Transcript Wall Street Crash & Great Depression (1929

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
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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
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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
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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
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Shift to the MARKET:1980s-present
 Hayek = philosophical/theoretical
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
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Shift to the MARKET:1980s-present
 Growth in the most advanced economies
increasingly based on financialization
 In the US:
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income & wealth inequality increases
real median household income declines
household debt increases
financial leverage (debt) overrides capital
(equity) in the corporate sector
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Income inequality in the US
(US Census Bureau data)
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financialization
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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
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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
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The Political Trilemma of the World Economy
(Dani Rodrik, 2010)
Hyper-globalization
Golden
Straightjacket
National
Sovereignty
Global Governance
Bretton Woods Compromise
Democracy
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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)
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"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.)
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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
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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 gov’ts 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
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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
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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 17
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
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Policymakers must respond to these tensions
without sheltering groups from foreign
competition through protectionism:
1) Strike a balance b/w openness and
domestic needs
2) Do not neglect social insurance
3) Do not use "competitiveness" as an excuse
for domestic reform
4) Do not abuse fairness claims in trade
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