Few writers have the good fortune to encounter such a scrupulous reviewer as Jeff Frieden.footnote¹ He has fairly and accurately represented the key ideas in The Dollar and Its Rivals,footnote² demonstrating their relevance to the debate on imperialism; and he has brought out those weak areas in my analysis which, despite attempts to remove them, are also of concern to myself. Although I am still a long way from definitive conclusions, I shall nevertheless try to clarify a number of points. Frieden thinks I am on shaky ground in adopting a ‘statist’ approach to the international economy. His critique falls into two parts: the first concerns the importance of private actors in the international economy, while the second stresses the composite and often conflictual character of the major interests within national capitalism (finance and industrial capital, agriculture and industry, large and small firms, producers for the internal and the external market, enterprizes and trusts, associations of independent producers, and so on). If one part of this critique is valid, it does not necessarily follow that the other holds good. On the first point, excessive weight should not be attached to private actors, even when they take the form of multinationals or international banks. The influence of traditional free-market theory has obscured the role of governments in the international economy. For neo-classicists insist that there is no break in continuity between the internal and international markers: choices involving the maximization of household utility and enterprize profitability are supposed to determine international equilibrium as well as international trade. If an economy has problems in its relationship with the rest of the world, manifesting themselves in a balance-of-payments deficit, then international equilibrium will be restored through such automatic mechanisms as a price-variation triggered by the flow of foreign currencies or variations in the exchange-rate. According to this view, state intervention can only serve to remedy defects in the automatic mechanisms of equilibrium. Any other intervention in trade and international settlements would have a damaging effect and anyway be cancelled by the spontaneous equilibration of market forces.

In Keynesian theory, by contrast, there is no tendency to equilibrium in a country’s foreign trade. Only by chance does the propensity to import of a particular country and of the rest of the world produce equilibrium at a given level of national incomes. Even exchange-rate variations are a highly imperfect instrument that does not assure a return to equilibrium in the balance of payments. From this point of view, the state plays a role in securing equilibrium through the introduction of tariffs or import controls and through the allocation of export subsidies. However, nothing prevents the state from actively fostering a balance-of-payments surplus rather than merely restoring equilibrium. Since the Keynesians clearly grasp the power of government action and the potential damage to international relations, they have always sought to exorcize the direct use of such measures by promoting multilateral, supranational organizations to regulate international trade and liquidity. Such mechanisms, albeit of a dubiously multilateral character, have been in force since the World War Two. But as I tried to show in my book, governments have still keenly pursued the national interest by exploiting the peculiar features of the system. Most observers of the international economy wrongly believe that the real role of governments, codified in the Keynesian stereotypes, has been tirelessly to defend the mechanisms that safeguard the harmony of international relations. A majority of observers argue that governments have been unable to operate the international monetary system because of the crippling problems involved; while a minority hold that the multinationals and international banks bear the main responsibility for the unhinging of the international economic order. A large number of Marxists are to be found in this latter category, but they are by no means alone. In recent years, more traditional sectors have also raised their voices against the profit-swollen banks on the grounds that they lend too much money to the developing countries without verifying their repayment capacity.

In the huge body of literature that has emerged on the multinational companies, above all in the 1960s, considerable light has been thrown on such malpractices as the cross-frontier movement of production or phases of the production process; speculative attacks on national currencies; the use of ‘transfer pricing’ to minimize the tax burden and relocate profits; and so on. But although new evidence is continually being found, it would be a mistake to give it too much importance. In my view, no one has yet shown that the multinational diffusion of large companies and banks is a genuinely autonomous phenomenon: in other words, that the variables determining the behaviour of multinationals have a market character uninfluenced by government intervention.

The market variable par excellence is the rate of return. Yet it is well known to analysts in this field that differential profitability cannot account for the vast expansion of us multinationals in Europe during the fifties and sixties, since the post-tax rate of return of us subsidiaries in Europe was more or less the same as that of parent companies in the United States. What is more, federal tax incentives actually encouraged the multinationalization of American companies. A number of theories emphasize the advantages enjoyed by branches of us multinationals over local competitors. However, no one has elucidated in every case why overseas production should have been preferable to the export of technology. Above all, no existing theory explains the commodity composition of the new operations in Europe: the concentration of direct American investment in the consumer-goods and intermediate sectors (mainly foodstuffs, textiles, pharmaceuticals, motor-cars and petrochemicals) almost to the exclusion of capital goods. Nor does any theory fully account for a factor which, at least in the early years of multinational expansion, played a very important role in guiding company decisions: namely, the fear that the formation of the European Common Market would involve more rigid protection from us imports.

In macroeconomic terms, the arrival of American multinationals in Western Europe corresponded to a clearly defined logic. Despite major devaluations of various currencies in relation to the dollar, post-reconstruction Europe did not manage to overcome its adverse balance of trade with the United States. As the famous ‘dollar gap’ grew, Europe was forced to reduce its American imports in agreement with Washington, even introducing differential freight-charges that favoured West-East over East-West transatlantic shipping. This situation, which jeopardized the unity of the world capitalist market, could not have lasted for a long period of time. Anyway, the influx of direct us investment solved the problem at root, both by providing the European countries with more dollars and by reducing the trade gap to tolerable proportions through the partial substitution of us overseas production for commodity exports.footnote³

This does not signify that American companies acted in collusion with the us government to concentrate their European investments in sectors that would not excessively weaken the European economy. But it does imply something very different from the prevailing view on the European Left, according to which the multinationals were designed to raise the profits of parent companies through access to cheaper European wages or subsidization by European governments competing with one another to attract fresh investment. I am convinced that even if a microeconomic, market-centred analysis were to incorporate other factors than the rate of return, it would still be incapable of exhaustively explaining this phenomenon.

Still less is the multinationalization of the banks reducible to a purely market schema. For although less work has been done here than on the multinationalization of manufacturing companies, the few available studies of American banks demonstrate that the rate of return of their overseas subsidiaries is lower than, or at most equal to, that of the parent houses in the United States.footnote⁴ The only coherent explanation is that American banks are following, and in some cases even preceding, their clients to the markets in which they invest or export. This process may be rationalized in terms of an urge to maximize ‘turnover’ or a fear of losing customers. Yet it is quite clear from the declarations of European financiers that bankers are generally very conscious of showing the flag when they expand overseas.