Paul Krugman's Great Illusion

In the New York Times (August 15, 2008) Paul Krugman warns us against the belief that economic rationality always prevents war. The war in the Caucasus could be a sign that the second great age of globalization may share the fate of the first. Remember – he writes – that shortly before World War I, at the peak of the first globalization, a British author, Norman Angell, published a famous book precisely titled this way, “The Great Illusion”, in which he argued that war had become obsolete, that in the modern industrial era even military victors lose far more than they gain. And, true, wars kept happening anyway.

So, can things fall apart again? Yes, they can, Krugman argues. The war in Georgia marks the return to militarism and imperialism, and the end of the “Pax Americana”. And if Russia is willing and able to use force to assert control over its self-declared sphere of influence, won’t China do the same?

These are important questions to ponder. But Krugman should consider a major difference between the current era of globalization and the first one, which spanned the decades from the 1860s to the first World War. The first globalization was a period of growing size and geographic expansion for the major states, the era of imperialisms (British, French, German, Russian, Japanese, and even US). It led necessarily to diplomatic frictions where two imperial powers collided, and economies of scale in state management and military power were obviously conducive to continued expansions, and finally to war.

The current globalization context is the complete opposite of the first one: ours is a period of shrinking average firm size, and state size (See my Second Twentieth Century, Hoover Press, 2006). The number of states in the world has consistently been increasing since at least 1945, and all empires have disintegrated, with the sole exception of the American “quasi-empire” after its triumph over the USSR. But it is more a global sphere of influence than a real empire, in the sense that subordinate states are not military occupied and do not pay tribute to the US. This is also a consequence (as is the reduced average state size) of the much reduced economies of scale in state management, compared to the situation at the beginning of the XXth century. In such a world of smaller nations, national economies cannot be self-sufficient anymore, but on the contrary have to be outward-looking. They do not hope to rely on an internal market, or an empire as a substitute for a large national market. They must rely on the open global market.
Given that the optimal state size is shrinking everywhere, this is the contrary of the age of imperialism. It is a new era of state fragmentation and regional secessions (see the experience of central Europe and the Balkans). And even if Russia is flexing its newly rebuilt military muscle, the fact is that the war in Georgia is about a tentative regional secession that a much smaller Russia (compared to what USSR was) tries to use to counter encirclement by the new allies of the USA. War is always a possibility in a process of state fragmentation, as the Yougoslav example showed, and the Russian aggressive opportunism is a real danger.

But this should not be confused with a renewed trend towards state integration, imperialism, and clash of expanding great powers. The trend towards smaller state size and secessions is not going to bring globalization to its end but, on the contrary, to more commercial integration. Smaller nations have to rely on international trade. And smaller nations can bring about civil wars, but are not led to irresistible and mutually incompatible expansions which are the real causes of international wars.