Much has been written about the policies that different countries adopted to handle the financial crisis. Far less has been written about the processes by which these policy decisions were made and the institutional contexts that shaped them. In particular, virtually nothing has been written about the ways in which patterns of national development affected these more proximate factors. We will show that one cannot fully understand what happened in the countries that concern us without appreciation of such historical patterns. It is as well to stress that this makes for an ambitious book. A brilliant paper by Charles Kindleberger that came to our attention as we were completing this book suggested that understanding trade and economic development across nations in the nineteenth century required “a rounded theory of social behavior [that] would include economic drives as only one strand in a broad web of social motivation,” an argument interestingly reinforced by an incisive and accurate analysis of Danish economic development.² The general statement precisely captures our intent and the result of our research: economic performance cannot be understood without the contribution of sociology.

Some clarification of terms is needed immediately. What we mean by a small country is not as straightforward as one might think. Smaller countries typically have fewer people and less arable land than larger ones, which means in many cases that they also have fewer and less diversified resources than larger countries. The size of their domestic markets also tends to be small. Further, when it comes to international relations, their power is generally dwarfed by larger countries; they are often rule takers rather than rule makers. The implication of all this, discussed in detail later, is that small countries tend to be vulnerable to external forces to an extent unfamiliar to larger ones.³

The nature of the nation is even more complicated and the subject of intense debate—which, however, can be resolved for the purposes of this book. It certainly is the case that some shared sense of ethnic, religious or linguistic similarity can facilitate the creation of a nation. But total cultural homogeneity in terms of language, ethnicity, and religion is not necessarily required for the creation of a fully developed national identity. Despite linguistic and religious difference there was some sense of Swiss identity very early on, as we shall see, even though it was only at the end of the nineteenth century that various festivals and nationalist myths consolidated the nation. Crucially, nationalists are liable to mislead the unwary because they so often put forward the view that the fully consolidated nation was always extant, merely asleep, waiting to be awakened. In fact a nation develops over time, moving, to use Marxist terms, from something in itself to something for itself—or, to use different language, from merely nominal status to something substantively present in daily life. The same point can be made about the state, the centralized political apparatus responsible for providing order internally and protection against external threats. States develop gradually in response to modern social conditions. The strength of a state is enhanced when it is the home of the people: democratic, highly educated, and provided with welfare. This leads to a very simple conclusion. The culmination of these two processes—nation-building and state-building—is the modern nation-state, the home of the people in every sense.

We have already claimed that our work will contribute to a broader and more complete view of the workings of economic life. But that aim might have been reached in other ways. So why should we care about a few small nation-states? One answer is simple: even the puny deserve attention! However, there is a larger theoretical issue. The theory that we offer about small nation-states suggests that the ability to act flexibly and quickly can help explain success within capitalist society. Earlier statistical papers certainly suggested that this is so.⁴ The point is that there are also lessons here for larger countries. They may need to foster greater national unity and institutional resilience if they are to navigate effectively in an increasingly volatile world political economy. As small countries have been more exposed historically to international vulnerabilities than larger ones, the analysis of their social formations provides an especially clear view of the factors affecting resilience relevant nowadays to all countries.

There are additional reasons of a more academic sort that explain why this book should appeal to readers beyond those interested in small nation-states. First, it weds the insights of two very important social science literatures that rarely speak to one another, one on comparative political economy, the other on nationalism. Second, our arguments contribute to recent scholarship on how ideas as well as interests affect institution-building and policymaking, and they do so with a particular twist. The scholarship on ideas within comparative political economy focuses on the influence of economic frames and paradigms such as Keynesianism and neoliberalism while largely ignoring more general political cultures. Our emphasis on nationalism fills an important blind spot in the discipline.⁵ Third, we offer a lesson about one economic paradigm in particular—neoliberalism—that went terribly wrong in some countries by convincing policymakers to limit government regulation of financial markets. As is well known, this led to disaster: the 2008 financial crisis. Although our emphasis will be on the ways in which thick and thin institutions affected responses to the crisis we show as well that institutions influenced the manner in which policymakers embraced neoliberalism in the run-up to the crisis. Finally the book speaks to the literature on the financial crisis from a new and broader perspective. Previous studies have tended to be sector specific rather than taking into account the wider national political economy: Cornelia Woll concentrates on the organizational capacities of the banking industry in her analysis of crisis management.⁶ Stephen Bell and Andrew Hindimoor analyze the industry’s incentive structures, noting that they varied across countries.⁷ Research on the U.S. financial crisis most often describes institutional and ideational factors specific to the financial services sector.⁸ Our analysis situates such facts within nation-state–building processes that gave rise to the institutions characteristic of each country’s social formation. So there are lessons here for the comparative political economy of advanced capitalism.

Small nation-states that have survived are well aware of these factors. They remember that their own survival has often depended upon forces that they could not control. Denmark is a clear example: none of the Great Powers wanted the entrance to the Baltic to be controlled by a rival, all thereby preferring control to be exercised by a smaller entity, and so sought the preservation of Denmark at various moments when its very existence was in question. Put differently, among the great vulnerabilities faced by small nation-states are geopolitical threats, the prospect of conquest by a larger state able to destroy sovereignty and to extirpate culture. Small states accordingly seek alliances and long for schemes of international order. Russia’s recent military incursion into Ukraine shows just how real such vulnerability remains even today. For similar reasons, small nations seek their own states when possible, but otherwise work hard to gain cultural rights. Quebec provides a clear instance of the latter: fearful that its identity would be destroyed if its language lost salience, it has fought hard and successfully to protect it.

Economic vulnerabilities loom just as large as geopolitical threats. For one thing, as noted, a large state can set the terms of trade for the small states that surround it and bend the rules of the international political-economic game to its own advantage, forcing small states to maneuver as best they can within them.⁹ For another, small states are likely to have relatively few natural resources, which makes them dependent on the external world. Still more important is the fact that small size entails a small domestic market—and this, as any reader of Adam Smith will realize, limits the specialization of the division of labor on which increasing wealth depends. Eras of protection and self-sufficiency have made small states poor. They long for agreements establishing openness in the international economy, for this allows the access to large markets on which their prosperity depends. Of course, nations can be just as vulnerable as states in economic terms. Palestinians in the occupied territories suffer from nothing less than economic persecution.

One very important caveat is necessary. A distinction should be drawn between vulnerability as an objective condition (easily recognized in hindsight) and the subjective perception of vulnerability. One may be in a vulnerable situation without necessarily being sensitive to it.¹⁰ What matters is whether the perception of vulnerability is strong enough to trigger action. All else being equal, perceptions of vulnerability are more easily translated into a sense of solidarity or “we-ness” uniting people in small countries than in large ones; it is easier to energize and organize a few people in a small country than many, especially if they have diverse backgrounds, in a larger territory. This allows us to make a comment about the currently popular term “path dependency.” Large countries are likely to be dependent on patterns established historically, finding repetition easier than change—and are able to behave in this way because of their large size. The pattern of small nation-states is different: at best their path is often one of flexibility, their path dependency being driven by the vulnerabilities that they tend to have at the forefront of their attention.

If vulnerabilities come in different forms, as we have seen, it is just as important to note that these change over time. One general point worth making about the contemporary world of advanced capitalism is that small nation-states have found it to be essentially benign. Order reigns geopolitically, and a marked degree of openness exists in the international economic realm. It is this background situation that serves as the condition of possibility for the success of small nation-states in the postwar world. This is not to say for a moment that vulnerabilities have ceased to exist; no set of institutions of a platonic sort is or ever will be available given changes in the international environment. This is obviously true in the economic realm. Capitalism changes all the time as do the rules that govern its workings, making it ever more important for the small—bereft of large domestic markets—to stay at the leading edge of the product cycle. Furthermore, the economy is not so to speak pure; to the contrary it is an arena in which power is exercised and occasionally shifts. Two particular elements of power, discussed later in this chapter, can be noted immediately. First, the geopolitical strength of the United States allowed it to borrow heavily from countries with financial surpluses, failing to balance its own books and thereby contributing to its Great Recession, which stretched from December 2007 to June 2009. Second, German surpluses have to be absorbed by countries within the Eurozone just as much, and this occasions vulnerability—despite the benefits of open markets—because the monies on offer have contributed to extravagant bubbles, particularly in housing markets.

There are additional complexities. Some nation-states are independent and exposed to the international political economy; powerful neighbors provide a measure of protection in other cases. In Ireland, for instance, exploitation by an empire was ironically followed by a measure of shelter for the new secessionist entity. Something similar is true of Eurozone membership. Nation-states are more vulnerable insofar as they relinquish control over monetary policy to the European Central Bank and agree to open their borders to flows of capital, people, goods, and services from other member countries. But at the same time they enjoy the protections and benefits of Eurozone membership—greater currency stability, lower interest rates and bond yields, and access to structural funds—that facilitate development that might not otherwise have occurred given their small size.

An interesting contrast neatly making our main point concerns the rather different t...