“[Karl Polanyi] identified a tension between what he considered to be the two organising principles of modern market society: “economic liberalism” and “social interventionism”, each with their own objectives and policies as well as support from the groups within society whose interests they are seen to serve. The aim of economic liberalism is to establish or restore the self-regulation of the system by eliminating interventionist policies that obstruct the freedom of markets for land, labour and capital. Through laissez-faire and free trade, social relationships are embedded within the economic system and subjected to unregulated market forces with support from the propertied classes, finance and industry. By contrast, the aim of social interventionism is to embed the economy within social relationships, thereby safeguarding human beings and nature through market regulation, with support from those adversely affected by the destabilising consequences of economic liberalisation and the self-regulating market – notably the working classes.
Polanyi argued that there is a conflict between the interest of capital in freeing itself from the constraints of society – and society’s interest in protecting itself from the social dislocation of the market (particularly that of finance). This generates a “double-movement” of counter-reactions by both capital and society, mediated by politics and the legal process. Without compensating social intervention, Polanyi contended that the pressure on vulnerable individuals and groups within society, arising from attempts at market self-regulation, would generate resistance in the form of labour, civic, social and political movements. If these become widespread – and discontent with the damaging effects of the self-regulating market intensifies – social order becomes more difficult to maintain; and in an effort to safeguard the existing system, political leaders may attempt to deflect dissatisfaction by scapegoating. However, at some point, the state is likely to be put in the position of having to decide whether to intervene on behalf of those affected or to risk social breakdown. In turn, the impairment of market forces associated with protective regulatory measures could set into motion a counter-movement on the part of capital to attempt to protect its own interests by freeing itself from social and political constraints. In response, the state would have to decide the degree to which laissez-faire should be restored and social protections and market regulations relaxed.”
Suzanne J. Konzelmann, Simon Deakin, Marc Fovargue-Davies and Frank Wilkinson (2018), Labour, Finance and Inequality, p.5-6
Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.128-129). It defines a well-known term in economics, co-opted by the right, often misleadingly, in order to provide support for ‘free’ markets:
“Invisible Hand: The term dates back to Adam Smith’s Theory of Moral Sentiments (1759) postulating that the world is organized in a way that leads individuals to increase overall prosperity by seeking their own self-interest. But by the time he wrote The Wealth of Nations in 1776, he described hereditary land ownership, monopolies and kindred rent-seeking as being incompatible with such balance. He pointed to another kind of invisible hand (without naming it as such): insider dealing and conspiracy against the commonweal occurs when businessmen get together and conspire against the public good by seeking monopoly power. Today they get together to extract favors, privatization giveaways and special subsidies from government.
Special interests usually work most effectively when unseen, so we are brought back to the quip from the poet Baudelaire: “The devil wins at the point he convinces people that he doesn’t exist.” This is especially true of the financial reins of control. Financial wealth long was called “invisible,” in contrast to “visible” landed property. Operating on the principle that what is not seen will not be taxed or regulated, real estate interests have blocked government attempts to collect and publish statistics on property values. Britain has not conducted a land census since 1872. Landlords “reaping where they have not sown” have sought to make their rent-seeking invisible to economic statisticians. Mainstream orthodoxy averts its eyes from land, and also from monopolies, conflating them with “capital” in general, despite the fact that their income takes the form of (unearned) rent rather than profit as generally understood.
Having wrapped a cloak of invisibility around rent extraction as the favored vehicle for debt creation and what passes for investment, the Chicago School promotes “rational markets” theory, as if market prices (their version of Adam Smith’s theological Deism) reflect true intrinsic value at any moment of time – assuming no deception, parasitism or fraud such as characterize today’s largest economic spheres.”
Following videos on Marx, Keynes, Adam Smith and Capitalism, and in the interests of some kind of balance, here is a brief video introduction from The School of Life on Austrian School economist Friedrich Hayek. His thinking influenced the political programmes of Reagan and Thatcher in the 1980s and, many years before, he was involved in some great intellectual debates with Keynes.
I found the video useful, as I have not read any of Hayek’s work, though I have read other writer’s critiques of him. One of the points in the video that stood out for me was Keynes’ questioning of Hayek as to where the line should be drawn between government intervention and the private sector, given the inevitability of some state planning. Of course, private firms make plans as much as governments, but the balance between the public and private will surely vary over time in any country depending on a range of factors.
I would also make the point that Thatcherism has been described by one academic as ‘the free economy and the strong state’. If this is an accurate characterisation, it illustrates the inevitable and shifting relationship between the market and the state, and a range of other institutions. Like it or not, modern capitalist economies are all mixed economies with interventionist states. There will always be room for debate over the balance between the various and evolving institutions that comprise such a system.
In this short video, Cambridge University’s Ha-Joon Chang, a particularly thoughtful economist whose work I find both interesting and inspiring, discusses the boundaries of the market and the state in modern economies.
He also argues that economic change is inevitably political and makes a strong case against the imposition of ostensibly scientifically derived economic policies on democratic states by unelected technocrats. This happened in nation-states from Greece to Italy in the wake of the eurozone crisis.
This post is one of an occasional series inspired by Ha-Joon Chang’s iconoclastic and very readable book 23 Things They Don’t Tell You About Capitalism. The quote below is from ‘Thing 16’.
“People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited – or, in the jargon, we have ‘bounded rationality’. The world is very complex and our ability to deal with it is severely limited. Therefore, we need to, and usually do, deliberately restrict our freedom of choice in order to reduce the complexity of problems we have to face. Often, government regulation works, especially in complex areas like the modern financial market, not because the government has superior knowledge but because it restricts choices and thus the complexity of the problems at hand, thereby reducing the possibility that things may go wrong.”
Ha-Joon Chang (2012), 23 Things They Don’t Tell You About Capitalism, p.168
The argument that humans have ‘bounded rationality’ and experience uncertainty (as opposed to calculable risk), in which they simply do not know what is going to happen in the future, illustrates the importance of a range of institutions in modern society. These both constrain and enable human activity. The market is an institution, but one of many, even in what is often called a market economy. Continue reading
This short extract of a talk by the thoroughly engaging Marxist economist Richard Wolff makes a useful point: that the domain of markets is and should be limited, even under capitalism. This is realized in the fact that all so-called market economies are in fact mixed economies, with a range of non-market institutions such as the state, the legal system, public services etc. which both support the functioning of markets, and help to temper their excesses.
You may or may not take Wolff’s viewpoint to its logical conclusion: the case for some form of socialism. But it is important to recognize from this that markets are political, cannot really be ‘free’, and that the mixed economy, while it may evolve and change, is what we live in for now. Pure market or planned economies remain unachievable utopias.
In his memoirs, Greenspan makes clear that he regards the current economic and financial crisis to have been largely unforseeable and not preventable by policy-makers; that it was a product of forces of globalization, of the opening up of markets globally. He has stated in subseqent interviews that it is a ‘once in a century event’, and thus that we should not try and prevent such an event in the future through a greater regulation of capitalism generally.
In his latest book, Chang makes no apologies for his position in being committed to government intervention in the economy to promote and sustain the prosperity of the nation, particularly in countries which have yet to ‘develop’, industrialize, and catch up to some degree in terms of national income with the current group of rich countries. He makes a strong case for intervention to promote development, and is highly critical of neo-liberal theories of development policy and practice. Since his book is largely about economic development, Chang does not make clear in this volume what he regards as suitable policy prescriptions for countries once they reach a relatively high level of income per capita. He is clear that poor country governments need to use protectionism and other interventions to build their ‘capabilities’ (their ability to use more advanced technologies in production), but this is not a book primarily about the policies of developed economies. Since rich countries usually continue to develop their wealth and techological capabilities, I would imagine he would advocate certain discretionary interventions in support of this process. He does mention that rich country governments, for example that of the US, often behave in a ‘Keynesian‘ fashion during recessions, cutting interest rates and running budget deficits to stimulate growth and employment, while at the same time, via the IMF, prescribing high interest rates and deficit reduction to poorer countries if they undergo a financial crisis. Chang is highly critical of this ‘one policy for the rich, another for the poor’ behaviour. In general then, it would seem that Chang favours well-designed government interventions as an absolute necessity for promoting growth and prosperity throughout the global economy, and within all nations.
Greenspan, in contrast to Chang, favours the extension of market activity as far as is possible (Chang is not against the growth of markets, but he would not promote them as an ideology), while acknowledging the stressful and unsettling side of ‘creative destruction‘ and the consequent social change for human beings. He sees a trade-off between the creation of wealth and the mitigation or tempering of market forces. His writings make allusions to history and the success of market economies to date, but he gives few detailed examples of this outside the US. Chang’s book explores the history of development policies much more deeply and makes a convincing case that economic growth and development success stories have been made possible by detailed government intervention. While not always successful, ‘wise’ interventions can make a real difference to the growth of material wealth.
Greenspan makes quite a convincing case as well that the current financial crisis and the preceding boom were caused by forces of globalization. Specifically, the opening-up of markets in China and India especially, have increased the global supply of labour by a huge degree, putting downward pressure on global wages, inflation and long-term interest rates. The price of risk was thus very low for a number of years this decade. These forces caused a boom in asset prices, which provided collateral for credit booms in many economies around the world. As these forces, and the associated economic and financial imbalances, unwind, a severe global slowdown, and a recession in most if not all rich countries, is precipitated, with the consequent need for massive government intervention in the rich world to prevent financial collapse. Greenspan has since commented that his approach had had a ‘flaw‘. Nevertheless, he has taken little responsibility for either the financial boom or the subsequent bust. Is he right? Do policymakers bare little of the blame? We must remember that it was government policies, conscious choices on the part of officials, which led to the current form of globalization. This implies that different forms would have been possible.
Are policymakers helpless in the face of market forces, and do they merely give way to their inevitable power? If they are, this does not say much for the power of democracy, to counter the power of what are also corporate and financial interests, and more than simply ‘market forces’. The latter is too convenient an excuse for inaction or one-sided argument. The current system of the global economy has been deliberately created by a whole sequence of policy choices and, as argued above, different forms of organisation may have been possible. I remain hopeful that this is the case, and that we do have choices about what sort of future we want materially, socially and politically.
In Chang’s approach, government interventions are necessary to ensure prosperity. This, I would argue, should include promoting economic stability. Some others, including Greenspan, have argued that it was stability, in the form of low inflation, that triggered the boom in the first place, and thus the success of policies which have promoted globalization and price stability, have created new instabilities. I find this convincing too. But could governments have been more preemptive and nipped the boom before it created such problems? Well, this may have been difficult, given that it would probably have undermined prosperity to some degree, which is politically unpopular. Central banks are to some degree meant to be free from political influence, although they are charged with a political mandate. Had their mandate been to guard against more general financial instability and not simply price instability, mitigating action by central banks and regulators could have been taken sooner and maybe prevented a crisis of such major proportions. If a central bank is meant to promote sustainable economic growth, as the US Federal Reserve is, it is the responsibility of Greenspan, his advisors, and their successors, to nip inflation in the bud, and that could include asset-price inflation, which can obviously cause a wider systemic instability and undermine growth in the medium term.
What defines sustainable growth? And does sustainable growth have to be as stable as possible? What is the link between instability and the long-run rate of growth? And will the population, particularly in a modern democracy, bear the hardships of short and even medium-run economic and financial instability? I would argue that the answer to the last question is no. The other questions require a deeper analysis. The important thing is that governments put in place new policies which lay the basis for a new round of sustainable growth across the globe. Barack Obama has promised to ‘create’ 2.5 million jobs in his first two years in office through public works projects to rebuild the infrastructure of the US. This vision could potentially increase US productivity and prosperity in the longer term. Elsewhere, EU countries have allowed budget deficits to increase to mitigate the downturn. In the UK, some public works projects are to be brought forward, as the budget deficit is forecast to reach some 8% of GDP in 2010. Probably more important to the longer-term restoration of growth is the ‘fixing’ of the financial system and the rebuilding of financial intermediation. According to Greenspan, the latter is ‘broken’ globally and part of the fixing is that banks needs to rebuild the capital base part of their balance sheets, while ‘toxic’ assets are wound down and removed. The whole process could take many years, but growth can be restored more quickly, as asset markets turn, particularly those that stimulate consumption and investment, the housing market and the stock market.
Clearly government intervention has been absolutely necessary in this time of crisis and only the most die-hard neo-liberals would argue against it now. Many of those who supported recent policies are probably reluctant interventionists even in the current situation, and may be saddened that it had to come to this. Interventionists by persuasion might be ‘happier’ that government stepped in in the way that it did, or at least feel vindicated. As the crisis begins to unwind and growth begins to return, government can either get out of the way as quickly as possible or else try to reshape public institutions and systems of regulation to ensure that the current form of global crisis remains a ‘once in a century event’, or even less so. I would argue for the latter.
So which approach is right, that of Greenspan or Chang? In the case of rich countries, both are partly right, depending on the circumstances. Policy choices shaped the current form of globalization, which gave rise to the financial boom and subsequent bust. New policies were and are needed to bring us out of the crisis, and even Greenspan has tacitly admitted this to be the case. The power of markets and of government, working together, will restore prosperity in the longer term.