single constituency, it need only score as little as 6 per cent, or roughly two million votes, to cost the Tories power.

It is highly appropriate that the post-Thatcher Tory party should face such a challenge from an arch-Thatcherite. For no figure better illustrates the paradox at the heart of Thatcherism and the contradictions inherent in globalisation than the former trader, and enthusiastic advocate of the City, Nigel Farage.

Thatcher was not just a pioneer of modern globalisation in the City. She pushed down trade barriers, encouraged open competition by ushering in the EU’s single market and evangelised in her speeches for free trade outside Europe. 

Yet she was ahead of her time in another respect. Towards the end of her premiership she became concerned about the rise of supra-national bodies such as the EU-empowered ostensibly to facilitate cross-border trade-seeking to replace the nation state. One of the greatest advocates of economic disruption and spreading free trade, Thatcher became uncomfortable with some of the consequences of globalisation. Having signed up to the Single European Act, as a liberal free trader, she came to realise (too late) that it entailed a serious loss of national sovereignty. 

Farage is a Thatcherite. He is for one half of globalisation, free trade, while being very troubled by the consequences in terms of migration and loss of national sovereignty.

I raised this recently at a private lunch, where the host was someone who had been a significant figure in the Thatcher revolution. The conversation among the various business leaders turned to globalisation and the question of the UK’s membership of the EU. The “what would Thatcher do?” question is almost as hackneyed as “what would Reagan do?”. Circumstances are different and both of those leaders — still justifiably much admired — made many more compromises in power than their most slavish followers tend to admit now. Still, I wondered aloud, what would Thatcher have made of the impact of globalisation?

She would not have pussy-footed around apologising for it, said one of those present. Thatcher would have pointed out that it had done more to lift hundreds of millions of the world’s citizens out of poverty than any amount of government interference in the workings of the free market. That it has done this in China, the Brics and beyond is undeniably true.

Surely, I suggested, she would have been much more conflicted than that. Thatcher was for free markets, economic openness and technological change, yet she was also deeply interested in the integrity of the nation state and its borders. Two of her deepest instincts were in direct conflict, one eroding the other.

Of course, the upsides of the shrinking of the world, thanks to improved transport, better communications, the integration of financial markets and the liberalisation of trade, have been tremendous. Take a country such as India, whose people existed on a diet of socialism and central planning in the decades after independence. The economy grew at an average of 3 per cent in the 1960s and 3 per cent in the 1970s. After the liberalisation of the early 1990s, growth rates climbed. In the 2000s, even including the years of the global downturn that followed the financial crisis, India’s average growth rate was 7.8 per cent.

The result is an expansion of the Indian middle class, a phenomenon replicated and exceeded in other fast-growing economies. EY, the professional services firm, estimates that the middle class in India — now in the region of 50 million — will grow to 200 million by 2020 and 475 million by 2030. It is estimated that around one billion Chinese will be middle class by 2030. Globalisation is working.

There have also been benefits for the older-established economies, not least in the downward pressure on prices paid by consumers in the West, because of the flood of cheaper goods from these newly-liberated economies.

And liberalisation and globalisation have had a remarkable impact in some previously stricken European countries too. A quarter of a century ago, Poland was only beginning its recovery from Communism. In recent years, it has had one of the best growth records in Europe. As the financial writer Matthew Lynn put it recently: “Poland got some big things right. It privatised its industries very quickly, restoring free and competitive markets. It limited taxes. It limited debt. Government wages were capped. And it has steadily climbed the tables for free, competitive economies.”

Poland also joined the EU and became an open trading economy, which meant that it could export labour. The Poles were free to come to the UK and many did so. By 2011, at the time of the last census, 1.2 million Poles had been issued with UK national insurance numbers. These new arrivals were joined later by youngsters from Spain and Italy seeking refuge from the eurozone crisis, and from migrants from outside the EU. In the age of globalisation, migration to the UK has boomed. 

Though British voters enjoy some of the practical benefits it brings, immigration makes many of them deeply uneasy. Farage has capitalised on such fears skilfully. He has refined the position developed by Mrs Thatcher towards the end of her premiership, added populist rhetoric and turned it into a powerful message that appeals to several million Britons. We are a nation of traders. Let’s have free trade in goods, services and finance with the outside world, he says, free of the interference of the EU. But let’s not have the transcontinental migration and influx of people that accompanies economic openness.

For this, the elite — which tends to approve of all aspects of globalisation, almost without reservation — dismisses Farage as a Little Englander trying to pull up the drawbridge, even though the rise of parties representing voters worried about these themes is not an exclusively English or British phenomenon.

In France, the National Front won the recent European elections, taking a quarter of the vote. As the results came in, its leader Marine Le Pen told supporters at National Front headquarters in Paris that voters were in revolt against the European project. She said: “They no longer want to be led by those outside our borders, by EU commissioners and technocrats who are unelected. They want to be protected from globalisation and take back the reins of their destiny.” Farage will have nothing to do with Le Pen in the European parliament, of course, because of the toxic reputation of her neo-fascist father, who led the National Front before her. 

However, in other European countries parties from outside the mainstream also scored highly in the recent elections. In Greece, the far-left Syriza defeated the established parties. In Denmark, the Danish People’s Party won 27 per cent of the vote demanding border controls and curbs on the benefits of EU migrants. The Austrian far-Right has prospered too.

The response of the EU establishment to this unseemly rebellion against the orthodoxy was to force through — via the centrist bloc of MEPs — the elevation of Jean-Claude Juncker as President of the European Commission. Juncker is a fanatical supporter of deeper union. It was as though those who are most in favour of creating a federal Europe, or a European state, had concluded that the best response to a rebellion by millions of voters in the nations of Europe was to put the foot on the accelerator and speed towards even more integration.

Their expectation appears to be that the rebellion and discontent will fade. It is tempting — comforting even — to think of the rise of such parties in Europe as a populist flash in the pan produced by public anger over the impact of the financial crisis and the Eurozone’s troubles. But although declining living standards and economic insecurity triggered by the crisis have played their part, the roots seem deeper than that. While globalisation brought cheaper goods, it also made crossing the planet in search of a better life much easier for millions of people.

That worry over uncontrolled migration is the strongest feature in the emergence of populist parties. The permeability of Europe’s southern borders — coupled with the endless expansion of air travel — raise perfectly legitimate concerns in the minds of many voters about pressure on public services, potential terrorism and the erosion of cultural norms. The overwhelming sense is of insecurity and fear of the future on behalf of the next generation. 

But any hope that this will somehow dissipate magically, with the populists fading away, looks to set to be dashed. The process of alienation is likely to intensify as existing technological trends accelerate. There will be more for voters to disputatious about, not less. If anything, Farage’s UKIP and other such parties are outliers for what happens next, when huge swathes of the lower middle classes and aspirational members of the working class discover what awaits. On top of migration, there is about to be more economic disruption, supercharged by the coming wave of automation and machine learning.

Already the early stages of this digital revolution of recent decades have brought enormous improvements that are often take for granted. The ease with which we can communicate instantaneously with friends and loved ones wherever they are on the planet is a wonder of globalisation. Advances in many types of production and in medical research have also been powered by epic amounts of computing power unavailable only a few decades ago.

But as a groundbreaking, brilliant book by a pair of technologists demonstrates, we should go into the next stage of this revolution with our eyes open.

The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies (W.W. Norton, £17.99) is by Erik Brynjolfsson and Andrew McAfee. The authors are not digital doom-mongers. They envisage a host of benefits for mankind. All manner of tasks currently undertaken by human beings will become automated as computer power and robotics combine.

Still, certain types of employment are going to be obliterated. Work at a desk in a law firm or in accountancy? Trade commodities like a young Farage once did? You could be in trouble. Those undertaking tasks such as cooking or tiling bathrooms might face less immediate competition from machines, because robots still struggle with spatial awareness.

Even there, however, the pace of change is so aggressive that the authors admit they cannot be sure. A decade ago, the possibility of driverless cars was a remote joke as developers struggled to get automated vehicles to perform basic tasks safely. Now, such cars are on Californian roads and coming to a motorway near you soon.

Ultimately, their realistic assessment — free of Panglossian piffle about the supposed inevitability of human progress — is refreshing and deserves more consideration by those of us in the pro-market camp. Too often the conventional free-market response to concerns about economic disruption involves an echo of the Marxist claim about revolution that you can’t make an omelette without breaking eggs. Millions may be put out of work; there will be disruption to the family and other established communities of interest — but relax.

For many free-market classical liberals there is a simple textbook answer to the latest technological question. Economists have been having a variation of this argument since the Luddites attempted to arrest or control technological change in the early part of the 19th century. Innovation, such as in the industrial revolution, creates disruption which displaces labour, which liberates people to work in new types of businesses that no bureaucrat could have predicted might exist, which grows the economy. Round and round it goes, with prosperity broadly rising, apart from when the course is altered by financial crises, recessions and wars.

What might be different about the coming Second Machine Age is the scale of the potential transformation and the speed at which it may be happening. Brynjolfsson and McAfee talk of us approaching an “inflection point” where technology suddenly becomes capable of tasks that seem impossible now. Then the graph showing the rate of change — involving the destruction of the ways in which many people make a living — shoots upwards and off the page.

At the more radical end of predications made by the technologists are the claims of a coming “singularity”, as described by tech guru Ray Kurzweil. This is the idea that there will be a moment when the machines can think independently, at which point we must hope we have taught them to share our values. While other technologists may reject the Kurzweil analysis as extreme, ever-greater global reliance on computing power is certainly on the way.

At the very least this should make us curious about privacy, democratic control and the quasi-monopoly power exercised by the new giants of the internet age. As Brynjolfsson and McAfee note, the tech industry also seems to be extremely good at creating a relatively small number of superstars, a digital 1 per cent that floats much further above the rest of the population than even financiers do. History suggests that such elites, understandably, gravitate to exerting influence in politics. Sometimes this is in order to do good and sometimes it is because they want to protect their interests.

What can we do about it? Are there any solutions or are we condemned to sit mute, satiated by the pleasures of the internet, while a technological storm remakes our economy?

Any attempt by government centrally to direct the next phase of the technological revolution is obviously doomed to fail. Any state-run commission would find that by the time it published its report the technology would have developed in some unforeseen way that made its recommendations out of date.

The authors of The Second Machine Age suggest other ways in which we might get ready. Education should emphasise ideas and creativity. Computers are “machines for generating answers, not posing interesting new questions. That ability still seems to be uniquely human, and still highly valuable.” Western students are going to have to study harder to acquire “the tools to help you stand out” from the machines, they say. And encouraging the growth of entrepreneurship is vital, so that more workers become prepared to establish their own businesses, or have several jobs, rather than being steamrollered by automation in large existing companies that may offer hardly any jobs, never mind one for life.

In the UK there are some signs of a shift, with self-employment on the rise, although the tax system is still one built in the 1980s for an economy with a different structure. This is a reminder that countries that hope to prosper will need bold tax reform, as capital and high-end labour become ever more mobile and the rest of the population is subjected to increased volatility and insecurity. The recent suggestion — quickly denied — that the Tories are flirting again with the idea of a flat tax was encouraging, although creating a system that offered lower and simpler taxation would be a start.

In such an era, the state and our expectations of it will also have to change. John Micklethwait and Adrian Wooldridge of the Economist addressed this in their recent book, The Fourth Revolution: The Global Race to Reinvent the State (Allen Lane, £20), in which they called for a redesign of the government to make it more agile and cost-effective.

It is certainly possible to envisage a conservative remodelling of the state in which technology and smart management means that fewer workers are involved, reducing costs and enabling those previously on the government payroll to generate fresh wealth. However, I suggest the state and the institutions of civic society will in other respects need to be strengthened to deal with the consequences of the Second Machine Age. Democratic assemblies will need to become vigilant protectors of human rights, not in the sense the term is used now, but as defenders of the rights of human society against potential incursions by machines and to guard against the excesses of the elite that owns the machines and software underpinning the technology.

Questions of ownership of data and digital rights, already identified by the Liberal Democrat party, will also soon become mainstream concerns as consumers wake up to the reality that some services are not necessarily “free”. The consumer and his or her data are the product that is sold. The state will also need to be prepared to confront digital oligopoly and ensure maximum competition in the interests of consumer power.

I reiterate, the possibilities of these new forms of technology are immense. But it is less than a decade since the West was agog at the new world the financiers and central bankers had created with seemingly endless growth. Unfortunately, there was a downside for which we were unprepared. The Second Machine Age is coming and it will bring more political turmoil.

Anyone hoping that after the slow recovery from the effects of the most recent financial crisis the global economy would settle down to a pre-crisis “normal” is going to be disappointed. Thanks to technology, the world is about to speed up again, rapidly. Conservatives who cannot acknowledge concerns about the downsides of technology and globalisation, who cannot empathise and design policy that protects the interests of those outside the small, globalised elite, are setting themselves up to be beaten by the next generation of populists from the Right or the Left, who will have an anti-globalisation message. The elite, they will say, opened the door of your country to uncontrolled immigration, signed away your democratic rights to supranational bodies and now their friends have sent a machine to make you poor or unemployed. Get ready.