This article figures as the first in a series advertised on the Asia Times Online web site as "The Complete Henry C.K. Liu."  --  Hong Kong-born and Harvard-educated, with interests in international relations and economics that developed late (after others, including architecture and urban design), Henry C.K. Liu has earned a following in on-line discussions of radical economics by developing a doctrine of "dollar hegemony."  --  Liu describes "dollar hegemony" as "a structural condition in world finance and trade in which the U.S. produces dollars and the rest of the world produce things dollars can buy."  --  Liu's goal here (as in many other pieces available on the Asia Times Online web site) is to describe the role of finance in the international relations of our time.  --  According to Liu, the modern world cannot be understood without the concept of dollar hegemony, for it is this that "makes possible U.S. finance hegemony, which makes possible U.S. exception[al]ism and unilateralism."  --  In the 5,500 words of "China vs. the Almighty Dollar," dated Jul. 23, 2002, Liu has written a readable chapter-length account of the history of capitalist finance.  --  As the title of the piece indicates, Liu's purpose is to propose how China can free itself from "dollar hegemony," but his recommendations for China, which can be found halfway through the article, take up only about one-fifth of the text.  --  The bulk of the piece proposes to account for how the dollar came to play the role it does in the contemporary world, marked in the early 21st century by -- in Henry C.K. Liu's view -- "the virtually undisputed rule of a market-dominated, ultra-competitive (yet not fairly competitive), globalized society with its cortege of manifold iniquities and legalized violence" facilitated by a "market fundamentalism" whose ideological dominance constantly inculcates the "empty promise of neoliberalism," a doctrine that "falsely poses slavery or death by starvation as natural alternatives of human civilization" while endlessly insisting that There Is No Alternative (or "TINA," one of Margaret Thatcher's nicknames)....

By Henry C.K. Liu

Asia Times Online
July 23, 2002

The Italian Marxist thinker Antonio Gramsci, while under Fascist imprisonment, developed the concept of cultural hegemony: control people's minds, and their hearts and hands will follow. Gramsci explained how one dominant class can establish its control over others through ideological dominance. Whereas orthodox Marxism explains social structure as shaped by economic forces, Gramsci adds the crucial cultural dimension. He showed how, once ideological authority (or "cultural hegemony") is established, the use of overt violence to impose control can become superfluous.

Today, the world lives under the virtually undisputed rule of a market-dominated, ultra-competitive (yet not fairly competitive), globalized society with its cortege of manifold iniquities and legalized violence. Many public and private institutions in all nations that genuinely believe they are working for a more equitable world have unwittingly contributed to the violent triumph of neoliberalism. Field evidence, however, shows that perpetual prosperity for anyone, let alone all, under market fundamentalism is merely an empty promise of neoliberalism. And the time may be ripe for China, as Asia's largest economy, to break free of a global market economy that nears collapse.

The chairman of the U.S. Federal Reserve Board, Alan Greenspan, now proudly uses the term "hegemony," in congressional testimony to describe officially U.S. financial preeminence and structural advantage. Unlike ideology, politics deal not only with moral validity, but also with power. The ideology of neoliberalism appears empirically operative because it has the hegemonic power to construct a "real" world that appears internally consistent and theoretically rational, with the aid of "scientific" neoclassical economics theories. No matter how many socioeconomic disasters the neoliberal globalized system of market fundamentalism has visibly caused, no matter what financial crises neoliberal free markets have engendered, no matter how many losers and outcasts it has created, market fundamentalism is still promoted as indispensable, like the word of God, as the only possible economic and social order available for human salvation. Margaret Thatcher's TINA (There Is No Alternative) explains it all. Economic slavery, though unfortunate, is preferable to starvation, according to neoliberal doctrine, which falsely poses slavery or death by starvation as natural alternatives of human civilization. The World Bank has estimated that neoliberal globalization has created 200 million newly poor people around the world in the past decade. Yet claims of globalization's contribution to global prosperity continue unabated.

Former U.S. president Bill Clinton's claim at the 2000 Asia Pacific Economic Cooperation (APEC) meeting that open economies have shown the highest growth rate is part of this cultural hegemonic push. Clinton had it backwards: it is the countries that have the highest growth rates resulting from complex conditions of structural advantage that are pushing for further selective openness in the poorer economies. The most fundamental flaw in the neoliberal logic is that the selective push for full and unregulated mobility for capital across national borders is not accompanied with the same mobility for labor.

It is self-evident that capital cannot exist without labor. Without labor, capital is merely an idle asset, unable to contribute to productivity. Until labor can move freely in the globalized system, there is no real openness. The current system is not true globalization. It is merely a global expansion of U.S. financial hegemony through dollar hegemony: the domination of the global economy by the U.S. national currency.

Dollar hegemony is a structural condition in world finance and trade in which the U.S. produces dollars and the rest of the world produce things dollars can buy. In 1971, the late U.S. president Richard Nixon abandoned the Bretton Woods regime of a gold-backed dollar and fixed exchange rates to stop the gold drain from the U.S. Treasury caused by chronic lapses of U.S. fiscal discipline. At that point, the dollar, as a fiat currency, theoretically abdicated its reserve-currency status for world trade. Yet for more than three decades since, the dollar has remained the reserve currency for world trade despite continued chronic U.S. government and trade deficits and the transformation of the United States into the world's most indebted nation. Notwithstanding its role as the leading proponent of market fundamentalism, the United States maintains a strong-dollar policy as a matter of national interest, in defiance of market forces.

A reserve currency for world trade without the necessary disciplinary backup is in reality a tax by the issuing sovereign on all other sovereigns participating in world trade via that currency.

The State Theory of Money (Chartalism) holds that the acceptance of a currency is based fundamentally on a government's power to tax. It is the government's willingness to accept the currency it issues for payment of taxes that gives the issuance currency within a nation. The Chartalist theory of money, as summarized by economist Randall Wray, claims that all governments, by virtual of their power to levy taxes payable with government-designated legal tender, do not need external financing and should be able to be the employer of last resort to maintain full employment. The logic of Chartalism reasons that an excessively low tax rate will result in a low demand for the currency and that a chronic budget surplus is economically counterproductive because it drains credit from the economy. The colonial administration in British Africa learned that land taxes were instrumental in inducing the carefree natives into using its currency and engaging in financial productivity.

Thus, according to Chartalist theory, an economy can finance its domestic developmental needs to achieve full employment and maximum growth with prosperity without any need for foreign loans or investment, and without the penalty of hyperinflation. But Chartalist theory is operative only in closed domestic monetary regimes. Countries participating in free trade in a globalized system, especially in unregulated global financial and currency markets, cannot operate on Chartalist principles because of the foreign-exchange dilemma. Any government printing its own currency to finance domestic needs beyond the size of its foreign-exchange reserves will soon find its currency under attack in the foreign-exchange markets, regardless of whether the currency is pegged to a fixed exchanged rate or is free-floating. Thus all economies must accumulate dollars before they can attract foreign capital. Even then foreign capital will only invest in the export sector where dollar revenue can be earned. But the dollars that Asian economies accumulate from trade surpluses can only be invested in dollar assets in the United States, depriving local economies of needed capital. The only protection from such attacks on currency is to suspend convertibility, which then will keep foreign investment away.

Precisely to prevent such currency attacks, tight controls on the international flow of capital were set up by the Bretton Woods system of fixed exchange rates pegged to a gold-backed dollar after World War II. Drawing lessons from the prewar 1930s Depression, economic thinking prevalent immediately after the war had deemed international capital flow undesirable and unnecessary. Trade was to be mediated through fixed exchange rates pegged to a gold-backed dollar. The fixed exchange rates were to be adjusted only gradually and periodically to reflect the relative strength of the participating economies. Under principles of Chartalism, foreign capital serves no useful domestic purpose outside of an imperialistic agenda. Thus dollar hegemony essentially taxes away the ability of the trading partners of the United States to finance their own domestic development in their own currencies, and forces them to seek foreign loans and investment denominated in dollars, which the U.S., and only the U.S., can print at will.

The Mundell-Fleming thesis, for which economist Robert Mundell won the 1999 Nobel Prize, states that in international finance, a government has the choice between (1) stable exchange rates, (2) capital mobility and (3) policy autonomy (full employment/low interest rates, counter-cyclical fiscal spending, etc). With unregulated global markets, a government can have only two of those three options.

Through dollar hegemony, the United States is the only country that has managed to defy the Mundell-Fleming thesis. For more than a decade, the U.S. has kept the dollar significantly above its real economic value, attracted capital account surpluses and exercised unilateral policy autonomy within a globalized system dictated by dollar hegemony. The reasons for this are complex, but the single most important reason is that all major commodities, most notably oil, are denominated in dollars, mostly as an extension of superpower geopolitics. This fact is the anchor for dollar hegemony. Thus dollar hegemony makes possible U.S. finance hegemony, which makes possible U.S. exceptionism and unilateralism.

The Chinese economy is at a point where it also can defy the Mundell-Fleming thesis and free itself from dollar hegemony.

China has the power to make the yuan an alternative reserve currency in world trade by simply denominating all Chinese export in yuan. This sovereign action can be taken unilaterally at any time of China's choosing. All the State Council (the Chinese government's cabinet) has to do is to announce that as of, say, October 1, 2002, all Chinese exports must be paid for in yuan, making it illegal for Chinese exporters to accept payment in any other currencies. This will set off a frantic scramble by importers of Chinese goods around the world to buy yuan at the State Administration for Foreign Exchange (SAFE), making the yuan a preferred currency with ready market demand. Companies with yuan revenue no longer need to exchange yuan into dollars, as the yuan, backed by the value of Chinese exports, becomes universally accepted in trade. Members of the Organization of Petroleum Exporting Countries (OPEC), which import sizable amount of Chinese goods, would accept yuan for payment for their oil.

In 2000, the United States exported US$781.1 billion (12.3 percent of world exports -- 11 percent year-to-year growth) and imported $1.2576 trillion (18.9 percent of world imports -- 19 percent year-to-year growth). Germany exported $551.5 billion (8.7 percent of world exports -- 1 percent year-to-year growth) and imported $502.8 billion (7.5 percent of world imports -- 6 percent year-to-year growth). Japan exported $479.2 billion (7.5 percent of world exports -- 14 percent year-to-year growth) and imported $379.5 billion (5.7 percent of world imports -- 22 percent year-to-year growth). France exported $298.1 billion (4.7 percent of world exports -- 1 percent year-to-year decline) and imported $305.4 billion (4.6 percent of world imports -- 4 percent year-to-year growth). The United Kingdom exported $337 billion (5.1 percent of world export - 5 percent year-to-year growth) and imported $284.1 billion (4.5 percent of world imports -- 6 percent year-to-year growth).

China exported $249.3 (3.9 percent of world exports -- 28 percent year-to-year growth) and imported $225.1 billion (3.4 percent of world imports -- 36 percent year-to-year growth). Hong Kong exported $214.2 billion (3.2 percent of world exports -- 19 percent year-to-year growth) and imported $202.4 billion (3.2 percent of world imports - 16 percent year-to-year growth).

China (including Hong Kong) exported more than $463 billion (7.3 percent of world exports) in 2000 and imported about $428 billion, yielding a trade surplus of around $35 billion. If all Chinese exports are paid in yuan, China will have no need to hold foreign reserves, which currently stand at more than $200 billion. And if the Hong Kong dollar is pegged to the yuan instead of the dollar, Hong Kong's $100 billion foreign-exchange reserves can also be freed for domestic restructuring and development.

China's spectacular export growth has not reversed the shrinking of world trade volume since 1997. Its growth has come at the expense of the now wounded "tigers" of Southeast Asia. China is on the way to becoming a world economic giant but it has yet to assert its rightful financial power.

There is no stopping China from being a powerhouse in manufacturing. With the Asian economies trapped in protracted financial crisis from excessive foreign-currency debts and falling export revenue resulting from predatory currency devaluation, the International Monetary Fund, orchestrated by the U.S., has come to their "rescue" with a new agenda beyond the usual IMF austerity conditionalities to protect Group of Seven (G7) creditors. This new agenda aims to open Asian markets for U.S. transnational corporations to acquire distressed Asian companies so that their newly acquired Asian subsidiaries can produce inside Asian national borders. The United States, through the IMF, aims to break down the traditionally closed financial systems all over Asia that mobilize high national savings to serve giant national industrial conglomerates, for massive investment in targeted export sectors. The IMF, controlled by the U.S., aims at dismantling traditional Asian financial systems and forcing Asians to replace them with a structurally alien global system, characterized by open markets in products and, crucially, in finance and financial services. The real target is of course China. For the U.S. knows: as China goes, so goes the rest of Asia.

Trade flows under neoliberal globalization have put Asian countries in a position of unsustainable dependency on foreign loans and capital to finance export sectors that are at the mercy of saturated foreign markets while neglecting domestic development to foster productive forces and to support budding domestic consumer markets. In Asia, outside the small circled of well-heeled compradores, most people cannot afford the products that they produce in abundance for export or the high-cost imports. An average worker in Asia would have to work days making hundreds of pairs of shoes to earn enough to buy one McDonald's hamburger meal for his family while Asian compradores entertain their Western backers in luxurious five-star hotels with prime steaks imported from Omaha. Markets outside of Asia cannot grow quickly enough to satisfy the developmental needs of the populous Asian economies. Thus intra-region trade to promote domestic development within Asia needs to be the main focus of growth if Asia is ever to rise above the level of semi-colonial subsistence.

The Chinese economy will move quickly up the trade-value chain, in advanced electronics, telecommunications, and aerospace, which are inherently "dual use" technologies with military implications. Strategic phobia will push the United States to exert all its influence to keep the global market for "dual use" technologies closed to China. Thus "free trade" for the U.S. is not the same as freedom to trade. Still, China will inevitably be a major global player in the knowledge industries because of its abundant supply of raw human potential. Even in the U.S., a high percentage of its scientists are of Chinese ethnicity. With an updated educational system, China will be the top producer of brain power within another decade. As China moves up the technology ladder, coupled with rising consumer demand in tandem with a growth economy, global trade flow will be affected, modifying the "race to the bottom" predatory competitive game of a decade of globalization among Asian exporters.

Asian economies will find in China an alternative trading partner to the United States, and possibly with more symbiotic trading terms, providing more room to structure trade to enhance domestic development along the path of converging regional interest and solidarity. The rise in living standards in all of Asia will change the path of history, restoring Asia as a center of advanced civilization, putting an end to two centuries of Western economic and cultural imperialism.

The foreign-trade strategies of all trading nations in the decade of neoliberal globalization have contributed to the destabilizing of the global trading system. It is not possible or rational for all countries to export themselves out of domestic recessions or poverty. The contradictions between national strategic industrial policies and neoliberal open-market systems will generate friction between the United States and all its trading partners, as well as among regional trade blocs and inter-region competitors. The U.S. engages in global trade to enhance its superpower status, not to undermine it. Thus the U.S. does not seek equal partners. With economic sanctions as a tool of foreign policy, the U.S. government is preventing, or trying to prevent, an increasing number of U.S. companies, and foreign companies trading with the U.S., from doing business in an increasing number of countries. Trade flows not where it is needed most, but to where it best serves the U.S. national interest.

Neoliberal globalization has promoted the illusion that trade is a win-win transaction for all, based on the Ricardian model of comparative advantage. Yet economists recognize that without global full employment, comparative advantage is merely Say's Law internationalized (Say's Law states that supply creates its own demand, but only under full employment, a condition supply-siders conveniently ignore). After a decade, this illusion has been shattered by concrete data: 30 percent of the world's population live on less than $1 a day, and global wages, already low to begin with, have declined since the Asian financial crisis of 1997, and by 45 percent in Indonesia.

Yet export to the United States under dollar hegemony is merely an arrangement in which the exporting nations, in order to earn dollars to buy needed commodities denominated in dollars and to service dollar loans, are forced to finance the consumption of U.S. consumers by the need to invest their trade surpluses in U.S. assets (as foreign-exchange reserves), giving the U.S. a capital account surplus to finance its current account deficit.

Furthermore, the trade surpluses are achieved not by an advantage in the terms of trade, but by sheer self-denial of basic domestic needs and critical imports. Not only are the exporting nations debasing the value of their labor, degrading their environment, and depleting their natural resources for the privilege of running on the poverty treadmill, they are enriching the U.S. economy and strengthening dollar hegemony in the process. Thus the exporting nations allow themselves to be robbed of needed capital for critical domestic development in such vital areas as education, health, and other social infrastructure, by assuming heavy foreign debt to finance export, while they beg for even more foreign investment in the export sector by offering still more exorbitant returns and tax exemptions. Yet many small economies around the world have no option but to continue to serve dollar hegemony like a drug addiction.

Japan provides the perfect proof that even a dynamic, successful export machine does not by itself produce a healthy economy. Japan is aware that it needs to restructure its domestic economy, away from its export fixation and upgrade the living standard of its overworked population and to reorder its domestic consumption patterns. But Japan is trapped into helplessness by dollar hegemony.

Japan sees its sovereign credit rating lowered by international rating agencies while it remains the world's biggest creditor nation. Moody's Investor Service downgraded Japanese government bonds by two notches recently to A2, or one grade below Botswana's, not to mention Chile and Hungary. Japan has the world's largest foreign-exchange reserves: $446 billion; the world's biggest domestic savings: $11.4 trillion (US gross domestic product was $10 trillion in 2001); and $1 trillion in overseas investment. And 95 percent of the sovereign debt is held by Japanese nationals, which rules out risk of default similar to Argentina. Japan has given Botswana, where half of the population is infected with the AIDS virus, $12 million in grants and $102 million in loans.

Why does the New York-based rating agency prefer Botswana to Japan? The Botswanan government budget is controlled by the foreign diamond-mining interests to protect their investment in the mines. Botswana does not run a budget deficit to develop its domestic economy or help its poverty-stricken people. Thus Botswana is considered a good credit risk for foreign loans and investment. Japan, on the other hand, is forced to suffer the high interest cost of a low credit rating because its government attempts to solve, through deficit financing, the nation's economic woes that have resulted from excessive focus on export. Dollar hegemony denies a good credit rating even to the world's largest holder of dollar reserves.

The Asia-Pacific trade system has been structured to serve markets outside of Asia by providing low manufacturing production cost through the use of cheap Asian labor. This enables the United States to consume more without inflation and without raising domestic wages. Yet all the trade surpluses accumulated by the Asian economies have ended up financing the U.S. debt bubble, which is not even good for the U.S. economy in the long run. Cheap imports allow the U.S. to keep domestic wages low and contribute to a rising disparity of both income and wealth within the U.S. where consumer purchasing power comes increasingly from capital gain rather than rising wages. The result is that when the equity bubble of inflated price-earning ratio finally bursts, wages are too low to keep the economy from crashing from a collapse of the wealth effect.

After thoroughly impoverishing the Asian economies with financial manipulation of crisis proportions, the U.S. now works to penetrate the remaining Asian markets that have stayed relatively closed: notably Japan, China, and South Korea. Control of access to its markets has been Asia's principal instrument for its sub-optimized trade advantage and distorted industrial development. This strategy had been practiced successfully first by Japan and copied with various degree of success by the Asian tigers. Protectionism will survive in Asian economies long after formal accession to the World Trade Organization (WTO).

China, with a giant integrated market composed of a fifth of the world population, can swap market access for technology transfer from the world's transnational technology corporations. Once free from dollar hegemony, China can finance its domestic development without foreign loans and capital. The Chinese economy then will no longer be distorted by excessive reliance on export merely to earn dollars that by definition must be invested in dollar assets, not yuan assets. The aim of development is to raise wage levels, not to push wages down to achieve predatory competitiveness. Yet export under dollar hegemony requires keeping wages low, a prerequisite that condemns an economy to perpetual underdevelopment.

Terms such as "openness" need to be reconsidered away from the distorted meanings assigned to them by neoliberal cultural hegemony. The contradiction between globalizing and territorially based national social and political forces is framed in the context of past, present, and future world orders.

The emerging world order has always been, and will again be, the result of a struggle for the direction of structural transformation of the current order, involving economic, political and sociocultural changes. The prevailing trend of the past two decades toward the marketization and commodification of social relations has led to the argument that socialism needs to be redefined away from the total visions associated with Marxism-Leninism, and toward the idea of the self-defense of society and social choice to counter the disintegrating and atomizing effects of globalizing and unregulated market forces. But this is precisely a Marxist-Leninist vision: that under globalization, national sovereignty in the form of nation-states and governments will give way to a pervasive socioeconomic order. In other words -- the withering away of the state.

The sole function of government is to protect the weak, because the strong is itself government and needs no other. This truth gave birth to monarchism: the king's function was to protect the peasants from aristocratic abuse. So in modern terms, the government's function is to maintain socialist/populist values in the context of capitalist market fundamentalism. So the withering away of the state prior to the end of economic exploitation is putting the cart before the horse.

The unwitting by-product of the rightist quest to get government off the back of the people is a Marxist dialectic. The only flaw is the economic structure. The right wants the withering away of the state prior to the progressive transformation of capitalism into socialism.

The perpetual boom has not replaced the business cycle, new economy or not. In the age of information and communication, the majority interest will prevail -- with luck, without violence. Despite U.S. fixations, majority interest does not necessarily spell capitalism, corporatism or representative democracy. Socialism collapsed in the 1980s not because its economic theories were inoperative, but because in defending the authority to make socialist principles work, socialist governments had to adopt a garrison-state mentality that overshadowed all other potential benefits. On the other hand, capitalist market fundamentalism appeared more desirable as long as this mutation of socialism was posed as a false alternative. Now, as the sole surviving operative system, capitalist market fundamentalism is faced squarely with its own internal contradictions. Unregulated markets have produced the debt bubble and financial manipulation and corporate fraud that impoverish unsuspecting investors and workers who placed their pensions in the shares of the companies that employed them. And the war on terrorism runs the risk of instilling in the United States the same garrison-state mentality that brought about the demise of the Soviet bloc.

Finance capitalism may turn out to be the deadliest enemy of industrial capitalism, and it may well be the last transformation of capitalism. There are clear indications that insufficient demand is caused by the abandonment of the labor theory of value and the wholesale acceptance by neoliberalism of the theory of marginal utility. Lack of demand caused by insufficient wages is more deadly to finance capitalism than the fear of socialism. Technology has finally turned Charlie Chaplin's "Modern Times" into reality. The rhetoric of the current political debate in the United States on corporate fraud is more populist than those of the New Deal, and the recession has yet to begin in earnest. Socialism, by other names (the Wall Street Journal calls it mass capitalism), is now about to be viewed as the vaccine against a catastrophic implosion of the capitalist system in its home garden.

Globalization is not a new trend. It is the natural policy for all empire building. Globalization under modern capitalism began with the British Empire, marked by the repeal of the Corn Laws in 1846, five years after the Opium War with China (I have written on the historical parallel between the Corn Laws and WTO), and two years before the Revolutions of 1848. Great Britain embarked on a systemic promotion of free trade and chose to depend on imported food, which gave a survivalist justification to empire. France adopted free trade in 1860 and within 10 years was faced with the Paris Commune, which was suppressed ruthlessly by the French bourgeoisie, who put to death 20,000 workers and peasants, including children. Despite a backlash movement toward protective tariffs in Britain, Holland, and Belgium, the global economy of the 19th century was characterized by high mobility of goods across political borders. As Europe adopted political nationalism, international economic liberalism developed in parallel, until 1914. Only World War I, the 1929 Depression, and World War II caused a temporary halt of free trade.

Like the United States now, Britain was a predominantly importing economy by the close of the 18th century. Despite the Industrial Revolution's expanded export of manufacturing goods, import of raw material, food, and consumer amenities grew faster than export of manufacturing goods and coal. The key factor that sustained this imbalance was the predominance of the British pound, as it is today with the U.S. dollar and its impact of the trade deficit. British hegemony of marine transportation and financial services (cross-currency trade finance and insurance) earned Britain vast amounts of foreign currencies that could be sold in the London money markets to importers of Argentine meat and Canadian bacon. International credit and capital markets were centered in London. The export of financial services and capital produced the returns which serve as hidden surplus to cushioned the trade deficit. To enhance financial hegemony, the British maintain separate dependent currencies in all parts of the empire under pound-sterling hegemony. This financial hegemony is now centered on New York with the dollar as the base currency. When the Asian tigers export to the United States, all they get in return are U.S. Treasury bills, not direct investment in Asia. Asian labor in fact is working at low wages mainly to finance the expansion of the U.S. economy.

Market fundamentalism, a modern euphemism of capitalism, is thus made necessary by the finance architecture imposed on the world by the hegemonic finance power, first 19th-century Great Britain, now the United States. When the developing economies call for a new international finance architecture, this is what they are really driving at. Foreign-exchange markets ensure the endless demand for dollar capital import by the poor exporting nations. John A Hobson and Lenin identified the surplus of capital in the core economies and the need for its export to the impoverished parts of the world as the material basis of imperialism. For neo-imperialism of the 21st century, this remains fundamentally true.

Then and now, the international economy rests on an international money system. Britain adopted the gold standard in 1816, with Western Europe and the U.S. following in the 1870s. Until 1914, the exchange rates of most currencies were highly stable, except in victimized, semi-colonial economies such as Turkey and China. The gold standard, while greatly facilitating free trade, was hard on economies that produced no gold, and the gold-based monetary regime was generally deflationary (until the discovery of new gold deposits in South Africa, California, and Alaska), which favored capital. William Jenning Bryan spoke for the world in 1896 when he declared that mankind should not be "crucified upon this cross of gold." But the 50-year lead time of the British gold standard firmly established London as the world's financial center. The world's capital was drawn to London to be redistributed to investment of the highest return around the world. Borrowers around the world were reduced to playing a game of "race to the bottom."

The bulk of economic theories within the context of capitalism were invented to rationalize this global system as natural truth. The fundamental shift from the labor value theory to the marginal utility theory was a circular self-validation of the characteristics of an artificial construct based on the sanctity of capital, despite Karl Marx's dissection that capital cannot exit without labor -- until assets are put to use to increase labor productivity, they remain idle assets.

Mergers and acquisitions became rampant. Small business capitalism disappeared between 1880 and 1890. Workers and small businesses found that they were not competing against their neighbors, but those on other sides of the world, operating from structurally different socioeconomic systems. The corporation, first used to facilitate the private ownership of railroads, became the organization of choice for large industries and commerce, issuing stocks and bonds to finance its undertakings that fell beyond the normal financial resources of individual entrepreneurs.

This process increased the power of banks and financial institutions and brought forth finance capitalism. Cartels and trusts emerged, using vertical and horizontal integration to eliminate competition and manipulate markets and prices for entire sectors of the economy. Middle-class membership was mainly concentrated in salaried workers of corporations, while the working class were hourly wage earners in factories. The 1848 Revolutions were the the first proletariat revolutions in modern time. The creation of an integrated world market, the financing and development of economies outside of Europe and the consequence of rising standards of living for Europeans were the triumphs of the 19th-century system of unregulated capitalism. In the 20th century, the process continued, with the center shifting to the United States.

Friedrich List, in his National System of Political Economy (1841), asserted that political economy as espoused in England at that time, far from being a valid science universally, was merely British national opinion, suited only to English historical conditions. List's institutional school of economics asserted that the doctrine of free trade was devised to keep England rich and powerful at the expense of its trading partners and that it had to be fought with protective tariffs and other protective devices of economic nationalism by the weaker countries. List influenced revolutionaries in Asia, including Sun Yatsen, who until coming under the influence of Marx and Lenin after the October Revolution was primarily relying on List in formulating his policy of economic nationalism for China. List was also the influence behind the Meiji Reform Movement in Japan.

The current impending collapse of neoliberal globalized market fundamentalism offers Asia a timely opportunity to forge a fairer deal in its economic relation with the West. The United States, as a bicoastal nation, must begin to treat Asian-Pacific nations as equal members of an Asian-Pacific commonwealth in a new world economic order that makes economic nationalism unnecessary.

China, as the largest economy in the Asia-Pacific region, has a key role to play in shaping this new world order. To do that, China must look beyond its current myopic effort to join a collapsing global market economy and provide a model of national domestic development in which foreign trade is reassigned to its proper place in the economy from its current all-consuming priority. The first step in that direction is for China to free itself from dollar hegemony.

--Henry C K Liu was born in Hong Kong and educated at Harvard University, U.S., in architecture and urban design. His interest in economics and international relations started when he participated in interdisciplinary work on urban and regional development as a professor at the University of California Los Angeles, Harvard and Columbia. He is currently chairman of a New York-based private investment group.