State vs. Market

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 govt 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 govt from economy
• ? Shift to the MARKET 1980s - present

3
Shift to the STATE 1940s-70s

• Keynes philosophical forefather
• Postwar advanced industrialized economies
  featured government intervention, subsidies to
  key industries, protection of labor rights,
  expansion of public spending (in education,
  infrastructure, etc.) trade protectionism
• Associated with postwar boom (1945 late 1960s)
  , a long period of growth in GDP and real median
  income

4
Shift to the STATE 1940s-70s

• The most successful newly industrializing
  economies in Asia and Latin America also had
  considerable govt 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 MARKET1980s-present

• Hayek philosophical/theoretical forefather
• Reagan revolution in US begins 30-yr wave of
  deregulation, proclaims faith in free markets
  mistrust of govt
• Labeled market fundamentalism by Stiglitz
• Neoliberalism, Washington Consensus, reigns
  supreme globally

6
Shift to the MARKET1980s-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)
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(No Transcript)
9
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
• financialization also makes economic rents
  possible
• ? financial leverage tends to override capital
  (equity) and financial markets tended to dominate
  over the traditional industrial economy

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 help norms
• ? tension between the market and social groups
  such as workers, pensioners, and
  environmentalists, w/ governments in the middle

14
Sources of tension between the global market
social stability

1. Reduced barriers to trade/investment increase
   asymmetry b/w groups that can cross borders
   those that can't
2. GL makes it difficult for govts to provide
   social insurance
3. GL engenders conflicts within and b/w nations
   over domestic norms and the social institutions
   that embody them

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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 govts to provide
social insurance

• social insurance is a central govt function,
  which has helped maintain social cohesion
  domestic political support for liberalization
  over postwar pd
• Govts have used fiscal powers to insulate
  domestic groups from excessive market risks,
  especially when they're foreign in origin, but
  govt 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 Maastricht
• Trade policy has redistributive consequences,
  among sectors, income groups, and individuals

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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