State vs. Market – in theory

1. State vs. Market – in theory • Mainstream economic thinking has been a battle between 2 paradigms, their relative influence shifting over time • paradigms: philosophical or theoretical frameworks • Crises spark “paradigm shifts” (Kuhn 1962) • Wall Street Crash & Great Depression (1929-late 30s) • Energy Crisis of the 1970s (1973 - late 1970s) • Global Financial Crisis of 2008? • Nature and extent of the “paradigm shift” still unclear

2. State vs. Market – in policy • Wall Street Crash & Great Depression (1929 - late 30s): stock market crash sparks bank runs & collapse of banking system, with worldwide ramifications, e.g., a global downturn • Prompts gov’t intervention & regulation to protect workers & economy  Shift to the STATE: 1940s – 1970s • Energy Crisis of the 1970s (1973 – late 70s): oil embargo of the Organization of Arab Petroleum Exporting Countries leads to 1973-74 stock market fall and sharply falling profits in manufacturing in US and other advanced industrialized countries, e.g., Germany & Japan • Prompts deregulation, de-unionization, retreat of the gov’t from economy  Shift to the MARKET: 1980s - present

3. Shift to the STATE: 1940s-70s • Keynes = philosophical forefather • Postwar advanced industrialized economies featured gov’t intervention, subsidies to key industries, protection of labor rights, expansion of public spending (in education, infrastructure, etc.) trade protection • Associated with postwar boom (1945–late 60s), a long period of growth in GDP & real median income

4. Shift to the STATE: 1940s-70s • The most successful newly industrializing economies in Asia and Latin America also had considerable gov’t intervention • South Korea subsidized & protected “infant industries” • Brazil followed ISI (import-substitution industrialization) to reduce foreign dependency, erecting trade barriers against cheap foreign imports while subsidizing the local production of industrialized products

5. Shift to the MARKET:1980s-present • Hayek = philosophical forefather • “Reagan revolution” in US begins 30-yr wave of deregulation, proclaims faith in free markets & mistrust of gov’t • Labeled “market fundamentalism” by Stiglitz • Neoliberalism, Washington Consensus, reigns supreme globally

6. Shift to the MARKET:1980s-present • Growth in the most advanced economies increasingly based on financialization • In the US: • income & wealth inequality increases • real median household income declines • household debt increases • financial leverage (debt) overrides capital (equity) in the corporate sector

7. Income inequality in the US (US Census Bureau data)

9. financial capitalism/financialization • In financial capitalism, financial leverage tends to override capital (equity) and financial markets tend to dominate over the traditional industrial economy • financial intermediaries (banks, investment firms) become large concerns • wealth holders have significant influence on political process and economic policy • financialization: an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument • original intent is to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments • workers, through a financial instrument such as a mortgage, could trade their promise of future work/wages for a home • financialization of risk-sharing makes all insurance possible • financialization of the US govt's promises (bonds) makes all deficit spending possible • but financialization also makes economic rents possible • economic rents are excessive payments for goods/services

10. The Political Trilemma of the World Economy (Dani Rodrik, 2010) Hyper-globalization Golden Straightjacket Global Governance National Sovereignty Democracy Bretton Woods Compromise

11. What is democracy? • Democracy is a certain class of relations between states and citizens • A regime is democratic to the degree that political relations between the state and its citizens feature broad, equal, protected and mutually binding consultation • Democratization means net movement toward broader, more equal, more protected, and more binding consultation • De-democratization is movement in the reverse (Tilly, Democracy, 2007)

12. "Has Globalization Gone Too Far?," Dani Rodrik, Ch. 28, pp. 241-246 (Excerpted from Rodrik, “Has Globalization Gone Too Far?,” in Has Globalization Gone Too Far?, Institute for International Economics, pp. 2, 4-7, 77-81.)

13. GL is exposing deep fault lines b/w social groups • Those who have the skills & mobility to flourish in global markets • Those who don't have these advantages or perceive expansion of unregulated markets as a threat to social stability & deeply held norms  tension between the market and social groups such as workers, pensioners, and environmentalists, w/ gov’ts in the middle

14. Sources of tension between the global market & social stability • Reduced barriers to trade/investment increase asymmetry b/w groups that can cross borders & those that can't • GL makes it difficult for gov’ts to provide social insurance • GL engenders conflicts within and b/w nations over domestic norms and the social institutions that embody them

15. 1: Reduced barriers to trade & investment increase asymmetry b/w groups that can cross borders (directly or indirectly via outsourcing) and those that can't • Those who can: owners of capital, highly skilled workers, professionals free to take their resources where they are most in demand • Those who can't: many unskilled & semiskilled workers and most middle managers • their labor is elastic, substitutable, i.e., they are more easily substituted by services of other ppl across national boundaries • most GL research has focused on the downward shift in demand for unskilled workers rather than the increase in the elasticity of demand

16. GL enables “substitutability,” transforms the employment relationship • Postwar “social bargain” b/w workers & employers (i.e., steady increase in wages and benefits in exchange for labor peace) has been undermined • Substitutability has concrete consequences: • Workers now have to pay a larger share of the cost of improvements in work conditions and benefits (i.e., bear greater incidence of nonwage costs) • They have to incur greater instability in earnings and hours worked in response to shocks in labor demand or labor productivity (i.e., volatility and insecurity increase) • Their bargaining power erodes, so they receive lower wages and benefits whenever bargaining is an element in setting the terms of employment

17. 2: GL makes it difficult for gov’ts to provide social insurance • social insurance is a central gov’t function, which has helped maintain social cohesion & domestic political support for liberalization over postwar pd • Gov’ts have used fiscal powers to insulate domestic groups from excessive market risks, especially when they're foreign in origin -- but gov’t has been downsizing, reducing social obligations

18. 3: GL engenders conflicts within and b/w nations over domestic norms & social institutions that embody them • With international diffusion of technology, nations with different values, norms, institutions, begin to compete head on in mkts for similar goods • presents opportunities for trade among countries at very different levels of development • Trade becomes contentious when it unleashes forces that undermine domestic norms • e.g., plant closed in South Carolina for child labor in Honduras or French pensions cut in favor of EU obligations • Trade policy has redistributive consequences, among sectors, income groups, and individuals

19. The Role of National Governments • Policymakers must respond to these tensions without sheltering groups from foreign competition through protectionism: • Strike a balance b/w openness and domestic needs • Do not neglect social insurance • Do not use "competitiveness" as an excuse for domestic reform • Do not abuse fairness claims in trade