The works of political economist Susan Strange are experiencing a revival of interest. But what are her big ideas?
Within the last few years, Susan Strange has made history by becoming the first female academic to have a professorship named after her at the London School of Economics. A new book has hailed her prescient writings as a “beacon of light” and her classic works – Casino Capitalism, States and Markets and Mad Money – have all been republished. Elsewhere, I have likened her ideas to those of Hyman Minsky, a once obscure economist who shot to fame after the financial crisis.
But even in the field she helped to establish, international political economy, some still dismiss her as a journalistic writer with few theoretical insights. One academic told me that her arguments are now “obsolete” and students report being discouraged from studying her. Benjamin Cohen, who has written a history of international political economy says that much of the field has moved away from her vision and that her legacy lies not in her ideas but in the ways she stimulated others. Is that fair?
Politics and power matter
Strange’s main idea was that economics alone cannot explain what happens in the global economy and financial markets. As markets developed alongside state institutions, the two are inevitably locked together in a dance. To Strange, trying to explain economics without consideration of political power is like studying the movement of the tides without paying attention to the moon. Markets need the security, law and order, and court system that states provide. The idea of self-regulating markets, she argued, is politically naïve.
Most macroeconomists describe a political event which causes a rise in oil price or a war as an ‘exogenous’ or external shock. Although trained in economics, Strange disagreed. In her global vision, nothing is exogenous. To understand what is happening you have to study power in all its forms.
Strange’s theory of ‘structural power’ argued that world affairs can be best explained by paying attention to four power structures which she named: security, production, financial and knowledge structures. Each one influences and interacts with the others. And, she reminded her students to always ask like a detective, “who benefits?”
Until the 2008 global financial crisis, most experts believed that complex financial products such as derivatives had reduced risk in the markets. Strange long argued that the boom in derivatives had, in fact, made the system as a whole more volatile and prone to crisis. In honour of her, Professor Nigel Dodd of the LSE calls the toxic assets which blew up in 2008 ‘strange money’. They were inferior money substitutes: like banks passing off brass as gold.
For Strange, credit was the lifeblood of the economy. Too little access to credit in communist countries had paralysed economies. Modern capitalist economies had delegated more power to private banks to create money, which led to too much credit in the system. This ‘overbanking’, as she called it, increased bank’s profits but also raised the risks of financial panic and collapse.
Global markets, Strange said, had become a ‘casino’ where everyone’s jobs, savings and income are in play on the traders’ roulette wheels.
Don’t take trust for granted
Many economists take the role of money in society for granted. To Strange, confidence in the monetary system with all the benefits it brings to society was crucial: it takes time to develop and can be lost quickly.
If trust in money is damaged – for example by pumping too much dodgy credit into the system – it can hollow out all other forms of trust in authority and institutions which are essential to bind society together. Distrust is contagious.
Volatile markets, she said, can lead to a surge in far-right nationalism and volatile politics as it did in the 1930s, a pattern which repeated in the wake of the 2008 global financial crisis.
Economists of all stripes – from followers of Keynes through to monetarists – were slow to recognise the significance of globalisation. Many often modelled economies as if they only operated within a single territory. Strange said this was a mistake: you had to think globally.
Strange thought that global finance had become more powerful than national governments and their economies. She grew increasingly concerned about a ‘contagious’ financial crisis going global.
International organisations – such as the United Nations or the Bank for International Settlements (BIS) – lacked real power, according to Strange, and the central challenge of the twenty-first century would be to find a new way to balance the power of global financial markets with legitimate, political authority.
Beware of simple solutions
Strange produced no elegant, economic models expressed in mathematics. For this, her critics say she is a poor theorist and lacked scientific rigour.
Strange thought the attempt of economists to mimic the natural sciences, championed by Milton Friedman among many others, was dangerous and misplaced. She argued that the resulting elaborate economic models were overly simplified and ignored the complexity of humans and society. Attempts to predict the future of the economy accurately were a wild goose chase and apparently scientific models often hid social values. Her approach was to study the real world and how it came to be (history), to be wary of ideologies and to keep an open mind. It was better to recognise what you did not know, she said, than trust in a useless map.
Strange’s own response to critics who used ‘journalistic’ in a derogatory sense speaks volumes about her. She called it “offensively arrogant”. At least academics trained as journalists, she wrote, rarely serve up “the sort of stodgy, long-winded, pretentious, jargon-ridden writing that too many academics inflict on their unfortunate students.” Small wonder that this rebel not just from mainstream economics but much of academia has not been cherished by all.
Professor Ronen Palan of City University of London, who has argued that Strange is a “great theorist”, told me that her relative neglect is due, in part, to sexism. One reason why she has not been considered a great thinker, he told me, is “frankly, because she is a woman”.
Today’s economists are coming around to Strange’s view of the world. Earlier this month, three leading economists, including Harvard’s Dani Rodrik, described a creative revolution in economics as it breaks free from theoretical blinders which have contributed to astonishing inequality and political tumult. Much of the new economic thinking is in line with Strange’s big ideas on the importance of power, a sound money supply and social trust in a globalised world that defies orthodox economic theory. She is a great thinker for today.
For Strange’s fans she is a new version of an older tradition of economics: the broader and more inclusive classical political economy of Adam Smith and John Stuart Mill. Like them, she asked big questions of importance to the world and worked with words rather than equations. Like them, her work deserves to be read time and again for its richness and insight.