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September 01st 2009 print

Paul Monk

The Rise of the Market State

We have gone through sixty years of global economic expansion, which we have called “globalisation”. By the end of the century, this had wrought notable changes not only in the global distribution of wealth and standards of living, but in the way states do business. These changes have had important implications for how states perceive their security. They have also had profound implications for international economic institutions and collective security. It is useful to see all this as a shift from the order of nation states towards one of market states.

A nation state is a state defined by sovereignty within territorial borders, the defence of those borders by means of deterrence or retaliation for violation of them, and a public policy of large-scale social security for the population within those borders. A market state, by comparison, is defined by constitutional, economic and strategic adaptation to a world in which the claims of human rights, the reach of weapons of mass destruction, the proliferation of transnational threats to security and well-being, and the emergence of global capital markets that ignore borders, curtailing the power of states to control their own economies; while the development of telecommunications networks that likewise ignore borders, serves to undermine national languages, customs, cultures and regimes.

The current global recession is widely seen as a massive set-back for globalisation and as occasioning the revival of the protectionist and regulatory behaviour of the nation state. The reflex rhetoric and behaviour of many national leaders suggests that some of this is under way. The geopolitical implications of such reactions are of the greatest importance, because if such regression cascades, we may well run into crises and even upheavals reminiscent of the 1930s and 1940s.

The challenges for security analysts and practitioners in the next few years are, therefore, particularly acute. I think that framing our strategic outlook in terms of market states will help us get things into clearer focus. These matters are far from simple, but I believe that by differentiating between nation states and market states we better enable ourselves to come to grips with the often bewildering changes we are going through. There are seven key points:

1. We need to reframe the way we look at the international order of states, given what has been happening for the past two decades.

2. Reframing and renaming things is, in general, what we do when we are trying to come to grips with change. I shall offer two powerful analogies to illustrate this.

3. The changes we have seen in China over the past thirty years exemplify the incipient shift from a nation state to a market state order.

4. We can gain important insights into the evolution of the system of states by seeing that, as with biological evolution, it is characterised by punctuated equilibrium —periods of relative stability punctuated by epochal upheavals that generate ecological transformations.

5. The challenges we face are best understood in the context of a crisis of international institutions in the order of nation states.

6. We can get some perspective on what this could mean by looking back a century, to the problems which beset leading statesmen in the decade before the outbreak of the Long War in 1914.

7. There are various possible ways in which the challenges of our generation might unfold. These present us with strategic choices that demand serious thought.

The Need to Rethink Our Frame of Reference

The global financial crisis that hit us in 2008 has been described or denounced as the end of neo-liberalism or even of capitalism; but it was merely a symptom of the inability of the anachronistic regulatory frameworks of the order of nation states to cope with the financial realities of the world as it now works. Our own country was in relatively good shape to cope with the crisis, owing to a number of reforms of the financial sector undertaken well before it occurred. But in general the sub-prime crisis caught the system as thoroughly unprepared as had 9/11—and for similar reasons.

As early as 1988, Walter Wriston, sometime chairman of Citibank, remarked that the gold standard had given way to the dollar standard and the dollar standard was rapidly giving way to what he called the information standard. Once you bind the world together with telecommunications, he wrote in Foreign Affairs, the game changes and politicians can no longer run things as they used to do. This has only become more so since.

Every day in currency markets the equivalent of the entire annual Chinese GDP is traded. The global financial crisis has only underscored the extraordinary disparity between the rapidity of international financial flows and the clumsy, territorially circumscribed reflex responses of nation states. We do not yet have—but the global financial crisis has underscored the fact that we need—a new set of international institutions and state regulations to cope with all this. There is no way back to a supposedly stable social democratic welfare state system within the OECD, and the challenges in the wider world are even more serious. We are in uncharted territory.

On the local scene, some disparagement has been directed of late at “the market” and at so-called “neo-liberalism”. It is important, therefore, to note that the term “market state” is not an ideological descriptor. The market state is not a prescription for a state beholden to free markets. It is a description of the kind of state that is required in order to govern amid the global forces that were unleashed in the late twentieth century and are gathering momentum now. It denotes a shift in the constitutional and strategic posture of the state, as it functioned throughout much of the twentieth century. That form of state, the nation state, was based on defence of territorial borders through maintenance of mostly conscript armies ready to defend those borders or retaliate against aggression; largely domestic industrial production and consumption; and large-scale social welfare guarantees for the population.

What has been emerging more and more clearly, over the past twenty years, is a form of state which needs to base itself on resilience in the face of transnational threats, rather than retaliation against direct assaults on its territorial sovereignty; on participation in globally dynamic capital, commodity and information markets, rather than largely domestic production; and on the generation of opportunities for citizens to benefit from those markets, rather than on the provision of welfare to them. One could keep calling this the nation state, but we generally use different names or labels to distinguish things from one another, even things that have a considerable family resemblance. I believe that the name “market state” is as good a label as any for the changed kind of state that is emerging in our time.

We all know that dramatic and often astonishing changes have been taking place for a generation and at an accelerating pace. What has been difficult is to make coherent conceptual sense of them. The lack of a workable conceptual framework and the institutional innovations that would flow from it has meant that political leaders, economists and the general public have been blindsided, again and again, by dramatic developments of which they can hardly make sense. Unsurprisingly, so have strategic planners and intelligence analysts. It’s time to reframe the overall picture.

Consider just some of the dramatic developments that have occurred in the past twenty years: the collapse of the Soviet bloc, the economic reforms in China, the looming insolvency of the Western welfare states, the disarray in the United Nations, the Asian financial crisis, the rise of global hedge funds and currency traders like George Soros, the legal and strategic dilemmas encountered in responding to global terrorism, the A.Q. Khan nuclear weapons technology bazaar, the shift from conscript armies to professional armies, the rise of mercenary forces like Blackwater, the proliferation of NGOs, the efflorescence of the internet, the rapidly increasing dangers of cyber warfare and large-scale cyber-espionage, the dangers of global pandemic disease and the global financial crisis.

The claim by Francis Fukuyama that the end of the Cold War was the “end of history” has been the butt of jokes for most of the twenty years since it was written. But we gain no conceptual traction by then throwing up our hands and declaring with Michael Oakeshott that history is just one thing after another; or by settling for some grab-bag of ideas rooted in anachronistic liberal or socialist views of the course of history. We need to take our bearings afresh. The conceptual framework of the shift from the nation state to the market state enables us to do this—and in doing so to chart a much more coherent course as both security analysts and the reformers of security and intelligence institutions and cultures.

Even as Fukuyama was heralding the end of history, various other schools of thought were hailing the fading away of the state as such, in an era of globalisation or incipient anarchy. The state as such, however, was never going to fade away. It was always going to mutate and adapt, as it has for hundreds of years, especially, starting in the West, since the fifteenth century, with the revolution in military affairs ushered in by the invention of light, mobile artillery. There have been a series of such revolutions since then, accompanied by remarkable changes in constitutional law, military strategy and economic norms.

Contrary to a widely unexamined assumption, “the state” has not been a constant phenomenon over the past half-millennium. We do not find “nation states” before the twentieth century. We find feudal states, princely states, kingly states, constitutional territorial states, imperial state nations, each with a distinct constitutional character and collectively working in a distinct inter-state—or, as we generally express it, international—order. The internal, constitutional character of states has had to adapt to changes in the competitive environment of states and that competition has been moderated, to some extent, by repeated attempts to construct international legal regimes, reflecting the constitutional character of hegemonic states. That process goes far to explaining where we now find ourselves, and it has not come to an end.

We have been blindsided over the past twenty years or so because of a lack of appreciation of this evolutionary scheme of things. We need to understand that we are caught up in a vast and ongoing evolutionary process. Not, let me emphasise, a teleological process. History does not have a goal, but evolution does have a logic. We need to try to understand that logic. We have only begun to understand the logic of evolutionary systems in the realm of biology. We need to grapple with it in the arena of geopolitics.

Two Conceptual Analogies

There is no point in changing the name of a thing unless it has undergone significant modification. Yet many people will be so habituated to the term “nation state” that they will be resistant to or sceptical of the utility of the term “market state” to describe what the state is becoming. Two analogies will help to show why I believe this to be misguided. The first is the evolution of the automobile. The second is the evolution of humankind.

It is roughly one hundred years since the invention of the automobile, but it has undergone tremendous change in that time. In Ingmar Bergman’s classic 1955 comedy, Smiles of a Summer Night, a Swedish gentleman, Count Malcolm, turns up at a country estate in the 1900s in his shiny new automobile. To the awe of the other guests he declares proudly, “Speaking of automobiles, the road permitting, we hurtled along at twenty miles per hour.” His car had all the basic features we associate with “the car”, but none of the features that distinctively characterise the kind of cars that most of us now drive. The steering, the engine design, the power, the fuel quality, the fabric of the body, the suspension, the grip on the tyres, the windscreen wipers, the computerised components, the sound system, the possibility of using hands-free mobile communications equipment while driving, and other features have all changed.

Yet we still talk of the four-wheeled, internal combustion engined vehicles we drive as “cars”, a term which does not differentiate between a Model-T Ford and a Prius. Similarly, there are good reasons for calling the city states ruled by the Medici or the Borgias, as well as the great industrial states of the twentieth century, “states”; but they are hardly the same phenomenon.

Now consider a biological analogy. Although a very large number of religious believers still struggle to come to terms with this fact, we are an evolved species, whose ancestry stretches back through many species of hominid. It is seven million years since our genetic line diverged from that of the great apes. We rightly pride ourselves on the very apparent differences between ourselves and our nearest primate relations, the chimpanzees, but geneticists have established that 98.6 per cent of our genetic makeup is identical with that of the chimpanzee.

The genetic overlap between ourselves and the fifteen or more now extinct species of hominid that have roamed the Earth over the past three to five million years is even greater. Yet the differences between ourselves and even the highly successful species, Homo erectus, who invented fire and refined stone tools and skin clothing 1.5 million years ago, are so striking that the very similarities seem to elude many of us.

The key differences are our capacities for fully developed language and symbolic thought. These have enabled our species, over a few tens of thousands of years, to develop everything from cave art to computers and from archery to ICBMs, while creating ever larger and more complex social orders. The acceleration in all this over the past few centuries has been staggering and is based on linguistic and symbolic feedback processes that are now occurring at warp speed.

What a difference a few genes can make! The difference language made between Homo sapiens and Homo erectus was far greater than the difference power steering and a more powerful engine in a contemporary Prius make, compared with a Model-T Ford. Nonetheless, in both cases the differences are at once apparently cosmetic and highly significant. And consider that, as a consequence of such changes in the car, we have needed, over the past seventy years or so, not merely to change the names of cars, but to make all kinds of collateral changes to our urban and rural infrastructure, our driving codes and traffic regulations, our motor insurance policies, our manufacturing processes and our systems of tariffs.

So it is, also, when it comes to states. Apparently very subtle differences can be highly significant and can generate feedback processes that lead to often quite unforeseen consequences. We need to change all manner of habits, assumptions, practices, laws and policies in order to cope with those consequences. Such changes have been occurring for hundreds of years and they have implications for how we think about military force structures, borders, intelligence, legal authority, political decision-making processes and citizenship. We are in the midst of further such changes. I submit that we do well to name these changes and that the designation “market state” is as good a name as anyone has yet come up with.

China as an Emergent Mercantile Market State

The recent history of China embodies the change from a nation state to a market state. It also raises all the security issues that flow from that change. For some years now, when folk have not been distracted by terrorism, the catchcry has been, “China isn’t just the biggest game in town; it’s the only game in town!” But insufficient analytic attention has been devoted to thinking about China, rather than merely expressing wonderment at the growth of its GDP, concern over its relentlessly increasing military capabilities and confusion regarding its approach to political reform and human rights practices.

For thirty years, since the death of Mao Zedong and the coup by Deng Xiaoping and the pragmatists, we have seen a more and more flagrantly anachronistic Communist Party trying to adapt to its ideological defeat in the Cold War by creating a quasi-capitalist economy highly dependent on international capital flows and massive exports to the West. We have seen it both demolish the old communist iron rice bowl of cradle-to-grave social security and exhibit strongly mercantilist tendencies as a trader on a gigantic scale in the global economy.

We have seen it abandon the old Maoist approach to national defence and seek military capabilities of a high-tech, asymmetric kind, notably including anti-satellite missiles and cyber-espionage and warfare instruments, for strategic competition in a world of critical global infrastructure and potential adversaries, most notably the United States, vitally dependent on such infrastructure. We see it seeking to develop soft power by setting up Confucius Institutes all over the world. The current intrusive efforts by the Party to prevent Rebiya Kadeer from getting a hearing in Australia show its insecurities and its sensitivity to the international dimensions of its domestic problems.

At the same time—and increasingly—we see friction between China and its key trading partners over what rules will govern its capital markets, its currency valuation, its human rights practices, its reliability as regards research into and responses to possible pandemic diseases, its role in checking the proliferation of weapons of mass destruction, its laws as regards protection of intellectual property or commercial negotiations—its willingness, in short, to enter into a new order of market states, with rules that will make it possible for that order to grow and flourish.

In its efforts to maintain governance in the old Chinese empire, the Communist Party finds itself torn between the atavistic arbitrariness and bureaucratic despotism of the nineteenth-century imperial state, the totalitarian ideology of the twentieth-century communist nation state, and relentless pressures for reform and flexibility demanded by the transition to a twenty-first-century market state. It invokes the sovereignty of the nation state, but what is demanded of it is the transparency of a market state. We see it setting its face against criticisms of its human rights abuses, but under growing pressure to accept norms that would seriously constrain its arbitrary exercise of power.

The recent arrest of Stern Hu and his colleagues highlights quite a few of these issues. It throws into high relief all the contradictions that riddle contemporary China. Its intelligent resolution would signify something of a breakthrough in legal, institutional and political reform in China. I should add that the arrest and detention (also without charge or legal access) of the leading Chinese human rights lawyer Xu Zhiyong in July underscores these issues. There simply is no rule of law in China; only rule by the Party, which abuses the law at will. Alas for Stern Hu, the needed breakthrough in this regard may be some time coming. However, incidents such as the arrest of business executives like Stern Hu could lead to spiralling conflict within the international system, as the assumptions of the order of nation states bend and crack under the strain of adapting to the requirements of an order of market states.

Epochal Wars and Punctuated Equilibrium

These strains and the potential for spiralling conflict must be our central concern as strategic thinkers and intelligence analysts in the years ahead. I have drawn attention to those emerging in regard to China, but there are others across the spectrum of world affairs. To get some sense of perspective on the kinds of systemic challenges we are now facing, we need to re-examine the history of the past 500 years. We need to do this not merely to understand what has been dubbed the “end of the Vasco da Gama era”, or to observe the patterns that Paul Kennedy described twenty years ago in The Rise and Decline of the Great Powers; but to appreciate that, throughout that half-millennium, the evolution of the state system has been punctuated by epochal wars. Those epochal wars have been fought not simply over spoils or power in some abstract sense, but over the rules of the game itself.

Seen in this light, modern history can be understood as characterised by a similar kind of punctuated equilibrium as the natural world. It was Stephen Jay Gould who educated a wider public regarding this pattern of transformative upheavals, against a background process of mutation and natural selection, in the biological order of things. In the world of geopolitics, the same kind of pattern can be discerned. The Thirty Years War, the Napoleonic Wars, and the Long War of the twentieth century between liberal democratic, communist and fascist nation states were such epochal wars.

We face new dangers after the Long War, and the greatest concern we should have is whether they will so undermine the order of nation states left over from the twentieth century that they trigger a new epochal war in the next generation—over the rules of the game in an order of market states. Seen in this light, the symbiotic imbalances between the United States and China, Russia and the EU, the tensions over fundamental matters, cry out for close analysis. It won’t do to describe what is happening as simply another round of great power rivalry. The precise terms of that rivalry are what we need to look at very closely indeed.

For a number of years, there have been pundits calling the struggle with Islamic terrorism the Long War, borrowing from Philip Bobbitt, whether they knew it or not, a term he had applied to the very different epochal conflict of the twentieth century. This only underscores the general vagueness about the issues that are in play as we lurch from one era into the next. We must get those issues into sharper focus—and shared understanding. That will not be easy. Throughout the twentieth century we collectively blundered from crisis to crisis because such a sharp and shared understanding was generally lacking.

Nowhere is this more so than with regard to how we think about, as well as conduct, the worldwide campaign against global terrorism. The realities of terrorism as it can now be perpetrated—and not only by Islamists—requires not only strategic reorientation and reform of security institutions and practices, but an actual rewriting of legal codes and international norms as regards intelligence collection, covert action, pre-emptive intervention and co-operation among states. Some of this has been happening, but we have only begun the work that needs doing.

Even more importantly, however, we must not succumb to the notion that the only real danger now is the damage that terrorists can do to states. The rivalries and frictions between states remain as important as ever. The greatest danger from terrorism, in fact, is that it will indirectly spark a conflagration between major powers that could be catastrophic. Just as Gavrilo Princip’s assassination of the Archduke Franz Ferdinand served to trigger general war in Europe in 1914, so a terrorist attack could trigger a chain of events which results in major power conflict or upheaval within a major state.

Writing just before 9/11 and well before the interventions in Afghanistan and Iraq, Philip Bobbitt foreshadowed the need for a new set of international norms that would govern such interventions:

I believe that we face the task of developing cooperative practices that will enable us to undertake a series of low intensity conflicts. Failing this, we will face an international environment of increasingly violent anarchy and, possibly, a cataclysmic war in the early decades of the twenty-first century … If we can successfully manage the consensus interventions of the great powers in low intensity conflicts … we will have constructed a new constitution for the society of market states, thereby avoiding the systemic breakdown that provokes more generally catastrophic war.

As the intervention in Iraq comes to a watershed and the struggle in Afghanistan and Pakistan continues to prove intractable, we should be mindful of this pre-9/11 admonition. Some of what we ourselves have accomplished since the Bali bombings, in our co-operation with Indonesia, has been notable; but we need far more shared clarity about the scope and nature of the tasks confronting us. Perhaps the recent hotel bombings in Jakarta will have served as reminder of that fact.

A Crisis of International Institutions

Terrorism, it needs to be emphasised, is only one of the more dramatic symptoms of the shifting shape of the international order. If anyone doubted that, between 2002 and 2008, the global financial crisis must surely have been a stark reminder. The whole set of Bretton Woods institutions, created in the midst of the Long War to enable a world of nation states to avoid catastrophic conflict and to develop more open markets, is in disarray and needs a radical makeover. The United Nations similarly needs reform not simply because the balance of power has been shifting in the world, but because the basic assumptions on which it was constructed have been eroding steadily for decades and are now at the point of collapse.

In the first half of the twentieth century, the stresses of adaptation from old imperial states to nation states, both in the West and around the world, triggered violent revolutions and gigantic wars. Liberal democratic nation states had to adapt quite profoundly to cope with the challenges involved. In countries without the institutional basis for liberal democratic governance, the adaptation was far more stressful and triggered the rise of totalitarian nation states, fascist and communist in ideology, but no less committed than their liberal democratic rivals to industrialisation, mass education and the idea of mass social welfare.

So it is now: the stresses of adaptation to the new shape of things are not producing and will not soon produce a single model of constitutional or strategic adaptation. The changes in China are dramatic and fit well within the general mould of move from nation state to market state; but what we are seeing is a rigidly authoritarian mercantilist market state, shot through with anachronistic power structures, grievances and ambitions, which are full of possible sources of crisis and conflict. Something similar can be seen in the case of Russia.

And at just this juncture, the United States is facing major challenges of its own. The current financial crisis cannot be solved by a debt-laden form of latter-day New Deal, though in some respects that seems to be what left-wing Democrats have demanded and Barack Obama has tried to deliver. Rather, what the United States faces is the need for substantial reforms and innovations, in finance and economics quite as much as in strategic force structure and intelligence priorities. Robert Shiller’s book The New Financial Order began pointing the way even before the crisis broke. If the United States rises to the challenge it is now facing, we can expect to see it become a revitalised entrepreneurial market state.

But this only underscores the question already on so many minds: how can a mercantilist market state in China and an entrepreneurial market state in America redefine the rules of international trade, finance and security in such a way as to be able to rebalance the international system, short of an epochal conflict between them? Are we seeing, in references to the Washington Consensus and the Beijing Consensus, the beginnings of a new ideological divide in place of those that caused such prolonged conflict in the twentieth century? None of us knows the answer to that question—or set of questions—but it constitutes a very important research and analysis task for analysts at the strategic end of the scale and a vital context for those operating in all manner of security and intelligence roles.

Getting Our House in Order

Part of the research task is to get into perspective the relevant lessons from the early stages of the Long War—the things that in retrospect might have prevented it, the things that were attempted and failed. By doing this work, we may gain sobering insights into the kinds of dilemmas and scenarios that now confront us. Earlier history is less directly instructive, but the twentieth century is vital territory. And we need to go back a hundred years to see parallels with where we now stand. The efforts by Colonel Edward House, eminence gris behind Woodrow Wilson, between 1911 and 1919, to conceive and get the United States behind a new constitutional order of nation states, a new liberal internationalism, should be a central point of reference.

Having tried in vain to head off the First World War, House attempted to remedy that failure. In December 1918, sailing across the Atlantic to the Versailles conference, House declared to President Wilson:

The conservatives do not realize what forces are loose in the world at the present time. Liberalism is the only thing that can save civilisation from chaos, from a flood of ultra-radicalism that will swamp the world. Liberalism must be more liberal than ever before, it must even be radical, if civilisation is to escape the typhoon.

His was the scheme for a League of Nations that would provide collective security and prevent the recurrence of catastrophic war between the major powers. But, as we all know, the League of Nations was a failed experiment. It broke down in the face of the rise of the fascist powers, and global war was rejoined in 1939.

House lived long enough to see his worst fears fulfilled, but not long enough to see the liberal democracies rise to the challenge. When he died, at the age of eighty, in 1938, he might have been forgiven for thinking that Nazism and Stalinism were set to overwhelm a liberal democratic order beset by depression, division and pacifism. His intellectual heirs, having defeated Nazism, were faced with the task of containing communism. They succeeded, narrowly averting a third round of global war. We live now in the equivalent of 1909 and we do not yet face anything as catastrophic as what House lived to see. Unless we get our house in order, however, we well might. The fact that he failed in his visionary and enlightened endeavour should serve as a sombre warning to all of us.

For all the confidence with which many of us witnessed the end of the Long War, in 1989, we may now have entered a period comparable in its fragilities to the 1900s. We need to undertake both an enquiry more searching and a program of reform even bolder than what House attempted a century ago—not least because he failed in his endeavours—if we are to avoid a comparable failure in this generation. In 1914, the great powers stumbled into a war that was horrendous, primarily because statesmen and generals had failed to anticipate the consequences of modern military technology. But the technologies now in the arsenals of the great powers and coming into their arsenals make those of 1914 look trivial by comparison.

For some time, we have been accustomed to think that the American lead in military power was so great that no other power could threaten it for decades to come. That still appears to be so, but even now, as Andrew Bacevich has recently pointed out, much of that military power consists of wasting assets. In any case, wars frequently commence due to misperceptions and there are many ways in which the present state of affairs may prove fissionable. Global terrorism might be the trigger, but it is not the plutonium, so to speak. The plutonium is the fissionable state of international institutions, due to the technological changes that are driving the emergence of market states.

One hundred years ago, the old arrangement among the imperial state nations of Europe, the Concert of Europe, had become anachronistic, but Lord Grey, in England, wanted to resurrect it, seeing that dangerous problems were looming. What was actually needed was a different system for balancing the interests and powers of the emerging nation states of Europe. The Concert of Europe could not work, because the imperial state nations that had put it together after the Napoleonic Wars had begun to mutate into industrial nation states, one of which, in Germany, was bent on actually overturning the old order. Germany was too powerful to be coerced into abiding by the old rules and too ambitious to co-operate in defining mutually acceptable new ones.

Does this sound at all familiar? It should. Those who think we can muddle through with the United Nations, the International Monetary Fund and the Nuclear Non-Proliferation Treaty in their present forms, take note. The jury may still be out on whether China will prove a co-operative partner in redefining the international order over the next decade or two. What is certain is that redefining it is inescapably necessary. And the twentieth century has taught us that there is no reason to believe that a new order will automatically emerge cleanly and peacefully out of the old. On the contrary, there are numerous ways to get it wrong and many ways in which old habits and the ineradicable reflexes of human psychology could lead us into calamities.

Possible Strategic Pathways

In the New York Times, on August 2, there appeared a report concerning contingency plans the United States had, in 2003, for cyber-warfare against Saddam Hussein’s Iraq. It began as follows:

It would have been the most far-reaching case of computer sabotage in history. In 2003, the Pentagon and American intelligence agencies made plans for a cyber attack to freeze billions of dollars in the bank accounts of Saddam Hussein and cripple his government’s financial system before the United States invaded Iraq. He would have no money for war supplies. No money to pay troops.

We knew we could pull it off—we had the tools,” said one senior official who worked at the Pentagon when the highly classified plan was developed.

But the attack never got the green light. Bush administration officials worried that the effects would not be limited to Iraq, but would instead create worldwide financial havoc, spreading across the Middle East to Europe and perhaps to the United States.

Fears of such collateral damage are at the heart of the debate as the Obama administration and its Pentagon leadership struggle to develop rules and tactics for carrying out attacks in cyberspace.

While the Bush administration seriously studied computer-network attacks, the Obama administration is the first to elevate cyber security—both defending American computer   networks and attacking those of adversaries—to the level of a White House director, whose appointment is expected in coming weeks.

This is representative of several things to which we should all be directing our attention: the development of new modes of warfare with unforeseen consequences; the need for new rules and tactics to wage such warfare; and the danger that new weapons will be used without regard to such rules by other non-state actors, disguised state actors and hostile states. There could be few better examples of the new dangers looming after the Long War, or of their link to the emergence of market states.

Consider the global financial crisis and add to your considerations the implications of the above report from the New York Times. The two point to the impact of telecommunications and rapid computation on the world order of nation states and the need for new rules and tactics to deal with the emerging order of market states. Both also throw into high relief the need to rethink doctrines of security and strategy inherited from the Long War and the nation state. We live now in a world of global critical infrastructure, and its vulnerabilities and rates of innovation are such that traditional doctrines of defence and retaliation simply will not work. Security planners need to think like epidemiologists, in terms of vulnerabilities rather than threats; mitigation, not defence; resilience, not retaliation.

And these observations hold for an increasing range of the problems we are now seeing on the horizon, or even having to cope with already. In order that such problems can be handled effectively, we need to rethink much that has long been embedded in both popular and professional approaches to national security. We need new laws and institutional arrangements to deal with our domestic vulnerabilities. We need new international covenants to underwrite low-intensity operations against a variety of insurgent forces that could threaten the order of market states. We need radically overhauled international institutions and understandings if such problems—starting with the growing dangers from cyber attacks—are not to become the spark that could ignite cataclysmic inter-state warfare in the twenty-first century.

There is so much that might be said on all this, but let me conclude with two brief and I hope provocative observations. The first is reference to P.W. Singer’s recent book, Wired for War: The Robotics Revolution and Conflict in the Twenty-First Century. It is a fascinating excursion into just one of the technological domains that are breaking open the world and making possible all at the same time wondrous new opportunities and rather dire possibilities. Singer uses as an epigraph, at the beginning of his book, a quote from the 1999 popular cult movie The Matrix:

This is your last chance. After this, there is no turning back. You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland and I show you how deep the rabbit hole goes. Remember that all I am offering is the truth. Nothing more.

It’s a delightful quote. Here’s my spin on it. Take the blue pill and you remain in the mindset you inherited from the Long War and try to muddle through in a world of nation states. Take the red pill and you are through the looking glass into the reframed world of rising market states. Remember, all I am offering is the truth. Nothing more.

My second observation is this: you should take the red pill. We are at a point, as I remarked earlier, comparable to where Edward House stood exactly 100 years ago, peering into the future and starting to feel concerned that civilisation could be facing a typhoon. The difference is that 100 years ago things moved relatively slowly and the world was a much less complex place; all that security planners had to learn about were machine guns, modern artillery, telegraphs and railroads. They did badly at that and there’s much more to learn now. Consequently, nothing is more important now than enhancing our capacity to think well about assumptions, mind-sets, the generation and testing of hypotheses, the construction and exploration of scenarios. This, and not any single decision we might make, is our most urgent task.

Paul Monk presented this address to the “Safeguarding Australia” conference in Canberra in August. His book The West in a Nutshell: Foundations, Fragilities, Futures (www.barrallierbooks.com) was launched by Professor Glyn Davis at the University of Melbourne on August 11.