Transcript States, Markets, and the Good Society

States, Markets, and the Good
Society
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Milton Friedman: “there are only two ways
to coordinate the economic activities of
millions. One is central planning by the
government; the other depends on the
voluntary cooperation of individuals—the
techniques of the marketplace.”
Key question: what balance between states
and markets (political economy) most
enhances people’s capability and contributes
to the good society? (57)
Market systems
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Market system = an economy in which production for
profit is intended for and coordinated through private
exchanges between buyers and sellers
◦ Productive assets are privately owned and employed to earn
profits for their owners
◦ Production is geared to produce commodities, goods for sale in
the market
◦ Prices are set through market forces, supply and demand
Over time, the market system has become more extensive
(involving more international transactions) and more
intensive (involving more social transactions)
 States determine how extensive markets are
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Taxation on imports
Regulations on foreign investment
Controls on currency
Trade treaties/international organizations
States determine how intensive markets are
◦ Restrictions on what is/can be for sale in the market
States and Markets
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Charles Lindblom: “Like the state…the market system is a method
of controlling and coordinating people’s behavior.”
Market systems require states and cannot exist without them
States make market system possible, making ground rules that
permit the system to work
◦ States create common currency, facilitate trade and exchange, enforce
contracts, supply public goods (transportation, police, courts, etc.),
which markets cannot provide
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Visible hand of state supplements invisible hand of market
Market freedom requires state compulsion
Markets only as good as rules states make to support them
Political economy = balance between political and market forces,
critical to creating conditions for the good society
As with political institutions, it is important to get economic
institutions right
Advantages of Market Systems
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Extraordinarily dynamic
◦ Promote new products, more efficient production
methods and technologies
◦ Competition and profits encourages innovation
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Enormously productive
◦ Leading to rising incomes and living standards
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Enhance prospects of democracy and political
rights; does not ensure democracy and political
freedom
◦ Market systems separate economic from political
power (potentially countervailing tendencies)
◦ Planned economies combine economic and political
power in hands of the state
Dark Side of Market Systems
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Highly volatile
◦ As we know all too well at present, susceptible to periods of boom and
bust
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Volatility can be socially destructive
◦ Unemployment, wasted resources, reduced investment, reduced
incentives for re-training
◦ Can lead to sense of powerlessness, insecurity
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Generate extraordinary inequality
◦ Depresses earnings of those without valued skills; undermines
bargaining power of unskilled workers; market position of low skill
workers declines
◦ Expands power of those who control scarce resources (skills, capital);
market position of those with market power increases
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Create harmful spillover effects (externalized costs)
◦ Markets encourage participants to adopt a narrow perception of
interests; encourage participants to avoid the costs of their decisions
and to pass them on to others, to the detriment of society; examples:
pollution, global warming/climate change
Shifting Balance
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Market systems require rules enforced by the state to work
◦ Effective rules reduce uncertainty that contracts will be honored, money will retain
value, consumers won’t be cheated
States also steer economies toward certain goals
 States intervene in the market
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◦ Counteract disadvantages: welfare systems, pollution controls, even out swings in
business cycle, etc.
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Degree to which states should intervene in the marketplace a source of
conflict in most societies
◦ Boundary between what should be left to market and what should be determined by
states shifts in response to political pressure, and has shifted over time in response to
changing circumstances
◦ Post-WWII, state intervention (mixed economies) considered appropriate in
developed and developing countries
◦ By 1970s, recession created grounds for new groups (in particular, the business
community) to challenge mixed economies; gave rise to market advocates (e.g., Reagan,
Thatcher) who criticized the state for spending, taxes, and regulation
◦ Whereas advocates of mixed economies pointed to market failures, free-marketeers
pointed to political failures
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Growth slowed because welfare state undermined work ethic
Regulations limited entrepreneurialism
Taxes diverted too much income
Public enterprises did not perform
Globalization
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Globalization = increasing flow of money
(investment), people, skills, ideas, and goods (trade)
across borders (market extension)
◦ While there has always been trade, investment, and
cultural exchange across borders, there is a qualitative
difference today in the volume of international exchange,
breadth/depth of connections/transformations, and speed
◦ In part, result of technological change (transportation,
communications)
◦ Also promoted by MNCs, governments, international
agencies
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“Washington consensus” (neoliberalism)
◦ Balance budgets, cut spending, open markets to foreign
trade/investments, privatization of industries
◦ Supported by large MNCs, US, and World Bank/IMF
 Made economic assistance dependent on adoption of neoliberal
policies
Neoliberalism
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Prescription (to promote efficiency, productivity, growth, rising incomes)
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Too much state regulation
Control inflation, limit debt, balance budgets
Rely on private enterprise
Free trade (reduce tariffs, barriers)
“Race to the top” (countries integrate themselves into global economy)
Neoliberalism’s critics
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Leads to increasing inequality between and within countries
Economic crises
Environmental destruction
Rationale for promoting interests of powerful individuals and corporations at expense
of poor people and disadvantaged states
◦ “Race to the bottom” (countries compete to have lowest wages, taxes, fewest
regulations to attract foreign investors)
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Empirical record of neoliberalism
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Uneven at best
Chile a success story; most are not (e.g. Haiti)
Many successful countries diverged from model (e.g., India, China, S. Korea, Taiwan)
Even World Bank now concedes one-size-all prescription of balanced budgets, open
markets, and privatization inadequate
Effects of Globalization
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On developing countries
◦ Rudra finds greater integration brought more job opportunities for
workers in countries at all levels of development; workers in less
developed countries at highest levels of economic development
benefited most
◦ Effects of globalization on workers in less developed countries
conditional upon country’s level of economic development and
economic/political institutions
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Consequences of globalization varies for developed countries as
well
◦ Exaggerated differences among them in terms of government spending
as proportion of GDP, union density rates, provision of welfare
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Various outcomes a function of different institutions and governing
coalitions
Some countries have political capacity to take advantage of
globalization, others failed to develop it
Only countries that have supportive institutions and governing
coalitions can take advantage of it and ameliorate its effects
State Intervention: Fiscal Policy
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Fiscal policy – manipulation of budgets; overall revenues
and expenditures
◦ Budget deficits (spending more than revenues) enables states to
increase money supply, demand for goods, business investment,
and reduce unemployment
◦ Budget surplus (spending less than revenues) enables state to
reduce money supply, cool economy, and reduce inflation
◦ States vary greatly in how much they tax and how much they
spend
◦ States that tax more (capture larger proportion of GDP) have
more influence over how national income is used and distributed
in society; states that tax less have less influence over how
income is used and who receives it
Monetary policy
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Monetary policy – manipulating rates of
interest, cost of borrowing money
◦ High interest rates discourage borrowing and
spending (used to counteract inflation)
◦ Low interest rates encourage borrowing and
spending (used to fight recession)
◦ Central banks issue currency and manage value in
foreign exchange
◦ States vary in influence/control over central bank
 Some are insulated from political influence (e.g., U.S.)
 Some are state controlled (e.g., China, S. Korea in 1970s)
Regulatory policy
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Regulatory policy – explicit rules of behavior
that firms must follow (manage competition, set
industry standards, require certain business
practices)
◦ States vary in how much they regulate firms to direct
behavior
◦ Standard measure: number of days it takes to start a
new business
◦ Another measure is labor relations (rules regarding
relations between owners and workers)
◦ U.S. one of the least regulated in the world; American
firms have significant power in deciding how to
manage their workforce
Nationalization
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Nationalization – state-owned and
controlled public enterprises
◦ Enables states to control strategic assets, and
to inject social criteria into economy
 Examples: Mexico and oil industry (PEMEX); China’s
public enterprises (jobs/services)
◦ States vary in degree of nationalization
 Socialist states own and control all means of
production (e.g., Cuba, N.Korea)
 More free-market systems have few public
enterprises (e.g., U.S. and Chile)
States and Markets
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Fiscal policy, monetary policy, regulations, and public enterprises only some
of the ways states influence/intervene in the economy
◦ In Japan, the state once promoted mergers and cooperation among firms to
create firms large, efficient enough to compete internationally
◦ In Germany, the state has brokered agreements among union and employer
organizations
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Each country works out a balance between states and markets through
political struggle
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In general, where markets play a greater role
◦ States do not redirect as much of the country’s income through its budget
◦ States do not exert much influence on central banks
◦ State regulations are not intrusive
◦ Public enterprises are small
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When states play a more powerful role in determining who gets what
◦ States redirect more of the country’s income through taxes and spending
◦ States exert greater influence over central banks
◦ States regulations are pervasive and directive
◦ Public enterprises control economy’s strategic industries
Markets and Capability
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Which form of political economy (what balance
between states and markets) is most compatible with
the good society?
◦ What mix of states and markets best promotes physical wellbeing, safety, informed decision-making, and civil/political rights?
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Markets/states and democracy
◦ Using Fraser Institute data (on economic freedom, i.e., free
markets, 82), it appears market systems and democracy are
related
 Liberal democracies have high degrees of economic freedom (more market
than state)
 Market systems may not guarantee liberal democracy, but there are no liberal
democracies without them
 More markets do not necessarily mean more political freedom, but a lack of a
strong market system does seem to preclude it
Markets and Capability, II
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Markets/states and literacy
◦ Using World Bank (World Development
indicators, 84), literacy rates are 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)
◦ Literacy rates appear to reflect cultural and
religious values
Markets and Capability, III
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Markets/states and safety
◦ Type of political economy (balance between state and market)
appears to be totally unrelated to likelihood of war
 States with market-based economies no more likely to be engaged in
conflict (with other states or internally, the more common form)
than state-led economies
 Type of political economy seems not to be related to state aggression
 Unlike with democracies (which usually do not fight each other,
democratic peace theory), states with market-driven economies and
those with state-led economies will fight with their own kind and any
other kind
◦ Using homicide rates (Murders per capita data, 85), little
correlation between homicide rates and political economy
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Type of economy appears to have little influence of
safety; citizens are no safter in market-based countries
than state-led economies
Markets and Capability, IV
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Markets/states and physical well-being
◦ Using life expectancy data (World Bank,
World Development indicators, 87), there is a
strong association between life expectancy
and market economies
 Countries with market systems are more likely to
live longer, but there are glaring exceptions (striking
anomalies) to the rule
 Cuba and the U.S. have the same life-expectancy
 Zambians (with a market-based system) can expect to live
half as long as Israelis with a strong state-led economy
Markets and Capability
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Market-based economies may improve capabilities a bit,
but not consistently so
◦ Democracy may be weak among state-led economies, but not
necessarily strong among market-led ones
◦ Countries with market-led systems are not necessarily the most
literate
 Conditioned by intervening variables (religious and cultural norms)
◦ Countries with market-led systems are no safer than those with
state-led economies
◦ Market-based systems do appear to correlate with life
expectancy, but with significant exceptions
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Markets are 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)