States, Markets, and the Good Society

1. States, Markets, and the Good Society • State (central planning by government) • Market (free market) • What balance between states and markets most enhances people’s capability, the good society?

2. Market systems • Market system = production for profit intended for, coordinated through private exchanges (buyers and sellers) • More extensive (more international transactions) and more intensive (more social transactions) • States determine how extensive and intensive markets are

3. States and Markets • Lindblom: “...market system…method of controlling and coordinating people’s behavior.” • Market systems require states (cannot exist without them) • Political economy= balance between political and market forces

4. Advantages of Market Systems • Dynamic • Productive • Enhance prospects for democracy and political rights • Separate economic from political power • Planned economies combine economic and political power in state

5. Dark Side of Markets • Volatile • Socially destructive • Inequality • Harmful spillover effects (externalized costs)

6. Shifting Balance • Market systems require rules enforced by state to work • States steer economies toward certain goals, intervene • Degree of intervention source of conflict • 1970s, rise of market advocates (Reagan, Thatcher) -- spending, taxes, regulation • work ethic, entrepreneurialism, taxes divert income, public enterprises unproductive, inefficient

7. Globalization • Globalization = increasing flow of money (investment), people, skills, ideas, and goods (trade) across borders (market extension) • “Washington consensus” (neoliberalism, “market fundamentalism”) • Balance budgets, cut spending, open markets to foreign trade/investments, privatize industries • Supported by large MNCs, US, and World Bank/IMF • Economic assistance dependent on adoption of neoliberal policies (Structural Adjustment Policies)

8. Neoliberalism • Markets = efficiency, productivity, growth, rising incomes • Critics • Inequality between and within countries • Promotes corporations and powerful individuals at expense of poor people and disadvantaged states • Crises, environmental destruction • Empirical record uneven • Widespread adoption of SAPs; little growth, development • Strong-state successes (e.g., India, China, S. Korea, Taiwan)

9. Effects of Globalization • Developing countries • Greater integration = more job opportunities for workers at all levels of development; workers in less developed countries at highest levels of economic development benefit most • Workers in less developed countries = effect conditioned by level of economic development and economic/political institutions • Developed countries • Function of different institutions and governing coalitions • States differ in government spending, union density, welfare • Some take advantage of globalization, others fail to • Some ameliorate its effects, others fail to

10. State Intervention • Fiscal policy – budgets; overall revenues and expenditures • Deficits/surplus; tax and spending • States that tax more have more influence over how national income is used and distributed • Monetary policy – interest rates, cost of borrowing money • Inflation/recession • Central banks/foreign exchange • States vary in influence/control over central bank (some insulated from political influence, e.g., U.S.; some state controlled (e.g., China, S. Korea 1970s) • Regulatory policy – rules that firms must follow • Manage competition, industry standards, certain business practices • Nationalization – state-owned and controlled public enterprises • States control strategic assets, social criteria; vary in degree

11. States and Markets • Japan = state promoted mergers, cooperation to create firms large, efficient enough to compete internationally • Germany = state brokered agreements among union and employer organizations • State-market balance product of political struggle • Market systems • States do not redirect as much income, exert influence on central banks; state regulations are not intrusive, public enterprises small • State systems • States redirect more income through taxes and spending, exert greater influence over central banks; state regulations pervasive and directive, public enterprises control strategic industries

12. Markets and Democracy • Liberal democracies have higher degrees of economic freedom • Market systems do not guarantee liberal democracy • No liberal democracies without market systems • More markets do not necessarily mean more political freedom • Lack of strong market system seems to preclude it

13. Markets and Literacy • Literacy rates not strongly associated with market economies • High literacy rates among East European countries • Low rates among poor and wealthy countries (e.g., African states and Arab states) • Appear to reflect cultural and religious values

14. Markets and Safety • Political economy totally unrelated to likelihood of war • Little correlation between political economy and homicide rates • Type of economy has little influence on safety • Citizens no safer in market-based countries than state-led economies

15. Markets and Physical Well-Being • Strong association between life expectancy and market economies • Countries with market systems are more likely to live longer, with glaring exceptions • Cuba and U.S. have same life-expectancy • Zambians (with a market-based system) can expect to live half as long as Israelis with strong state-led economy

16. Markets and Capability • Market systems may improve capabilities a bit, but not consistently • Democracy not necessarily strong among market systems • Not necessarily most literate • No safer • Longer life expectancy (with significant exceptions) • Markets not a panacea; must be supplemented to increase capabilities • Challenge: to develop a balance between states and markets that promotes best qualities of markets (innovation, productivity), while avoiding worst effects (instability, inequality)