Power inheres in the markets for hydrocarbons: natural gas and oil. The extraction, transit, sale, and price of hydrocarbons all create geopolitical moments in which agents may exercise control over one another or create new modes of interaction.

Firms extract hydrocarbons from beneath us. Some of these firms are minuscule beasts, privately owned with a handful of technicians and a drilling rig or two. Others are leviathans that employ hundreds of thousands and have varied owners that often include states. The vast majority of these large firms do business across national borders. When they produce outside their home nations, firms rely on institutional environments and often complex contractual arrangements designed to manage their calculable risks of cost and price. Firms that produce at home and sell abroad face symmetrical risks. Governments are ever-present in these markets. Are the firms the masters of the governments, or is it the other way around? Such is a common, but ultimately unanswerable, question.

Governments covet the gas and oil that rest untapped beneath the territories and waters of other nations. That covetousness always results in politicking over the pipelines and shipping lanes through which hydrocarbons are supplied; and sometimes it leads to war. Control over routes can be used to coerce, though it is more often a tool of influence, the subtle reshaping of domestic coalitions and national policy preferences.Footnote ² Whose power is greater: the government that controls the supply or that which controls the transit? Thus is posed another hopeless question about hydrocarbons and power.

The price of the hydrocarbons affects very nearly everyone. Oil is traded on markets that are essentially global. Already liquid, and thus easy to move from where it is buried to where it is burned, oil is a commodity that comes close to having a single world price. With the notable exceptions of financial market expectations and radical uncertainty about geopolitical supply disruptions, the price of oil results primarily from the intersection of supply and demand. Only a few firms are capable of influencing the price of oil by restricting or expanding supply when they cooperate within the context of the Organization of the Petroleum Exporting Countries (OPEC). One firm, the Saudi Arabian Oil Company, commonly known as Aramco, has sometimes done so on its own.

The price of natural gas is another matter altogether. Naturally occurring in a gaseous state, and expensive to liquefy, natural gas is sold on markets that are local, regional, and global. In the densely pipelined United States, gas is traded on spot prices. So it is in a few gas trading hubs around the world. Liquefied gas can, like oil, travel by ship to the highest bidder. For the most part, however, gas travels from source to consumer through a pipeline that allows for no diversion; the prices for piped gas have generally been determined by complex formulae agreed upon by suppliers and consumers. Until recently those formulae relied extensively on the oil price as the most important reference in an index. Supply shocks – such as the US unconventional oil and gas revolution – and demand shocks – like the pan-European recession and the slowdown of Chinese growth – both influence price. There is, to be sure, power in those prices. Whose is it? Over whom? And to do what? The simpler questions obscure the differences between multiple forms of power that interact.

In this chapter I explore the character of protean and control power in hydrocarbon markets. I first describe the relationships among firms, among states, and between firms and states as constitutive of what we ultimately interpret as markets. In these relationships we find both protean and control power. Then, I narrate briefly four cases that illuminate the effects of protean and control power in hydrocarbon markets: the European–Russian gas relationship over several decades; the geopolitical consequences of the US unconventional revolution; the Sino-Russian energy rapprochement; and the effects on Russia of the sudden, rapid, unintended, largely unanticipated decline in the price of oil amidst the Ukrainian geopolitical crisis. I conclude with some reflections on the paradox that the particularities of natural gas markets render them ostensibly susceptible to control power, whereas in fact protean power is their defining feature.

The Circulation of Power in Hydrocarbon Markets

The participants in hydrocarbon markets experience, promulgate, deploy, and embody power, both dominating and shape-changing. Seybert and Katzenstein (Chapter 1, p. 16) distinguish between two different instantiations of power: between the possibility to “exercise ‘power over’ (understood here as actual capability) the human or non-human world …,” and the fact of being “empowered to have ‘power to’ (understood here as the capacity to actualize potentialities) navigate in that world successfully.” Many scholars and practitioners recognize control power in hydrocarbon markets, but the most interesting, consequential outcomes and practices result from the interaction of control and protean power. Power circulates across these ways of being, of seeing, and of doing.

The interplay of these forms of power defines the relationships among states and firms, the transit of hydrocarbon supply to its demand, and the formation of prices. As is true of finance (Chapter 8), hydrocarbon markets comprise moments of probabilistic risk and both radical and operational uncertainty. Firms generally try to write contracts to manage the risks that they estimate. When faced with uncertainty, however, those same firms rely on the depth of their relationships, on trust and habits of thought, and on improvisation to reshape the institutional contexts within which they manage.Footnote ³ Technological change in the industry may sometimes seem endogenous, but in fact such change results largely from firms taking seemingly calculated risks that collectively create uncertainty about supply and price. Risk-based behavior leads to systemic uncertainty and unpredictability. Thus, these markets are characterized by elements of both risk and uncertainty. And firms experience both the riskiness and uncertainty as they alternately acquiesce or refuse, improvise or innovate.

Stories

Four stories reveal the interplay of control and protean power in the markets for hydrocarbons.

Conclusions

The world’s two most important hydrocarbon markets – oil and gas – are impressively dissimilar. In the first, the molecules naturally occur in a liquid state, so oil can be piped, shipped, even trucked around the world and sold to the highest bidder. In oil markets power is intrinsically entwined with price and, to a lesser extent, the freedom and safety of transit routes used by anyone who has taken temporary or permanent ownership.

The relevant molecules of the second market naturally occur in a gaseous state. Although the gas molecules may be liquefied, shipped in a manner similar to oil, and then re-gasified upon delivery, the relative expense of that process is often prohibitive. So the gas generally remains gaseous. And for gas, it is more accurate to speak of a number of gas markets, rather than a single one. For these markets, producer and consumer are – intimately, literally – bound together, since physical pipelines carry the product of one firm based in one country – and only that country – to another firm and country. In gas markets, the risk to the importing country is not simply that the price will become untenable, but that the gas might stop flowing altogether with no ready alternative suppliers or other ways of generating electricity or heat at hand. Where gas moves in pipelines, it not only crosses borders, but it almost never avoids traversing state territory. It is therefore bound up with government interests, since it is not as regularly subject to the kind of market manipulations that influence the market for oil.

One might, reasoning from first principles, expect that gas markets – in which states and firms are physically bound to one another – control power would be primary, and protean distantly secondary. Yet this intuition is precisely wrong. Rather, in precisely the markets in which one might imagine state interests to dominate and control power to obtain, protean power is far more in evidence. Protean power has organized the response to uncertainty in the form of unforeseeable technological change, unknowable geopolitical transformations, and incalculable price fluctuations.

Consider two views of the power of finance. From one perspective finance is in the driver’s seat. The residue of the sector’s control power can easily be glimpsed in the capture of the regulatory and lawmaking processes in the United States by the major players in the financial sector – an achievement made possible by finance’s sheer material resources and by the revolving door that brings regulators out of the government and into the sector (and sends former employees of financial firms back into the regulatory organizations).Footnote ² An important byproduct of finance’s highly concentrated political power, in this perspective, was the construction of an incomplete and insufficient regulatory system riddled with loopholes even before the crisis of 2008 – and the production of an even more woefully inadequate regulatory system after the collapse that took the world economy into the biggest crisis in seventy years.Footnote ³

Power in finance appears much more fleeting from an alternative vantage point, however. The players in financial markets that look, to many industry outsiders, like all-powerful “masters of the universe” are in fact constantly engaged in struggles to stay afloat in complex environments rife with ambiguities and incalculable uncertainties. For an experienced market player like George Soros, radical uncertainty is an ever-present condition of modern finance and participants can never fully uncover the “hidden generators” that move market sentiments.Footnote ⁴

The players in sophisticated financial markets face both risk and uncertainty. The past distribution of returns in different markets can be relied upon for predictive purposes only insofar as the generating process for those returns will continue to operate into the future. Players in the markets for financial assets, subject as they are to episodic crises and innovative breakthroughs that permanently shift the means of the distributions, impose a (often illusory) sense of stability by relying on market conventions.Footnote ⁵ Financial markets are, in Zuckerman’s words, open rather than “closed system(s) whereby investors repeatedly encounter the same or highly similar problems of valuation … Investors must repeatedly manage the uncertainty generated by events that defy categories of existing models.”Footnote ⁶

The pervasiveness of uncertainty and the fleeting nature of the control power possessed by players in finance are leitmotifs in many of the recent ethnographies of financial markets produced by economic anthropologists.Footnote ⁷ The pressure on market players to innovate radically new strategies to beat their competitors is intense. Chong and Tuckett, based on numerous interviews in 2007 and 2011 with professional money managers in the United Kingdom, the United States, France, and Singapore, contend that players in financial markets need to be convinced about the “profitability of the uncertain opportunities for future gain they hypothesize to exist.” “Conviction narratives,” sharing similar characteristics, become the social conventions upon which managers “depend to feel committed to their beliefs and to manage dependency on the uncertain future. They can then promote themselves as skillful and survive in the industry.”Footnote ⁸

In contrast to conventional views focusing on which actor has more control over the other, we contend that a richer conceptualization of power – one that goes beyond simple dyadic relationships of coercion and control – is indispensable for understanding power dynamics in contemporary globalized financial markets. Like other domains explored in this volume, the financial markets that we discuss are realms of deep, “Knightian” uncertainty. Yet the institutions and conventions that serve to stabilize expectations sometimes lead market players and regulatory authorities to experience their environments as domains of measurable risk. As Lawrence Lindsey, former member of the Federal Reserve’s Board of Governors, observed about the run-up to the 2008 crisis: “we had convinced ourselves that we were in a less risky world. And how should any rational investor respond to a less risky world? They should lay on more risk.”Footnote ⁹

Complete control in finance, however, is illusory. Uncertainty cannot be fully eliminated and thus there is space for improvisational and innovative practices by agile actors; these practices, in turn, can generate unpredictable protean power effects.Footnote ¹⁰ In the next section, drawing on the work of Marglin and Scott, we explore how different systems of knowledge can help us to understand the conditions under which protean power-generating practices can emerge. Financial markets are realms in which there are ongoing struggles to exert control by both private and public actors (each seeking to impose greater stability and predictability on markets), but these attempts to impose control on an open system can generate unanticipated consequences, serving as an endogenous source of uncertainty within financial markets. At the same time, actors who experience markets as more radically open and uncertain than manageably risky devise innovative strategies that confound efforts to “close” systems.

For illustrations of how different configurations of power-generating practices produce unanticipated outcomes and have unpredictable consequences for actors’ power potentialities, we look at the markets for over-the-counter (OTC) credit derivatives and sovereign debt contracts. These markets are, in some important ways, a study in contrasts. Credit derivatives markets are massive, largely unregulated, highly innovative, and extraordinarily complex. By comparison the international sovereign debt market – the size of which is still in the multitrillion dollar range – is significantly smaller, less complex, and – given that governments are by definition participants in the market – more politicized. And while the markets for credit derivatives and international bonds issued by sovereigns overlap to a degree (sovereign bondholders can and do offload credit risk by entering into credit default swaps (CDS) with counterparties, paying fees to the CDS dealers who then assume the risk of default on the bonds), the sovereign debt market has been distinguished by its long-standing “reputation as relatively safe, staid, and conservative.”Footnote ¹¹ Both markets, however, share a key feature: they are realms characterized by quantifiable risks and by irreducible uncertainty. Unlike the market for hydrocarbons (Chapter 7),Footnote ¹² neither sovereign debt nor credit derivatives are material assets, making valuation far less certain and expectations more dependent on stabilizing market conventions. Our analysis of these markets thus helps to illustrate the power-generating effects of practices employed by financial market actors grappling with uncertainty – practices that can often subvert the instruments of control power and that produce surprising outcomes.

Uncertainty, Knowledge, and Incomplete Control in Financial Markets

Viewed through the analytical lens of financialization, the balance of power between the financial sector and the state resembles a seesaw that has, over the past thirty years, tipped away from the “postwar settlement” arrangement in which finance, “controlled by the state and the rules of the Bretton Woods system,” was relatively weak, and toward a new arrangement in which “financial institutions have become increasingly powerful and influential” – a power shift that necessarily involved a significant loss of public control. “The powers and capacities of the financial sector,” Morgan observes, “have clearly varied over time according to the degree to which the state has managed to control and regulate its activities and processes.”Footnote ¹³

By focusing exclusively on the struggle for control and domination, the conventional perspective provides only a partial view of power dynamics in financial markets, however. Other scholars of power in finance make similar claims. Nesvetailova, for example, observes that the complexity and uncertainty of globalized financial systems calls for a process-centered understanding of power; as she notes, “it would be mistaken to present the financial industry as some cohesive or unified force that is able to control outcomes … The industry’s power [lies] less in its ability to control the agenda and more in its ability to adapt and innovate in a way that it [is] not harmed by agendas set by others.”Footnote ¹⁴ Likewise, in Woll’s comparative study of bank–government relations during the 2008 global financial crisis, thinking about power as a resource that financial actors hold, store, and strategically deploy misses the heart of the story; far more important are the processes by which finance enrolled, convinced, and enlisted “people who perform social relations defined in the interests of the financial industry.”Footnote ¹⁵ The protean power framework is better placed to understand innovations that allowed financial players to evade control by outside actors arising from what Johal et al. describe as “a kind of practical bricolage which responds to changing circumstances by mobilizing whatever means are to hand and thereby adds both new capacities and unintended consequences.”Footnote ¹⁶ By bringing the protean power approach to the analysis we can better account for both the specificity and unpredictability of agile actors’ navigation of open and uncertain environments and the structural consequences that result from the efforts by both private and public authorities to alternately facilitate and crack down on agile players’ power-generating practices.

Illustrative Evidence from the Market for Over-the-Counter Derivatives

The recent history of OTC credit derivatives illustrates how utterly unpredictable power-generating effects can emerge when the conventional control-oriented practices that enable some actors to experience their environment as more risky than uncertain confront radically disruptive strategies from agile players, under enormous competitive pressure to innovate, who experience their environment as highly uncertain. This section of the chapter traces collateralization practices in OTC markets from the self-regulation of the 1990s and early 2000s, through the 2008 global financial crisis, to the post-crisis regulatory requirement that requires OTC derivative contracts to be cleared through central counterparties (CCPs). Although the mandated shift to central clearing was intended to restore a measure of public oversight and control to a market that was constituted by near-constant innovation, complexity, and opacity, to date the central clearing mandate has been prone to unintended consequences and has itself been a source of uncertainty for market actors.

Derivatives are financial assets, the value of which is derived from an underlying asset or source of risk, such as a bond or interest rate, and which effectively allow asset-holders to insure or hedge against the risk of future price changes in the underlying asset. The development of financial derivatives can itself be understood as an illustration of the effects of protean power. Although commodity derivatives have existed in various forms for centuries, the development of financial derivatives can be dated back to the emergence of currency swaps, in which the underlying asset was not a tangible commodity, but rather the risk of future changes in currency values, in the early 1980s. The first of these deals was between the World Bank and IBM, with Salomon Brothers acting as an intermediary. This form of financial exchange was an unanticipated innovation, and one that disrupted not only foreign exchange markets, but also financial markets more generally as the underlying methodology quickly spread to other forms of financial risk such as interest rates and, eventually, to credit risk. As Gillian Tett writes, “This new form of trade quickly spread across Wall Street and the City of London, mutating into wildly complex deals that seemed to give bankers godlike powers.”Footnote ³¹ The novelty of these products allowed them to elude controls; they did not fit clearly into existing regulatory categories, which allowed banks to persuasively argue that swaps were neither futures nor securities nor loans and could not be regulated under the regulatory regimes for any of those product classes.Footnote ³²

The market for OTC derivatives was largely unregulated by public authorities prior to the 2008 crisis. The categorical ambiguity of swaps and derivatives contributed to this self-regulatory outcome, but public regulators, especially in the United States under the leadership of Alan Greenspan, also took an intentionally hands-off approach to regulating the market for these products in the first decades after they were developed and became widespread. Regulatory intervention was thought likely to distort the efficient allocation of risk, and regulators argued that market actors had sufficient incentives to manage counterparty risk on their own. Alan Greenspan’s 2003 address at the Conference on Bank Structure and Competition illustrates this regulatory attitude toward derivatives markets: “Market participants usually have strong incentives to monitor and control the risk they assume in choosing to deal with particular counterparties. In essence, prudential regulation is supplied by the market through counterparty evaluation and monitoring rather than by [public] authorities.”Footnote ³³ Although Greenspan recognized that the limited number of market participants in the OTC derivatives market risked creating concentrations of counterparty risks, “rais[ing] the specter of the failure of one dealer imposing debilitating losses on its counterparties, including other deals, yielding a chain of defaults,” he asserted that “derivatives market participants seem keenly aware of the counterparty credit risks associated with derivatives and take various measures to mitigate those risks.”Footnote ³⁴ While perhaps most dominant in the US regulatory culture, the pro-self-regulation view was also shared by the Basel Committee for Banking Supervision, the main international public actor to take up the issue of transnational market regulation. The Basel Committee’s recommendations for national regulations included the “[promotion of a] better foundation for self-regulation.”Footnote ³⁵

The lack of public regulation of derivatives did not, however, indicate an absence of control power in market governance. Prior to the crisis, the risk of counterparty default was addressed through a series of conventional practices, intended to measure and control risk, and rooted primarily in private authority structures – most notably the International Swaps and Derivatives Association (ISDA), an industry coordinating and lobbying group, as well as the credit rating agencies. ISDA supplied parties to derivatives deals with a standard contract known as the Master Agreement that could be modified to fit the specifics of individual derivative dealings. The ISDA Master Agreement outlined provisions for terminating contracts in the event of counterparty default, most notably permitting parties to “net out” all of their transactions with each other, rather than undertaking a series of payments back and forth that the defaulting party might not be able to complete.Footnote ³⁶ Regulators lauded the provision as an example of market-based initiatives to reduce counterparty risk.Footnote ³⁷ The Master Agreement also includes an Annex (the Credit Support Annex) that was widely used to govern collateral agreements between counterparties, intended to reduce the risk of large losses in the event of counterparty default.

In addition to the ISDA Master Agreement and its termination and netting provisions, derivatives dealers relied heavily on credit assessments from credit rating agencies to calculate counterparties’ creditworthiness. Credit rating played a particularly important role in the market for credit derivatives, which are contracts that protect investors against the risk of default and depend on an estimation of securities’ creditworthiness for their value.Footnote ³⁸ Finally, derivatives market participants relied on standardized risk and valuation models to accurately price contracts, taking the risk of default into account.

The inadequacy of these private forms of counterparty risk management through control power was starkly revealed during the 2008 financial crisis, when waves of defaults by insufficiently collateralized counterparties spread through the derivatives market. The system of bilateral private contracts was recognized as overly complex and severely lacking in transparency, as contracts were unwound rapidly and without sufficient liquidity in the system to ensure full repayment. As Andrew Haldane of the Bank of England observed in early 2009, “The financial system is … a network, with nodes defined by the financial institutions and links defined by the financial interconnections between these institutions … When assessing nodal risk, it is not enough to know your counterparty; you need to know your counterparty’s counterparty too.”Footnote ³⁹

In response to this financial contagion and to systemic risk more broadly, the G20 and the Financial Stability Board called for a series of substantial reforms of the OTC derivative market, most notably decreeing that “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.”Footnote ⁴⁰ While not all of the G20 proposed reforms have been implemented, public regulators in the United States and the European Union mandated a system of central clearing of most OTC derivatives through central counterparties – private clearing houses that would serve as immediate counterparties to all derivatives transactions. Central clearing was a key component of both the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank) in the United States (section VII) and of the 2012 European Markets Infrastructure Regulation (EMIR) in the EU, which authorized the European Securities and Market Authority to impose clearing obligations on certain classes of OTC derivatives. These reforms were intended to make Haldane’s complex networks of counterparties more transparent and to allow for centralized risk management: since each derivatives buyer and seller has the CCP as a counterparty, netting and collateralization are multilateralized and market actors’ net exposures are more readily apparent. Although relatively recently implemented, the central clearing requirement has already had a significant effect. By 2016, 62 percent of all OTC contracts were conducted through CCPs, and the Bank for International Settlements estimated that the rate of clearing for interest rate derivatives had more than doubled (and perhaps even tripled) between 2008 and 2016 as a result of the clearing mandate.Footnote ⁴¹

It is tempting to read this as a straightforward story of weakly regulated markets running amok, followed by the reassertion of control power by authoritative actors. The move to central clearing is undoubtedly rooted in a post-crisis consensus not just among public actors, but also among many private market participants that the OTC market is an appropriate object of public regulation.Footnote ⁴²

But we contend that we can better understand the tremendous power of the financial industry before and after the crisis, as well as the instabilities and uncertainties that continue to characterize financial markets, by looking at interactions between control power and protean power effects. In our narrative of three moments of the recent history of derivatives – pre-crisis, during the crisis, and its aftermath – we observe innovation by agile market players, to which other market players respond, and which triggers responses to uncertainty generated by protean power by actors seeking to re-impose a degree of control. New forms of control, however, breed new forms of adaptation in the market, with unpredictable consequences.

In the pre-2008 period, the market for OTC derivatives was largely unregulated by public authorities, but intentionally so, as the lack of public control was essential to the continued profitability of the market and to ensure the efficient distribution of risk. Greenspan’s claim (“the benefits of derivatives, in judgment, have far exceeded their costs”) is illustrative of this attitude.Footnote ⁴³ Derivatives were seen as important tools to enhance economic performance through the global financial system, and this economic performance was directly tied to more traditional forms of state power. It is possible to read public regulators’ accommodation of finance’s power as a form of financial statecraft, an attempt to, if not harness, at least capture and direct some of the unpredictable but undeniable power of unfettered global capital.

Examining the forms of knowledge operating in the pre-crisis derivatives industry reveals further points of interaction between market practices. Financial markets are often characterized in terms of techne, spheres of activity that are systematically structured to reward practices that make use of specific local knowledge deployed in highly uncertain contexts – the kind of knowledge on which arbitrage trading has historically depended. The constant development of bank-specific product classes, portfolio composition techniques, and trading and risk management strategies are sources of profit-making that depend on superior information, gained through experiential knowledge of the market and asset values.

At the same time, however, financial markets should also be understood as structured by standardized, widely diffused forms of knowledge and associated practices that are better geared to risk-based contexts. While episteme is often equated with state control, all financial markets require some level of standardization to establish the basis for price discovery and adequate liquidity, and private regulation played a key role in the development for the market for OTC credit derivatives. ISDA’s Master Agreement (as detailed above) was a key innovation in creating a liquid global market for derivatives. Standardized contracts, basic pricing and risk models, and electronic trading platforms are all innovations that have imposed a measure of standardization and centralization on derivatives markets. Credit rating, which is explicitly intended to render assets and creditors comparable, is a constitutive financial market practice that is clearly in the realm of episteme, rather than techne, even as it allowed assets to be combined in new and innovative ways. It is precisely these private forms of governance that have served as permissive conditions for the protean power-generating effects of financial market innovation to flourish.

The application of episteme-type knowledge to financial markets, shot through with uncertainty and complexity, requires forms of knowledge more akin to techne. For instance, while ISDA’s Master Agreement structured derivatives deals in a predictable and comparable way, the actual processes through which collateral agreements were reached were in fact sites of considerable uncertainty, stabilized through negotiations by legal technicians and conventional “legal fictions.”Footnote ⁴⁴ Although often represented (by market actors) and interpreted (by regulators) as a realm of technical, objective problem-solving, the techniques embodied in the Master Agreement and actually enacted by market participants are a politically consequential mode of private financial market governance.

Examining the pre-crisis market for OTC derivatives through the lens of power reveals a fractal-like pattern, where each interaction of control and protean power-generating practices touches off another dynamic in which seemingly opposing forms of knowledge and power again come together, often in unpredictable ways. Rather than enhancing real economic performance, the assiduous accommodation of the purveyors of control power to the unfettered protean power-creating practices of innovative financial market players was ultimately cited as magnifying the subprime crisis in devastating ways.Footnote ⁴⁵ With this analysis in hand, we are better equipped to make sense of the ambiguous consequences of the move to central clearing.

While ostensibly a move by public regulators to reclaim a measure of control over financial markets, the central clearing requirements in the EU and the United States have struggled to do just that. Rather than centralizing a market formerly seen as overly complex and decentralized, central clearing requirements have produced regulatory fragmentation, as different jurisdictions have imposed different clearing requirements on different timelines, a development that risks a reduction of liquidity in the global market for derivatives. This market fragmentation has been accompanied by significant uncertainty on the part of derivatives end users about what central clearing means for banks’ profitability.Footnote ⁴⁶

Similarly, analysts and market observers have raised questions about the ability of CCPs to effectively mitigate systemic risk. For example, ISDA’s then-chair Stephen O’Connor’s recent remark that the two major clearinghouses, LCH.Clearnet and CME “probably” have enough capital on hand in case of widespread default of their members.Footnote ⁴⁷ Other commentators have observed that risk is becoming increasingly concentrated in CCPs, raising the possibility that these institutions will become, in effect, too big to fail. Announcements in 2015 by the European Central Bank and the Bank of England that they would backstop CCPs in crises fueled concerns that some of the same problems of moral hazard and excessive risk-taking on the part of investment banks that were cited as conditions of possibility for the financial crisis have merely been transferred to a new set of private financial actors.Footnote ⁴⁸

Finally, some commentators have observed that large volumes of trading do not even qualify for central clearing. Not all OTC derivatives have large enough trading volumes to ensure the liquidity necessary for centralized clearing and are exempted from the clearing requirements of Dodd–Frank and EMIR. Perhaps more significantly, so-called dark pools of capital continue to be unregulated at the public level.

The shift in regulatory thinking from viewing derivatives as an area in which authorities should not obstruct the protean power-generating innovations pursued by actors on the frontiers of the market to a view shared by influential regulators in the EU and United States that the market for derivatives is an appropriate object for at least some measure of state control is a significant one. Nonetheless, state actors have struggled to assert control over a sphere of social interaction that is constituted by irreducible uncertainty – and thus is a realm of breakthrough innovation by adaptable, agile actors. Having legitimized these forms of privately governed social activity in the 1990s and early 2000s, recent attempts to put the genie back in the bottle have instead touched off new practices that subvert efforts at bringing the system under control and that have unpredictable effects on actors’ power potentialities.

Illustrative Evidence from the Market for International Sovereign Debt

The international market for sovereign debt provides additional illustrations of the dynamics of control and protean power in finance.Footnote ⁴⁹ Control power in the international sovereign debt market manifests in several ways. Certification of the creditworthiness of prospective borrowers is tightly controlled by a small number of key players. As in derivatives markets, three rating agencies (Fitch, Moody’s, and S&P) dominate. In addition to the credit-raters who grade sovereign borrowers, an elite group of investment banks serve as the “underwriters” for the issuances. The few “primary dealers” in the market rake in huge fees paid by the issuing governments to arrange the deal with money managers; the market underwriters work with prospective buyers to gauge demand, organize countries’ auction schedules, and bring in the lawyers from elite international firms to write the debt prospectuses. Gatekeeping by the elite, market-making primary dealers is intended “to promote liquidity, predictability, and stability in sovereign bond markets.”Footnote ⁵⁰ Flandreau et al. identified forty-three different banks that served as underwriters in the sovereign debt market between 1993 and 2007, but the top three primary dealers – JP Morgan, Citi, and Deutsche Bank – handled nearly 40 percent of the deals during the period.Footnote ⁵¹ Control is highly concentrated in the international sovereign debt market.

Control power is also exercised in the sovereign debt market through the classification schemas employed by market players to differentiate borrowers. The market devices that sort sovereigns into “developing/frontier,” “emerging,” and “advanced” categories are powerful instruments of control.Footnote ⁵² The so-called “currency clauses” in sovereign debt contracts, for example, systematically differ depending on whether an issuer is considered an “advanced” country or slotted into a different category of borrower. For the advanced borrowers, the denomination of payment to bondholders is typically the same as the national currency; for issuers in the emerging and developing categories, by contrast, the currency clause in the prospectus requires repayment using one of the handful of “hard” currencies issued by the governments in the global financial centers. Sovereigns in the emerging and developing categories are also obliged to include another clause in their debt contracts: they select a foreign legal jurisdiction (almost always New York or London) under which the transaction will be registered (and which becomes the site for adjudication if the bondholders and issuer get into a dispute).Footnote ⁵³ Dominant classification schemas in the market for sovereign debt also govern the term structure of debt issuances: historically, only the countries in the advanced club could float long-dated bonds (exceeding thirty years) on the international market.Footnote ⁵⁴

The contractual arrangement between the sovereign and private creditor, spelled out in the debt prospectus that accompanies the “coupon” purchased by the bondholder, is clearly a locus for the exercise of control power in the market. But control power, as in other financial realms, is incomplete, and contracts have in recent years become the key instrument for a massive disruption of the market engineered by aggressive, protean power-generating players in the international market for sovereign debt.

The disruptive innovators in the market are newer, more litigious specialized firms (“distressed debt funds,” colloquially known as “vulture funds”) that set out “to buy defaulted debt at large discounts with the aim of extracting the best possible settlement.”Footnote ⁵⁵ Their disruptive capacity springs from three sources: the deepening of the secondary market for sovereign bonds; the erosion of the principle of sovereign immunity; and, most importantly, the contractual terms that we (following Riles) interpret as “legal fictions” that market players employ primarily as a way to deal with Knightian uncertainty endemic in all but the simplest of financial markets.

Riles’ work directs our attention to the way in which seemingly arcane, technical, and (ostensibly) apolitical contractual clauses serve as “legal fictions” that enable the transacting parties to act “as if” the ambiguity about what will happen in the (unknowable) future has been mapped out so that the deal can be completed. Legal fictions do not resolve the fundamental uncertainties that parties to a financial market transaction actually face. Rather, the contractual clauses sweep uncertainty – at least for the moment – under the rug.Footnote ⁵⁶ Market participants may not believe in or even fully understand the meaning of a “placeholder” that appears in financial market contracts.Footnote ⁵⁷

The pari passu clause in sovereign debt contracts is a prototypical legal fiction that, were it not the wellspring for a massively disruptive innovation hatched by a “vulture” fund that many believe is “systematically harmful … to the market for sovereign bonds,” would be of little interest to anyone outside market specialists.Footnote ⁵⁸ In English “pari passu” means “in equal step.” The clause is typically a single sentence occupying several lines of text, and it appears “in most cross-border credit instruments.”Footnote ⁵⁹

The pari passu clause can be interpreted as a means of preventing borrowers from “ranking” debts, such that in a debt rescheduling event one outstanding obligation could not be paid before the others. But the pari passu clause certainly has a fictional quality, since “almost no one knows what it [really] means.”Footnote ⁶⁰ The fictional element of the pari passu is that a bondholder’s rights and obligations are clearly defined and enforceable. Rather than resolving uncertainty, the clause introduces other ambiguities: if the sovereign borrower’s legislature passes a law preventing the government from paying “holdouts” that do not participate in a debt rescheduling but the debt was issued in a different jurisdiction (in New York, for example), which legal system applies? What happens if the sovereign borrower violates the clause? What constitutes a violation of the covenant?

The clause does not reduce the uncertainty that the bondholder faces; rather, it describes the exchange as a relationship involving rights and obligations of the contracting parties. The pari passu clause does nothing to clarify the probability of default or the price of the instrument, nor does it involve making predictions about what will actually happen in the future; rather, it generates the possibility of moving the discussion to the realm of law, and in doing so it empowers some actors and disempowers others. As in Reus-Smit’s case of human rights revolutions (Chapter 3), the contractual clause that enabled vulture funds to innovate their disruptive strategy is chiefly characterized by meaning indeterminacy. The clause requires interpretation, and since meaning is fundamentally uncertain, space is opened for “contractual arbitrage” in which an opportunistic player advances “an interpretation not contemplated by the parties in the ex ante drafting process.”Footnote ⁶¹ But activating the clause’s latent capacity to function as a politically potent form of private governance requires the willingness and means to pursue a highly improbable legal strategy.

The uncertain gamble that would shock the world of sovereign debt originated with a small fund specializing in distressed debt, Elliott Associates L.P. The fund’s now-legendary legal arbitrageur, Jay Newman, was one of the very few in the market who actually read bond contracts.Footnote ⁶² He and the other partners at Elliott identified the obscure pari passu clause as the fulcrum in a strategy to extract payment from sovereigns that had fallen into difficulty paying their debts.

In the late 1990s, Elliott Associates sued a Peruvian bank (Banco de la Nación, the issuer) and the government of Peru (the guarantor of the debt) for repayment of bonds the fund had purchased at steep discount just before Peru wrapped up restructuring its external debt under the auspices of the Brady Bond plan spearheaded by the US Treasury. Elliott Associates won its case in a New York court and was awarded a $57 million judgment – but winning a case against a government and collecting on the judgment are two different problems, and the former is easier to solve than the latter.Footnote ⁶³ To ensure that it would be paid, Elliott’s lawyers constructed a legal argument, built on law professor Andreas Lowenfeld’s interpretation of the pari passu clause in the Peruvian debt contracts as requiring ratability of payments, to prevent any other bondholder (including the vast majority of bondholders that participated in the Brady negotiations) from being paid if Elliott was not also paid in full.Footnote ⁶⁴ Instead of the conventional interpretation of the clause as meaning that a borrower could not accumulate new debt that would be paid before the previously issued debts in a restructuring event, Elliott’s lawyers argued that “a debtor not yet in bankruptcy that has accepted a pari passu covenant must pay all its equally-ranking debts equally.”Footnote ⁶⁵ In September 2000, a Belgian court ruled in favor of Elliott over Peru, and it ordered the Euroclear system through which the first Brady payments were to flow to European bondholders to freeze Peruvian payments. Caught between two horns – give up its case against the “vulture fund” or miss the Brady bond payment and fall into technical default – the Peruvian government chose to settle with Elliott for over $56 million.Footnote ⁶⁶ Other distressed debt funds noted the extraordinary interpretation of the clause in the Brussels court and a number of similar lawsuits were launched.

Buchheit and Pam lay out a series of criticisms of the Belgian interpretation of the pari passu clause.Footnote ⁶⁷ The decision strengthened the position of holdout creditors and worsened coordination problems involved in organizing debt restructuring among far-flung bondholders with different preferences. The decision also conflicted with a long-standing convention in the sovereign debt market: the debt owed to “official” creditors (the IMF, World Bank, and other international financial organizations) is, by custom, senior to privately held debt. The “ratable” interpretation of the clause threw this practice into question. Varottil distills the critical view of the decision: “The overwhelming number of arguments against the judgment in Elliott confirms that the court’s interpretation cannot stand. The market should therefore be expected to react by clarifying the language in sovereign debt documentation to avoid similar results in the future.”Footnote ⁶⁸

That is not what happened. Instead, the pari passu clause was retained in post-September 2000 sovereign debt contracts without any significant alterations.Footnote ⁶⁹ The clause was at the center of the legal case brought by NML Capital (a subsidiary of Elliott Associates) against Argentina. The Argentine government refused to redeem NML Capital’s holdings of bonds, purchased on the secondary market at bargain-basement prices, because doing so would contravene the 2005 “padlock” law that prevents the government from paying bondholders that were not party to the country’s debt restructurings.Footnote ⁷⁰ In 2011, a judge in New York ruled that the 2005 law was a violation of the pari passu clause and moved in 2012 to freeze the country’s payments to its creditors, raising the specter, as Peru experienced in September 2000, of another (this time involuntary) default on its international debt. And indeed Argentina did fall into a “technical default” in July 2014 after the US Supreme Court rejected the Argentine government’s challenge to the New York court’s decision. Argentina was unable to make payments to any of its creditors; as a consequence, the country was locked out of the international debt market, and as the central bank’s reserves dwindled the threat of a serious balance of payments crisis loomed.Footnote ⁷¹

The major players in the international market for sovereign debt tried to write off the Belgian court’s September 2000 interpretation of pari passu as an aberration. But the New York court’s decision in the NML v. Argentina case threw the market into a panic. In Gulati and Scott’s estimation, “the almost universal assumption of the sovereign debt community of lawyers, academics, and government officials was that the Second Circuit Court of Appeals – traditionally, the pre-eminent court in the country on business law matters – would … repudiate the pro rating sharing interpretation of pari passu.”Footnote ⁷² When the court affirmed the “aberrant” interpretation of pari passu (and the US Supreme Court declined to hear Argentina’s appeal) the potentially catastrophic consequences of the fact that Elliott’s gamble had paid off began to sink in: given that every issuance in recent decades includes the clause and that a large proportion of emerging market borrowers (and, increasingly, advanced countries) would need at some point to restructure their outstanding debts, the holdout strategy could tie up the market in a welter of lawsuits. The standardized contract in sovereign debt had gone from instrument of market control by a few powerful players to an engine of uncertainty and ambiguity, upon which the newer, smaller players in the market, the distressed debt funds, thrived (while the old guard reeled). As in the case of rights revolutions (Chapter 3), a novel legal interpretation was the source of transformation, illustrating both the incompleteness of the law as a form of control power, as well as the potential for creative interpretation of ostensibly fixed and standardized rules to serve as a generator of protean power effects, with unpredictable consequences for actors’ power potentialities. Formerly peripheral players in the sovereign debt market – the vulture funds – have shown that they can use legal arguments about the meaning of boilerplate clauses in debt contracts to hijack debt restructurings and extract large settlements. Sovereign states that cannot fully repay their debts, meanwhile, are likely to have a more difficult time mounting a defense against litigation brought by private creditors – though the Argentine ruling “leaves behind a confused and contested jurisprudence, which will take years to sort out.” But one lesson from the episode is clear: “not suing is the one sure path for a creditor to be left out in the cold.”Footnote ⁷³

Conclusion

We conclude by reflecting on lessons from the analysis of power in our illustrative cases for two important questions. What drives the high degree of accommodation by political and societal actors to financialization, a process that has increased the financial sector’s material power while simultaneously rendered markets more unpredictable and fragile? And, second, why are financial markets prone to ruptures that surprise insiders and outsiders alike? The empirical sections of our chapter suggest two complementary answers to these questions.

In the OTC derivatives case, we argue that political and societal actors came to regard the innovation and adaptation that fuel the market for derivatives as legitimate, and indeed as socially beneficial, economic activities. The traditional holders of control power have, in effect, carved out a sphere in which techne-type knowledge circulates freely – and with unpredictable effects. In one sense, the story of accommodation of finance is the inverse of Marglin’s account of accommodation in production: rather than devaluing techne in favor of (inevitably incomplete) episteme-type knowledge, conventionally powerful actors have recognized and authorized the power of financial actors’ creativity – and inevitably, its potential for disruption and crisis. Nonetheless, the imperatives of commensurability and risk management for purposes of price discovery and profitability, even (or perhaps especially) within a highly uncertain market, brought episteme back into the picture, wielded first by private regulatory actors such as ISDA and, following the crisis, increasingly by public actors. When confronted with the forms of adaptive and innovative knowledge that partially constitute derivatives markets, however, these attempts at imposing control have not only been incomplete but have, in the case of central clearing, perpetuated uncertainty. The protean power of financial actors represents a likely insurmountable challenge to wielders of control power, even when financial actors’ creativity is not directly aimed at subverting control.

The evidence from the sovereign debt market pushes this argument a step further. Disruptive “legal arbitrage” strategies pursued by vultures have not been legitimated or authorized by the traditional wielders of control in the market. The effect of protean power-creating practices in the sovereign debt market has generated responses, in the form of the IMF’s recent efforts to get contract writers to use a narrower version of the pari passu clause and the UN General Assembly’s endorsement of a global set of principles for debt restructurings. But attempts to impose greater control in irreducibly uncertain environments are not only necessarily incomplete, but in fact serve as conditions of possibility for improvisatory and innovative practices that have unpredictable power effects. In sovereign debt, as in OTC derivatives, a market has developed in which risk and uncertainty are central economic objects. The attempt to reckon with the uncertainty of bondholder rights in the future event of debt rescheduling by means of the pari passu clause can be read as an effort at asserting control over an uncertain future by means of deploying episteme-type knowledge. The clause was intended to move this uncertainty into the standardized, transnationally applicable world of law. However, because the underlying uncertainty linked to the interpretation of the clause was not eliminated, vulture funds were able to leverage this uncertainty to their benefit. And there are other conventional clauses of indeterminate meaning in debt contracts that vultures may use to pursue legal cases against sovereigns.Footnote ⁷⁴ While the particular form of market disruption could not have been anticipated by Seybert and Katzenstein’s approach (Chapters 1, 2, and 13), their framework nonetheless attunes us to the possibility that protean power-creating practices, followed by agile, innovative actors operating in contexts marked by incomplete control under uncertainty, can be endogenous forces that push financial markets into conditions that are experienced by all – including people with otherwise indirect connections to the markets – as destructive crises.

Terrorism is commonly understood as a coercive strategy of armed non-state actors operating under conditions of asymmetry in capabilities.Footnote ² This perspective is grounded in the understanding of power as control; even scholars who advocate complex and more nuanced conceptions of power view terrorists’ application of force as a variant of control power.Footnote ³ Yet control power tells only a part of the story when considering policymakers’ failure to foresee the emergence of al-Qaeda and the Islamic State (referred to here also as ISIS) as consequential actors on the global scene with tremendous capacities to disrupt the international order. If we only consider one dimension, control power will be a poor explanatory factor.

This chapter argues that in order to understand the interaction between terrorist groups and their state enemies we must view the world as an open system in which actors experience both risk and uncertainty. It demonstrates that protean power – defined by Seybert and Katzenstein (Chapter 1, p. 4) as the effect of improvisational and innovative responses to uncertainty that arise from actors’ creativity and agility – does not appear as the result of external shocks only, but also as endogenous and central to state–terrorist dynamics. It shows that protean power could be the effect of actions taken not only by the weak (terrorists), but also by strong actors (states), and that agility and creativity are not the attributes of benign peaceful actors only, but also characterize predatory terrorist entities.

Terrorists try to harness uncertainty to advance their goals. They take advantage of the radical uncertainty of both the international system and its state components to undermine state legitimacy, and of operational uncertainty to expose the limits of states’ control power. And yet, the agility that allows terrorist groups to effectively navigate under conditions of uncertainty does not eliminate the constraints deriving from terrorists’ ultimate goal of control. As the experiences of both the Islamic State and al-Qaeda’s Yemen branch indicate, the more successful terrorists become, acquiring territorial possessions and the trappings of states, the more vulnerable they become to their enemies’ control power. Thus, by moving toward attaining their goals, terrorist groups lose many of the benefits that come from their manipulation of uncertainty: states’ resource advantage regains importance, while terrorists’ own ability to negotiate protean power weakens.

In contrast, states experience the world as predominantly risky, relying on control power to attain their objectives and fend off threats. When facing agile terrorist actors who improvise and innovate, states are slow to adjust, often failing to understand the threat in terms of uncertainty, to acknowledge the limitations of control power, and to design appropriate responses to power that circulates in unanticipated ways. Yet despite these difficulties, states are not impotent in the face of protean power. Slow as they are, states too can innovate and improvise to amplify their terrorist opponents’ uncertainty, thus undercutting the operation and message of terrorist groups.

Interestingly, all actors, even those that are highly adaptable when operating under uncertainty and intentionally seek to magnify the uncertainty of their foes, yearn to reduce their own sense of uncertainty. States often do so by translating uncertainty into risk. Decision-making is complicated and leaders are more comfortable basing their policy choices on probabilities to help simplify it – even if the prevalence of uncertainty means that these probabilities are often a fiction. Terrorists have a similar need to address their own sense of uncertainty. But as disparities in material capabilities turn the odds against them, translating uncertainty into risk is not enough. Instead, terrorists wish to create a sense of certainty and promote the belief that victory is inevitable. Religion can be very effective in producing such certainty and jihadis regularly employ Islam for this purpose, but other ideologies can provide a similar psychological relief in the face of forbidding odds.Footnote ⁴ The need of both states and terrorist groups to reduce their own sense of uncertainty comes with a price. It can easily lead them to misinterpret the underlying context, adopt failed policies, and then to misidentify the causes behind their failures.

Even as my analysis below emphasizes states and terrorist groups, it is important to note that they are not the only relevant actors: terrorist groups articulate a narrative of inevitable positive outcomes – victory or martyrdom – to assuage the fear of supporters and operatives. At times, their plans require inspiring unknown and uncontrollable individuals to take uncoordinated action that would increase states’ uncertainty. Yet reliance on such lone wolves also enhances terrorist groups’ own uncertainty because they do not know if and to what extent their calls will be answered, and whether such attacks will promote the groups’ objectives or backfire. Similarly, states are not the only actors to engage in counterterrorism. A vast infrastructure to combat terrorism depends on the functioning and knowledge of street-level bureaucrats in airports, local FBI offices, street corners, and elsewhere. Moreover, to confront amorphous threats, states empower a long list of societal actors – including civilians, high-tech companies, and banks – turning them into counterterrorists. Yet when protean power resulting from societal responses manifests in deepening social cleavages, Islamophobia, and hatred of refugees, it could undercut governments’ efforts.

The remainder of the chapter is organized around the two facets of uncertainty that Seybert and Katzenstein present in Chapters 1 and 2. I first discuss how terrorist groups, particularly those that seek to overthrow the Westphalian state system, respond to its radical uncertainty by innovating within cracks and contradictions of institutional complexes. The following section examines the role of religion in mitigating the psychological effects of uncertainty. Although Jihadis find religion a useful tool for replacing uncertainty with certainty, such efforts come with a price. At the same time, states’ attempts to respond to the religious messages are complicated by their amorphous audience and the decentralized nature of authority in Islam. The final section analyzes the links between lone wolves, suicide bombing, social media, and operational uncertainty, emphasizing not only terrorists’ efforts to increase operational uncertainty, but also the way states’ responses to terrorism mirror these efforts.

Terrorism and Radical Uncertainty

Radical uncertainty concerns those unknown unknowns that inherently defy calculation. As both the state and international society – the main targets of terrorism – depend on legitimacy, the resulting meaning indeterminacy creates a space for agile terrorist groups to leverage this uncertainty: they identify cracks and contradictions within these institutions and seek to amplify them. Terrorists chip away at states’ control power, challenging their legitimacy, and forcing them to search for effective responses to protean power.

In their quest for security, states are accustomed to looking at rival states – traditionally, the only threat to state survival. They build militaries to address threats emanating from other states, and design rules to manage interstate conflict. But measures designed to enhance predictability and stability in interstate relations present terrorist groups with opportunities to challenge states and erode their legitimacy. They take advantage of the tension between the anchoring of states’ legitimacy in the goods it provides – primarily security – and states’ inability to deploy the full extent of their control power when facing actors who seek to influence state calculations indirectly. They seek to force states to choose between unappealing options: appearing incompetent or controverting their own rules. From the terrorists’ perspective, either choice weakens the state’s legitimacy.

By using violence against innocent civilians, terrorists seek to shock their enemies, persuade them that the conventional dynamics of control power no longer apply, and intimidate them into submission. Turning all locations into a potential arena for violence, terrorists force states into a struggle in which the traditional deployment of forces to the front does not provide a viable solution: when every crowded street and shopping mall is a potential front, traditional defense becomes obsolete.

Twisting convention to their own ends, terrorists harness ideational developments such as the spread of the norm against the killing of civilians (primarily among democracies) to advance their cause. This norm, perceived as advancing human security by limiting the scope of legitimate violence, led to an unanticipated increase in the shock value of targeting innocents, inadvertently giving terrorists an effective tool to shape public opinion and pressure states into submission. Terrorist actors can engage in ever more gruesome violence, capture it on camera, and distribute it widely, multiplying the impact. Citizens’ fear of terrorism and states’ emphasis on this threat leads to disproportionate responses, such as the lockdown on Boston after the 2013 marathon bombing. Indeed, one of the most astonishing aspects of protean power is how the actions of terrorists, states, and ordinary people are mutually reinforcing, creating disconnects between the experience and actual threat of terrorism.Footnote ⁵ That states and individuals emphasize terrorism while accepting much more lethal threats – such as mass shootings, car accidents, and even accidental gun deaths at the hands of toddlersFootnote ⁶ – as unfortunate yet inevitable facts of life stands as a testament to terrorists’ ability to stoke fear.

Since states are constrained by norms regarding the application of force, responding to terrorism in kind, by violating rules of appropriate behavior, is likely to come at a stiff price. The flexing of a state’s control power only weakens its impact, as observers respond to the state’s overreaction by reconsidering both the competence and legitimacy of the state. Indeed, in fighting terrorism, the state can easily lose the moral high ground. The reliance on drone strikes to target terrorists has undermined users’ claims of moral superiority, because of the collateral damage and portrayals of it as extrajudicial killing that weakens the rule of law. The legitimacy of the state’s fight against jihadi terrorism has been further challenged by the very limited legal protections for detainees in US-run black sites and Guantanamo Bay, the torture of suspects, and the abuse of detainees in the Abu Ghraib prison.

The limitations on a state’s coercive power are particularly pronounced in Western countries that came to redefine their security obligations as encompassing the personal security of their inhabitants.Footnote ⁷ A state expected to protect the safety of its citizens and their property, not just of the state itself, is highly vulnerable to terrorist acts. Rising expectations regarding states’ responsibilities coincide with their declining ability to protect individuals. Thus, terrorists demonstrate agility by leveraging these normative changes. Protean power exposes the state’s inadequacy in providing an expansive security blanket and results in the erosion of people’s trust in their government. Terrorists expect states to ultimately understand the futility of their counterterrorism efforts and comply with terrorists’ demands.Footnote ⁸

The impact of states’ control power is further weakened when terrorist groups manage to shift the public discourse from the illegitimacy of their actions to a comparison between states’ morality and terrorist practices. Such efforts are aided – unintentionally rather than by terrorist groups’ design – by self-interested state leaders who exploit the illegitimacy associated with the term terrorists to label their opponents (including human-rights activists) as such. When accusations of terrorism are bandied about freely, they become less credible and may even normalize terrorism.

States are trying to readjust domestic and international law to revitalize their control power and open a new space for anti-terrorist action. This process is slow and difficult. In many countries, especially in the West, it involves contesting established norms regarding the relations between states and their citizenry, as well as the balance between security and personal freedoms. States’ responses to terrorism raise serious questions about the nature of the social contract that delineates what states owe their people, and the limits of legitimate state rights to reduce personal freedoms. Terrorists exploit the ambiguity and uncertainty that characterize states’ scramble to find an answer to terrorism, as well as the time it takes for new norms to take hold. American overreach following 9/11 proved to be particularly useful for recruiting individuals to join the jihadi cause.Footnote ⁹ Although the United States and the international community have been trying to recalibrate their response to jihadi terrorism and make more measured adjustments of international law to allow for fighting terrorism while preserving personal freedoms, the damage done by the initial overreaction – in particular, the launching of expansive, costly, and unwinnable wars based on shaky legal foundations – has not been easily undone.

And yet terrorists are hardly the masterminds that the media portrays. They tend to exaggerate both states’ weakness and their own prowess (or the appeal of their cause). While demonstrating agility in turning rules of international society against its members, terrorists are confronted with the uncomfortable reality that the working of protean power is unpredictable and often results in changes that could undermine their own objectives. Indeed, rather than the high level of interstate tensions al-Qaeda expected, post-9/11 counterterrorism featured greater cooperation and even a revolutionary attempt to revamp the state-based order, including the start or acceleration of regulating spheres of activity that they had largely avoided.Footnote ¹⁰

Despite the task’s broad scope, in the financial sphere, for example, cooperation among states managed to cut down terrorist funds. Agile groups, however, still find ways to subvert the rules. Kidnapping for ransom is a particularly effective terrorist response, with Western states facing a difficult dilemma: when they pay millions of dollars for the release of their citizens, they finance the same groups they fight and subvert their own rules. But when states refuse and the terrorists gruesomely execute the hostages, often in front of cameras, these states face accusations that they have abandoned their people. Moreover, as states pursue different policies – the United States, Canada, and the United Kingdom refuse to pay ransoms, whereas most European countries pay them – terrorists increase friction between allies.

The structural advantage of states is perhaps the greatest detriment with which terrorist groups must contend. States’ control power does not stem merely from their superior capabilities, but also from their primacy among the various political entities populating the international system. By defining international order as state-based and assuming the role of international society’s gatekeepers, states assume exclusive rights that non-state actors lack, thus weakening the ability of the latter to attain authority on their own terms.

States’ ideational hegemony extends to the question of legitimate use of force. Through law and discourse, states reserve the right to use coercive means while denying it to non-state actors, consequently crippling non-state actors’ ability to confront states on an equal footing. International law narrows legitimate non-state violence to resistance against occupation. Meanwhile, states delegitimize non-state violence by largely exempting themselves from the term terrorism and by labeling armed non-state actors as terrorists even though many – including Jabhat Fath al-Sham (previously known as Jabhat al-Nusra) in Syria and al-Qaeda’s branches in Yemen and Somalia – are primarily insurgent groups, a term with more positive connotations. Even when armed non-state actors manage to gain control over a territory and govern it (e.g., the Taliban in Afghanistan 1996–2001 and Islamic State since 2014), their viability often depends on international acceptance, which in turn requires these actors to submit to the norms guiding the Westphalian order.

The combined effect of states’ material advantage and ideational hegemony over non-state violence is that even when non-state actors decide to challenge states, they usually accept the dominance of the state-based order and ultimately seek to become states and join the international society. A byproduct of these limited aspirations is self-imposed limitations on terrorist groups’ violence as they balance conflicting needs: unauthorized violence advances coercion, but respect for norms – such as the prohibition on using WMDs – is necessary to gain international legitimacy.Footnote ¹¹

Thus, although terrorist groups aptly expose the tensions inherent to the operation of states when facing terrorists, utilizing radical uncertainty to undermine states’ legitimacy, they often succumb to the structural strengths of international society and its state components; as they get closer to attaining their most common objectives – independence or capturing state power – they become increasingly vulnerable to the socializing power of international society and pressured to accommodate states’ demands. Indeed, protean power has its limits; legitimate and viable membership of international society means a greater need to experience the world as one of risk, and greater susceptibility to the coercive power of other states.

Religion and the Production of Certainty

Uncertainty also has an emotive element. Actors design plans to advance their interests in a highly complex social environment, but they also look to satisfy psychological needs for some control over their environment. To overcome “fundamental uncertainty,” and a threat to one’s ontological security, actors might respond with exaggerated certainty.Footnote ¹² Terrorist groups try to mitigate uncertainty’s negative psychological effects. The coping mechanisms they develop to allow them to operate despite forbidding odds simultaneously amplify the anxiety of their enemies’ populations. The language of religion is particularly effective for such a dual use, boosting members’ and potential recruits’ confidence while reinforcing an image of uncompromising zeal that terrifies their foes. Religious discourse uniquely challenges states: limited in their ability to control the message or identify those likely to succumb to it, states utilize multiple channels without ever knowing to what extent their efforts were successful. The decentralized nature of religious authority in Islam further weakens states’ control efforts.

Improvisation, Agility, and Operational Uncertainty

Whereas terrorists’ strategic logic involves the exploitation of radical uncertainty, in their tactics they harness operational uncertainty – the de facto unknown unknowns. Agile terrorist groups improvise, developing tactics such as suicide bombing and lone-wolf attacks that rely on the inevitable limitations of states’ control. They also subvert and repurpose originally benign tools such as Facebook and Twitter for predatory purposes, recruiting members, promoting violence, and spreading fear.

Conclusion

Terrorism could be understood as a creative resistance to the control power of the state. On the face of it, terrorists are better equipped to exploit uncertainty than their state opponents. State legitimacy strongly depends on its ability to demonstrate control, predictability, and accountability. No wonder it prefers to view the world through the lens of risk. But such inclination is a source of weakness given the prevalence of uncertainty. States might try to address this uncertainty by planning for the worst-case scenario and throwing resources at the problem, implicitly translating uncertainty into risk. As it is impossible to show that a particular means used was successful or not, such a damaging dynamic could continue for a long time, costing the state considerable resources without necessarily making it safer. Ultimately, states repeatedly fall into the trap of terrorists who expose control power’s limitations.

Notwithstanding the greater agility of terrorist groups, they are confronted with the fact that protean power is very hard to control. As a result, protean power can become a double-edged sword, manifesting in unanticipated and undesirable effects (in the eyes of those harnessing uncertainty). Furthermore, terrorists’ agility does not guarantee success. Terrorist groups can survive online by jumping between different social media platforms, thus defying control attempts. But Telegram allows them to only communicate with each other or post their propaganda; it does not offer channels to the much broader Muslim audience whom ISIS must mobilize if it is to attain its objectives. As long as most young Muslims stick to platforms that do not tolerate ISIS, it must fight to stay on Facebook and Twitter.

Even more problematic from the terrorists’ perspective is the fact that most of them seek control power and thus must still grapple with their weaker material capabilities. It appears that protean power is more meaningful as an effect of subversion, designed to undermine local and international order. But when terrorist groups seek to establish their preferred order, it is the logic of control power that dominates. In fact, the greater the trappings of a state that terrorist groups attain, the less relevant their ability to negotiate protean power and the more vulnerable they become to their enemies’ control power. This could explain how terrorists can wreak havoc yet still often fail to achieve their political objectives.

The turmoil in the Middle East is a testament to states’ struggles to handle flaws and internal contradictions at the heart of the international system. The Arab revolutions involved great uncertainty from the start as individuals took to the streets long before they could enjoy the safety of numbers. But this was only the beginning of the story as the toppling of regimes further enhanced an already pervasive uncertainty. The regional system is in flux as control power diminishes and greater space for protean power opens. Regimes throughout the region have been unable to re-establish control power, but are also ill-equipped to harness uncertainty. Whether due to the sovereignty norms, fears of entanglement, or the complexity of recreating functioning states that could provide their people security and other services, members of international society appear unable to find a solution to the chaotic aftermath of the revolutions. In contrast, jihadi groups, who thrive in this chaos and benefit from exacerbating it, have been quick to capitalize on the uncertainty and fill political and security vacuums. But the loss of territories that ISIS and al-Qaeda had controlled in Iraq, Syria, Yemen, and Libya show that as long as terrorist groups keep looking to achieve control at the expense of others, they will find that, like their state enemies, they also are vulnerable to both control and protean power.

You know Hollywood, you are likely familiar with India’s Bollywood, and you may have heard of Nigeria’s Nollywood. There is also Chollywood in China, Wellywood in New Zealand, Lollywood in both Pakistan and Liberia, and several more in Africa. Such labeling of regional film industries reveals more than an attempt at a catchy gimmick. The reference to Hollywood in all these cases is clear, but so is the alternative desire to produce films that the Los Angeles-based studios are unable or unlikely to offer. Similar reinvention efforts have rebalancing consequences for the film industry, often beyond what their initiators intended. Each of the many “woods” caters to diverse tastes, some more and some less specific than those of Hollywood’s traditional target viewers. Most importantly, non-Hollywood film production undermines the pretense of control over cultural templates and meanings that move global audiences and even pushes traditionally powerful actors to abandon the assumptions of calculability. The underdogs of the movie world introduce a decisive degree of fluidity to cultural, economic, and political competition. They thrive on the uncertainty that incumbent Hollywood seeks to reign in, although they are not themselves immune to unexpected challenges at the next creative turn.

The quintessential underdog story that both emerged from and symbolized such ongoing power shifts was the Oscar triumph of Slumdog Millionaire (2008). Audiences around the world found themselves cheering for protagonists in the Mumbai story of unlikely success. Slumdog Millionaire, directed by a British director, based on a book by an Indian author, tapping international production talent, and featuring local actors also reveals boundary-blurring trends in moviemaking that provide opportunities for capitalizing on high levels of uncertainty. Power need not come from a single center and flow in one direction only. In fact, we should differentiate between an order that is made and one which forms itself as a result of apparent regularities and their reconfiguration.Footnote ² Slumdog Millionaire illustrates the role of geographically and culturally dispersed activity in enhancing innovation, adaptation, networking of international talent and, ultimately, power.Footnote ³

What our account employing the concept of protean power captures is that seemingly stable systems can be reconfigured quickly through decentralized innovative moves.Footnote ⁴ Such changes turn the tables and send challenged leaders scrambling to restore their primacy. Their search for full control, however, may be illusory. Outcomes in such struggles are unpredictable. Analytical quandaries of how to explain and interpret shifting constellations of international power emerge with great regularity. The theoretical framing of this book calls for an additional vantage point for examining power dynamics. Other contributions to this volume aptly illustrate that all too often power does not inhere in the measurable attributes of the actors wielding it. Rather, it rests in the dynamic interactions between the controlling and the controlled.

Without wishing to diminish in any way the importance of control power, we highlight the explanatory significance of protean power. It is diffuse in its effects and lacks an identifiable core as it operates from multiple, often uncoordinated sites. Ultimately, this power can enhance political conformity and social stability while also engendering political innovation and social change. Protean power links actors and networks with distinctive discursive structures. It comes into effect through creative individual or collective actions that tap into the distinctive capacities of and relationships among dispersed actors that do not necessarily mirror the apparent distribution of control power or the propensity to use it.

We explore the dynamics of protean power in a heuristic case study, the AmericanFootnote ⁵ film industry. At the nexus of commerce and culture,Footnote ⁶ its political and cultural significance make it an important subject for social science analysis.Footnote ⁷ Are a small number of capitalist and cultural entrepreneurs located at the center of the American movie and media industry controlling the world with films infused by American ideas, norms, and values? Or are foreign governments, producers, directors, and audiences developing effective strategies to circumvent, adapt to, and innovate around American control? The first question is indebted to theories of cultural imperialism with a long pedigree in Marxist theory; the second to contemporary discussions of cultural and economic power. Yet, rather than operating like ships passing at night, control and protean power typically are interacting and co-evolve. Control power of American producers and directors aims at foreseeable consequences that is often undermined by creativity and innovation, characteristic hallmarks of protean power coursing through global viewing publics and non-American film producers.

Although the American film industry enjoys a position of unrivalled primacy in global markets, this does not diminish the radical uncertainty it faces when releasing its movies. This uncertainty stems from unattainable knowledge about the changing circumstances that encompass much more than just audience tastes. In a global marketplace the need for rapid adaptation to such change is greatly facilitated by decentralization.Footnote ⁸ Innovation and improvisation are bypassing rather than controlling uncertainty. At the same time, the fluidity of relations between actor experiences and the context in which they operate alters the nature of the underlying uncertainty further, making it important to examine the link between culture, markets and power.

Deploying Control Power By and Against Hollywood

To talk about power and culture is a subject fraught with difficulties. Josef Goebbels reportedly reached for his gun when he heard the word culture. The philosopher Slavoj Žižek reaches instead for culture when he hears the word gun.Footnote ⁹ Political philosopher Kwame Anthony Appiah uses less martial imagery but also conveys the challenge of working with the concept: “It’s reached the point,” he writes, “that when you hear the word ‘culture,’ you reach for your dictionary.”Footnote ¹⁰

Compulsion, institutions, and structures are three different faces of control power. Compulsion occurs in relations of direct interaction of control by one actor over another. Institutional power is found in the control that actors exercise indirectly over others, including through controlling the process of agenda-setting in various institutions.Footnote ¹¹ Structural power affects directly both the context and the conduct of actors.Footnote ¹² It often entails its opposite, structural uncertainty, which frequently makes it difficult to translate successfully policy intentions into action with predictable consequences. Structural power in no way guarantees success. Hollywood’s all-too-many failed or middling movies show this clearly.Footnote ¹³ This section focuses on historical episodes of control power deployment by the American film industry, with particular attention to why such strategies would have seemed viable and the reasons why they ultimately proved to be inadequate.

In the 1920s and 1930s, Hollywood gained the upper hand over its competitors by standardizing film production through the adoption of more capital-intensive technologies aiming at greater economies of scale. Brand loyalties flourished together with the star system and the ever-widening appeal of the nascent Hollywood studio complex’s products.Footnote ¹⁴ Regional concentration and later subcontracting in and around Los Angeles were efficient “for an industry where standardization is important to keep costs down, but innovation remains critical as a hook for audiences.”Footnote ¹⁵ The production complex that had emerged in California during the 1920s and 1930s was thus well positioned for extending its reach nationally and internationally.Footnote ¹⁶ The high cost of producing movies generated an advantage for established players in both production and promotion.Footnote ¹⁷ This advantage was reinforced further by American dominance over channels of distribution.Footnote ¹⁸ Taken together these added up to a powerful structural advantage of American moviemakers.Footnote ¹⁹

In the annals of the history of movies, compulsion plays a role in times of war and postwar reconstruction. Before the Second World War the German movie industry dominated European markets and Josef Goebbels built on that strength to construct an imposing propaganda machinery. In the midst of the Second World War American movie moguls planned, with the active support of different branches of the US government, to establish European markets freed from German, though not American, influence. According to Geoffrey Nowell-Smith this was little more than “a cover for obstructing the revival of any [European] film industry.”Footnote ²⁰ Since film was an essential tool of the government’s de-Nazification campaign, government and industry were engaged in a relationship of competitive cooperation.

“Studio bosses like Darryl L. Zanuck demanded the total destruction and unlimited prohibition and elimination of their strongest pre-war rival, the German film industry.”Footnote ²¹ Somewhat reluctantly, the Information Services Division (ISD) of the American occupation authorities obliged and insisted on a total dismantling of the Ufa conglomerate, the center of German movies in the Weimar Republic and a docile instrument in the hands of Josef Goebbels after 1933. After 1945, West Germany was soon fully permeated by American culture, including movies.Footnote ²² But only after the US Army gave in to Hollywood’s most far-reaching demands in 1949, did the studios release Hollywood movies in the German market in large numbers.Footnote ²³ The result, in T. P. Elsaesser’s words, was that after 1945 “Hollywood stands at the very heart of the New German Cinema becoming a national cinema.”Footnote ²⁴

Some German filmmakers resented the decartelization of the German movie industry, modeled after the change in America’s domestic film industry in 1948; others welcomed it as offering an escape from the meddling of local conservative state and religious leaders.Footnote ²⁵ By being free to join Germany’s central film industry trade organization during the military occupation, American distributors enjoyed a unique advantage which gave Hollywood an effective veto over German film policy. It is therefore hardly surprising that American film companies had a profound influence over West Germany’s cultural policy.Footnote ²⁶ This manifest success of control power in Hollywood’s penetration in postwar Germany justified its continued prioritization and expectation of efficacy.

There were parallel attempts to adopt the strategy of structural positioning, institutional backing, and economic muscle to protect the rising dominance of Hollywood studios in America and abroad. This power has been widely recognized. Aspiring presidential candidates, especially of the Democratic Party, make Hollywood a regular stop on their fund-raising trips. With ready access to the halls of power, the lobbying of the Motion Picture Association of America (MPAA) has been very successful.Footnote ²⁷ By trying to have movies covered under the catch-all rubric of intellectual property rights, the US government, for example, has backed the industry’s demand at the international level. Such interventions were often without great success;Footnote ²⁸ however, that is not a reflection of the limits of control power wielded by Hollywood but rather that of the US government.

The recognition of Hollywood’s control power resulted in valiant efforts to resist it. Both comparatively strong European producer countries (such as Britain, France, and Germany) and weak ones (in Latin America, Africa, and the Middle East) have relied on a panoply of direct and indirect protectionist and promotive measures.Footnote ²⁹ What Anne Jäckel describes for Europe holds also for other parts of the world. Most countries “continue to implement some form of protection for their national film industry … films are considered far too socially important to be left to market forces.”Footnote ³⁰ Yet, because non-American audiences have come to share American tastes for films and genres that translate well across national borders and different subcultures, political resistance against the import of American movies often has been half-hearted and short-lived.Footnote ³¹ Informed or instructed by the preferences of viewing publics, American and foreign producers and governments are thus enmeshed in an unending game of probing and adaptation.Footnote ³²

Hollywood studios have also used their dominance to shape markets.Footnote ³³ For example, exclusive distribution of “one-size-fits-all” movies, selected by a few leading distributors, spurs markets that favor “a homogenized film product that can be profitable everywhere” and generates pressures that leave only limited market segments available for international competitors of American movies.Footnote ³⁴ These developments set the stage for a profound transformation of global cinema in the 1980s and 1990s. Film production, financing, and distribution have each become increasingly global, and are dominated by America’s major studios. This has created a system in which the national production of movies abroad, through different commercial linkages, became an integral part of the American industry.Footnote ³⁵ Film production in the United States has long been seen as a template for corporate and industrial change.Footnote ³⁶ The advent of the era of conglomerates allowed for the development of digital technology,Footnote ³⁷ which further boosted Hollywood’s distribution system.Footnote ³⁸ More recently, the combined effect of big-budget moviemaking and expanded marketing opportunities that include the full range of media and sales outletsFootnote ³⁹ has extended the reach of Hollywood to secondary markets in soundtracks and other paraphernalia, creating additional advantages for the American movie industry.Footnote ⁴⁰ The movie industry is part of a thriving American popular culture complex that includes television programs, rock, rap and pop, theme parks, sports, clothes, fast food, advertising, the internet, and social media that easily reach customers across national borders.Footnote ⁴¹ Across a broad front, Hollywood has frequently succeeded in muting refusal to submit to its control by cajoling actors abroad.

The fact that Hollywood has benefitted greatly from the different kinds of control power does not mean that key representatives of the industry followed a strategic plan. As Michael Storper writes, “outcomes need not be intended or planned by large firms; if new production techniques are superior, at a given moment, to what they replace, the path taken can be the outcome of short-term strategies or even accidents.”Footnote ⁴² This describes accurately the workings of protean power as partially intended and at the same time unanticipated in a situation shot through with fundamental uncertainty. As we argue here, while the effects of control power are real, fundamental uncertainty is not eliminated by measures focusing on market share and risk calculations.

In attempts to retain control by preserving and expanding its primacy, it is easy for Hollywood executives to overreach in their international ambition. Structural power can have unexpected consequences. Outside the United States there exists, for example, considerable resistance to treating movies as normal economic commodities that should be traded freely.Footnote ⁴³ In the words of one French movie director “the majors have been laying the foundation for future domination by infiltrating countries with cartel power. As a result, audiences get accustomed to US production values and voila, the Yanks control the world.”Footnote ⁴⁴ That sentiment is likely to be even more pronounced in culturally different and institutionally distant international markets, China and India most prominently, possibly limiting the industry’s widely touted growth opportunities abroad.Footnote ⁴⁵

Whatever the dominance over global markets by Hollywood creators and the blockbusters they produce, it does not make the American film industry immune against unknowable fluctuations. On the contrary, a lack of knowledge about the preferences of global audiences makes the industry often operate under conditions of radical uncertainty.Footnote ⁴⁶ Hollywood has set key standards for the global film industry, gaining considerable market control, only to find that the markets for which the strategy was devised may follow an entirely different course. “Much of what Hollywood does,” Prindle writes, “can be interpreted as a series of strategies to replicate the unpredictable … People in Hollywood … face the incalculable every day.” As in the crisis-prone markets for sophisticated financial products with highly uncertain future values, in which agents’ expectations are often (contingently) stabilized by market conventions (see Chapter 8), Hollywood producers thus have developed strategies to cope with the fact that few movies actually make a return on the invested capital. “Brand loyalty” and “star power,”Footnote ⁴⁷ specific genres, sequels, and series to tap into stable audiences,Footnote ⁴⁸ cutting production costs, expanding markets, control over distribution channels and finance,Footnote ⁴⁹ high production and advertising budgets and moderately priced starsFootnote ⁵⁰ – all make the list of practices and strategies employed by predictability-seeking Hollywood producers.Footnote ⁵¹ Yet De Vany’s statistical analysis of the covariates of Hollywood films’ box office performances rejects as useless nearly all of these strategies, without weakening the tenacity with which they are pursued.Footnote ⁵² More recent (and ever-more sophisticated) attempts at forecasting the performance of films have proved to be similarly unsuccessful.Footnote ⁵³ The bi-modal (and unusually long-tailed) shape of the distribution of box office returns is captured in Figure 10.1. The figure plots the box office performances for 8,401 films released between 1950 and 2010.Footnote ⁵⁴ The data confirm that many films earn little, a few do well, and a very, very small number become global blockbusters – and no one can predict in advance of the release into which category a film will fit.Footnote ⁵⁵ Screenwriter William Goldman encapsulated the radical uncertainty that defines the modern movie business in his best-known bon mot: “nobody knows anything.”Footnote ⁵⁶

Figure 10.1 The Distribution of Box Office Returns, 1950–2010

Despite Hollywood’s dominance in select areas, like box office revenues, which enhance control in domestic and international markets, the battles for survival are hardly won. Returns on investments are low, and the ability to reach global audiences and retain their loyalty has been a source of permanent anxiety among Los Angeles film producers. Analyses of the movie industry stress its history of instability.Footnote ⁵⁷ Although fewer films are made today than two decades ago, competition within the industry remains fierce, and is aggravated by competition with television, Blu-ray, online streaming services, other entertainment industries, and with piracy. The unpredictability of consumer preferences in Hollywood’s domestic and foreign markets is also well known.Footnote ⁵⁸ In a complex market place, the frequency distribution of profits and losses in the film industry is non-Gaussian and has very long tails.Footnote ⁵⁹ Hollywood’s film producers may try to exert control power, and they have been assisted in this endeavor by the establishment of a template for global blockbuster movies that has helped to create key markets in its viewing public, as well as aspiring moviemakers wanting to create global hit movies. But they are often frustrated when their competitors have a better view of the (moving) target, or once creative entrepreneurs in other sites of protean power master, perfect, and substitute the tools devised by Hollywood to reach the widest audiences.

Put differently, Hollywood’s control over global markets and audiences is not limited only by the counter-power of state and corporate actors seeking to evade its control and to impose their own instead. It is also limited by a protean power that circulates among producers, directors, and viewing publics and that can, at times, also course through Hollywood, although not as a result of deliberate strategies. That protean power operates in a decentralized manner and indirectly, appearing to lack identifiable agents, and often results in novel practices.

Both control and protean power are, therefore, deeply intertwined. To focus only on one or the other type of power impairs our understanding. It is the dynamic relation between the two kinds of power that best elucidates developments in the movie industry. “Movies are both art and commerce.”Footnote ⁶⁰ Existing studies typically provide either an economic analysis of the system of production and distributionFootnote ⁶¹ or focus on the movies themselves, the culture of consumption and the ultimate arbiter, the moviegoer.Footnote ⁶² The analysis of the movie industry should, however, capture both economic relationships and cultural exchanges.Footnote ⁶³ Economic and cultural crosscurrents reveal clearly power’s two different and complementary facets and practices that enhance the circulation of power.

Protean Power

The uncertainty that Hollywood faces comes in forms that are not fully captured by market competition. Cultural producers tackling the problem of competitiveness head on and relying on risk-driven shortcuts are often frustrated. Those strategies fit the template for exercising control power, which is not ineffective but limited both as a practical guide, evidenced by Hollywood’s struggle for dominance, and as a conceptual framework, since it neglects the dynamic complexity characterizing the world of global film. Control power would suffice if specific market moves met with predictable responses that could be thwarted and neutralized by still more calculated action. No global actors, and certainly not Hollywood, operate in such a laboratory-like environment where controlled experiments produce transparent results. Rules of the game and of “competitiveness,” if they are set at all, remain temporary and the creative content of films offered to diverse audiences is only the most visible manifestation of the impossibility of anticipating success. Behind this fluidity, we find control-eluding improvisation-turned-innovation, which both sustains and unravels the relations of power between actors.

Film producers operating in other national and international markets do not necessarily compete with Hollywood’s domination head on. Films produced for specific audiences, like those of Bollywood, “have carved out an autonomous history alongside American popular films on an international and now an increasingly global scale.”Footnote ⁶⁴ For example, in serving their respective diaspora communities, the Chinese and Indian film industries harnessed Hollywood’s content-standardizing strategies that generate product according to the “most-exportable” formula.Footnote ⁶⁵ Cairo, Mumbai, and Hong Kong have significant cultural divides that differ from Hollywood’s, which helps to explain “why producers in these cities have been able to sustain distinctive product lines and survive the onslaught of a much more powerful competitor.”Footnote ⁶⁶ In striving to become their own force, prospective competitors to Hollywood in India, China, and Korea adapt the organizational content of Hollywood films, sometimes unwittingly. Their power lies in their less-than-fully-deliberate revision of audience tastes and their tapping of local talent, both moves that unintentionally end up transforming practices in major Hollywood studios as well.

For example, the rise of the Nigerian film industry since 1992 has been a totally unexpected development in the global film industry. The emergence of “Nollywood,” decidedly low-budget and rooted in Nigeria’s informal economy,Footnote ⁶⁷ is popular throughout Africa and even generates worries about the continent’s “Nigerization.”Footnote ⁶⁸ Within two decades the film industry has displaced Hollywood films not only in Nigeria but throughout Africa. It has become the second largest sector of Nigeria’s oil-dependent economy and employs about 200,000 people directly and 1 million indirectly. In 2013, it generated $800 million.Footnote ⁶⁹ Between 1992 and 2009 it released about 11,000 full-length features, which made Nollywood the world’s leading producer of digital video films. Production costs typically are well below $50,000 and the average production time is seven days. Low-quality is a hallmark of Nigerian movies. In the words of veteran Nigerian director Eddie Ugbomah, “you don’t produce 20 films a week. You must be producing rubbish.”Footnote ⁷⁰ Movies are produced in English and in one of Nigeria’s 521 native dialects. Customized to existing markets, they sell about 50,000 copies, successful ones ten times more. Without a strong property rights regime creativity has flourished. And competition is weak in Africa’s most populous country. The entire country has less than fifty movie theaters. Programming on state-run TV is unappealing. Internet connections are slow and unreliable. And about two-thirds of households have either VHS or VCD players. Piracy is widespread and discs now sell for about a dollar. Distribution networks are highly decentralized and have regional and even global reach.Footnote ⁷¹ Typically, within two weeks of their release date new films are distributed across the continent.Footnote ⁷²

Actors from other African countries, mostly living in Lagos, are hired to enhance the appeal of Nigerian movies in markets throughout Africa.Footnote ⁷³ Still, times are changing and competition is bound to emerge from other African countries. Filmmakers in South Africa, Tanzania, and Cameroon are producing hundreds of movies a year. And in an exercise of creative self-branding, South Africa, Ghana, and Kenya are describing their own nascent film industries as “Sollywood,” “Ghallywood,” and “Riverwood.” Uganda’s “Wakaliwood” is taking this development to its extremes; emblematic of the growing industry is Isaac Nabwana’s dusty backyard in Kampala’s Wakaliga neighborhood, where he has written, directed, shot, and edited forty-seven movies since 2008, the last one at a cost of less than $200 (selling 20,000 copies in the first week after release before wide-scale piracy took its toll on sales of the film).Footnote ⁷⁴ Film has become Africa’s dominant popular cultural medium, ahead of music and dance.

In short, in Africa Nollywood rather than Hollywood came out on top. Though we usually fail to notice until it has already happened, when the shift occurs, the innovative sway of protean power can be so forceful that it may transform even what newly empowered actors do, perpetuating the uncertainty of the environment surrounding all film producers. The direct connection to audiences, the low-cost operation, and the ambition to penetrate markets beyond Nigeria has also exposed Nollywood to the vulnerabilities stemming from uncertainties only seemingly separate from film production.Footnote ⁷⁵ The emergent threat of Boko Haram, for instance, necessitated agile responses that Nigerian military leaders hoped to borrow from Nollywood.Footnote ⁷⁶ In an attempt to tap access to viewing households and gain valuable legitimation, the army has sought cooperation in portraying the fight against Boko Haram in Nollywood films.Footnote ⁷⁷ Interestingly, a parallel strategy is being pursued by Pakistan’s army, whose soldiers work as extras in otherwise low-cost productions and participate in spreading a deliberately positive picture of anti-insurgent operations.Footnote ⁷⁸ Although it is only a matter of time until audiences see through such efforts, this additional layer of resourcefulness and innovation in addressing terrorist threats reinforces the argument made by Barak Mendelsohn (Chapter 9). The profound uncertainty that gave rise to Nollywood is exacerbated by growing security challenges, opening new territory not only for market–political relations but also redefining threat, with an impact on the future uncertainty within the sector.Footnote ⁷⁹

Protean power does not denote direct or actor-specific effects. It speaks to the degree to which the attempted transfer of values sets free creative processes that generate new capacities as the values in question are examined, breached, negotiated, affirmed, and undermined. The flow of ideas and information as well as fashions and fads on a global basis, with American society as an important node, thus reflects protean power’s face. It is partly shaped by the spontaneous preferences and practices of ordinary people.Footnote ⁸⁰ Just like imported movies, the international success of the TV-series Dallas, for example, illustrates the ability of non-American viewers to interpret, select, resist, and adapt to the themes of a quintessentially American television show to suit their own distinctive institutions, values, and practices.Footnote ⁸¹

The lack of an overarching strategy that marks protean power, given the right circumstances, is readily discernible in the case of American cinema and supports our core point about the co-evolution of and interaction between control and protean power. In the words of film historian Vanessa Schwartz, the globalization of culture produced a “‘cosmopolitan’ cinema … this term denotes multinational production teams making films that represented subjects, themes, and plots that underscored a transnational cultural experience and perspective rather than a discrete national experience of culture that contributed to separate national identities and rivalries.”Footnote ⁸² While this cosmopolitan cinema is neither anti- nor un-American, it retains unmistakable American traits. David Puttnam, a producer, puts it this way: “The norms and values embodied in Hollywood films have come to be absorbed as universal … American films have always been consciously tailored to a multicultural audience; in the early days they had to be simply because of the high proportion and diverse mix of immigrants in America. In defining itself in acceptable national terms, the US domestic industry quite naturally tended to be international.”Footnote ⁸³

It would be unfair and inaccurate to argue that Hollywood has misguidedly used control power only and has been immune to the opportunities resting with protean power. In fact, what may seem as a structural advantage is an element that has been exploited by both Hollywood and its competitors. They all watched the dynamic unfold with some intention, but without any ability to anticipate the full extent and depth of the resulting impact. Exemplifying this dynamic in the case of Hollywood, the polyglot character of American culture may well have greater access to and be more readily accessible by members of other communities. Looking well past structural power, Janet Wasko singles out not only the effects of Hollywood’s diverse cultural milieu, but also the role of English as a lingua franca that enhances the narrative transparency of American movies.Footnote ⁸⁴ As film director Sidney Pollack observed while reflecting on the American obsession with remaking foreign films: “You can’t understand a lot of Japanese movies unless you understand Japanese culture. You don’t have to understand American culture to understand our movies.”Footnote ⁸⁵ The narrative transparency of many American movies is a great asset in global markets. “Transparency is defined as any textual apparatus that allows audiences to project indigenous values, beliefs, rites, and rituals into imported media or the use of those devices. This transparency means that American cultural exports … manifest narrative structures that easily blend into other cultures.”Footnote ⁸⁶ Protean power thus reflects the very construction of American fantasies and the illusions of control and pleasure that cannot be actualized anywhere.Footnote ⁸⁷

Returning to the de-Nazification example, elements of protean power underpinned much of that success as well. Even under the extreme circumstances of US occupation German audiences did not passively accept or imitate Hollywood norms. “Hollywood was a cultural palimpsest upon which local audiences construed their own readings.”Footnote ⁸⁸ Jennifer Fay writes in a similar vein that “German spectators and filmmakers did not merely imitate Hollywood examples; they reinterpreted, adapted, and domesticated these fictions. German directors even managed to subtly mock, boldly contest, and at times empty these constructs of American citizenship by inverting the conventions of Hollywood genres.”Footnote ⁸⁹ This has also happened under more normal circumstances in recent decades.

Protean power helps us to understand why Hollywood’s control over domestic and international markets remains limited. Protean power sets unavoidable limits to the notion of control that focuses on the mechanisms of compulsion, institutions, and structures. It has decentralized and indirect effects. These effects create the innovations and unpredictabilities in a world marked not only by calculable risk but also unavoidable uncertainty.

Conclusion

The American film industry illustrates a puzzle. Hollywood controls the global industry by many conventional measures such as screen time, artistic and technological inventiveness, prestige, and access to capital. Yet the confidence that control should instill is not what Hollywood experiences. The American film industry operates in an uncertain environment marked by the intersection of control and protean power. In entertainment, Nate Silver states, “statistics do not provide all the answers; you have to measure the uncertainty in a problem.”Footnote ⁹⁰ Overstating a good point, Taleb emphasizes uncertainty even more when he writes that “what we call talent generally comes from success, rather than its opposite … a large dose of nonlinear luck makes the movie.”Footnote ⁹¹ Control power, therefore, is an incomplete guide for fathoming the direction of the next big wave of hot cultural products that will capture the imagination of consumers, directors, producers, and investors. The statistical effect of the wisdom of the crowds on the revenues a film generates is ten times stronger than the reviews of film critics.Footnote ⁹² Crowds thus have agency in shaping Hollywood, but in an attenuated sense of that term.

As this chapter has sought to demonstrate, the world of movies is marked by the intersection between control and protean power. Despite its formidable compulsory, institutional, and structural resources, protean power stands in the way of the American movie industry’s secure control of markets and recurrent attempts to transform radical uncertainty into manageable risk. Thinking of power in differentiated terms highlights dynamic relationships between power types that can be mutually reinforcing, undermining, or indifferent. As a practical matter, in the film industry, America’s institutional and structural power is more important than its compulsory power. Still, the former two operate in direct interaction with protean power – the greater the push to streamline production processes and bet on previously proven horses, the greater the inclination to assume away important changes in market context, thus opening up room for innovative interventions. As such institutional and structural power are both enhanced and set back by the dispersed and indirect effects of protean power.

The American and global movie industry is an institutional complex full of conflicts and contradictions revealed in both the refusal of national governments to submit to US pressure for unfettered access to protected national markets and the improvisations and innovations by foreign producers and moviemakers, setting free protean power dynamics. The historical trajectories of the movie industries in different parts of the world diverge widely in both the scope they reached and the means they use, while subject to the scrutiny of choice-wielding audiences. The American and European film-production complexes date back to the beginning of the twentieth century; Nigeria’s cottage industry saw the light of day as late as 1992. The difference in timing, scale, and audience responses has a lot to do with the balance between centralizing and decentralizing movements in each industry and in its links to global networks, from finance to diasporas. Uncertainty has typically defeated efforts at forecasting audience preference with the help of risk-based models. Yet it is that same uncertainty that provides a fertile ground for the exercise of creative, innovative, and improvisational protean power.

The existence of and configuration between different types of power is helpful for rethinking what we mean by the term Americanization and how processes that this concept describes link to the broader world. Rather than arguing that America made the worldFootnote ⁹³ or extolling that world’s flatnessFootnote ⁹⁴ in imposing one best standard, the analysis of different types of power points to two perspectives. First, the transnational movement of American film elucidates how and why American culture is an important part of global culture. The broad context of world politics connects local and global domains of social and political life. Local practices remake global culture just as global culture remakes local practices. It is unhelpful to think of national cultures as stable and global culture as intrusive. Contested local and global cultures change as they travel. Second, the protean power of American society interacts with the control powers of the United States. Circulation is not a one-way process. Just as American society affects others, so do others affect American society and the United States. Protean power can be genuinely creative, innovative, and original in developing new social practices, knowledge regimes, and policies.

Like the American imperium of which it is a part, Hollywood is remarkable for the open access it grants to outsiders.Footnote ⁹⁵ Distinctive of the contemporary American movie industry is the fact that most of its studios are foreign-owned; many of its most distinguished directors are non-American; and many foreign producers can come to make “Hollywood” movies for non-American audiences. The intimate relation between the American movie industry, foreign producers and directors, and global audiences expresses widely shared commonalities and differences across boundaries that make global viewing publics both receptive and resistant to the industry’s products.Footnote ⁹⁶ Located in America and belonging to the world, Hollywood thus embodies very different and complementary faces of power in contemporary world politics.