Sometimes simple and bold ideas help us see more clearly a complex
reality that requires nuanced approaches. I have an "impossibility
theorem" for the global economy that is like that. It says that
democracy, national sovereignty and global economic integration are
mutually incompatible: we can combine any two of the three, but never
have all three simultaneously and in full.
Here is what the theorem looks like in a picture:
To
see why this makes sense, note that deep economic integration requires
that we eliminate all transaction costs traders and financiers face in
their cross-border dealings. Nation-states are a fundamental source of
such transaction costs. They generate sovereign risk, create regulatory
discontinuities at the border, prevent global regulation and supervision
of financial intermediaries, and render a global lender of last resort a
hopeless dream. The malfunctioning of the global financial system is
intimately linked with these specific transaction costs.
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