Deregulated and flexible labour markets promote economic efficiency. That has been something of a conventional wisdom in mainstream economics, and an article of faith among proponents of the so-called free market since the 1970s. The examples of the US and the UK, and to a lesser and more variable extent Western Europe, have apparently proven that labour market regulations and the power and influence of trade unions should be curtailed as far as possible, the results being greater efficiency in the form of faster growth in productivity and lower unemployment.
An interesting corrective to these tenets of neoclassical economics, particularly its free market variant, can be found in the March issue of the heterodox and usually fairly leftist Cambridge Journal of Economics. A paper by Alfred Kleinknecht provides a commentary on the links between supply-side labour market reforms and lower productivity growth since 2005, in the US, Japan and Western Europe. Continue reading →
An interesting piece by John Weeks, Professor Emeritus of economics at SOAS, with insights on environmentalism as well as the impacts of neo-liberalism on public policy. An excerpt and link to the full piece below:
A central characteristic of neo-liberal ideology is to render contentious public policy issues apolitical. As I show in my forthcoming book, Debt Delusion (Chapters 6 and 7), misrepresenting economic policies as apolitical was central to the construction of the reactionary neo-liberal agenda. While the neo-liberal grip has weakened, especially over economic policy in Britain, it remains powerful. An outstanding example is the UK debate over membership in the European Union, which the centre presents as a choice between civilization and chaos.
“[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 from the iconoclastic Michael Hudson’s J is for Junk Economics (p.109-110), in this occasional series:
“Government: From the Greek root cyber, meaning “to steer,” this social control function historically has been provided by public institutions at least ostensibly for the general welfare. Sovereign states are traditionally defined as having the powers to levy taxes, make and enforce laws, and regulate the economy. These planning functions are now in danger of passing to financial centers as governments become captive of the vested interests. The FIRE (Finance, Insurance and Real Estate) sector and its neoliberal supporters seek to prevent the public from regulating monopoly rent, and also aim to shift the tax burden onto labor and industry.
The recently proposed Trans-Pacific Partnership (TPP) agreement and its European counterpart, the Trans-Atlantic Trade and Investment Partnership (TTIP), would compel governments to relinquish these powers to corporate lawyers and referees appointed by Wall Street, the City of London, Frankfurt and other financial centers. The non-governmental court would oblige governments to pay compensation fines for enacting new taxes or applying environmental protection regulations or penalties. The fines would reflect what companies would have been able to make on rent extraction, pollution of the environment and other behavior usually coming under sovereign government regulations. Making governments buy these rights by fully compensating mineral and other rent-extracting businesses would effectively end the traditional role of the state.”
Robert Reich is an influential commentator, professor and author, who served under US Presidents Ford, Carter and Clinton, in the latter case as Labor Secretary. YouTube features plenty of his short, useful videos on economics and politics. Here is one of them. Thanks to Lars P. Syll for drawing my attention to it on his blog.
As an aside, I like Reich’s use of illustrative cartoons!
Donald Trump came into office promising to ‘roll back’ the regulatory ‘burden’ on business as part of his economic strategy. The claim is that this will reduce business costs and create jobs by boosting economic growth. But will it work?
The right often complains of the ‘burden’ on business and, particularly in the US, equates the absence of regulation with freedom.
This is emotive stuff. Burden? It sounds bad. Freedom? What’s not to like? But this kind of rhetoric avoids a more nuanced discussion of the issue. Continue reading →
A thought-provoking quote from Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism (p.190-191), part of my occasional series of brief excerpts from his bestselling book:
“Despite the importance of the corporate sector, allowing firms the maximum degree of freedom may not even be good for the firms themselves, let alone the national economy. In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force. Regulations can also help businesses by making them do things that may be costly to them individually in the short run but raise their collective productivity in the long run – such as the provision of worker training. In the end, what matters is not the quantity but the quality of business regulation.”
Michael Hudson’s latest book J is for Junk Economics is a treasure trove of, by current mainstream standards, radical economic ideas. Here he is on Big Government, that much-maligned feature of modern capitalist economies (p.41-2):
“Europe’s 1848 revolutions by the bourgeoisie against Europe’s royalty, landed aristocracies and their allied vested interests sought to transfer power away from government bodies controlled by these classes (eg., Britain’s House of Lords). Subsequent democratic reform movements favored progressive taxation, consumer protection and general economic regulation. These original liberals fought to tax special interests, not to free them from taxation. The thrust of parliamentary reform since the 19th century accordingly has been to make governments strong enough to tax rent extractors such as landlords, high finance and monopolists.
These rentiers have fought back by wrapping themselves in the rhetoric of individualism. Accusing politicians of corruption and insider dealing, populist demagogues assert that government is by nature incompetent as compared to private management – which turns out to be giant Wall Street corporations and trusts. The effect (indeed, the lobbying aim) of downsizing democratic government is to turn the economy over to the financial sector and its allied rentiers to administer in their own interest. The wealthy are all in favor of Big Government when it is oligarchic.
Trickle-down economists accuse social spending programs of leading to budget deficits that are inherently inflationary, but applaud tax cuts and bank bailouts that benefit primarily the FIRE (finance, insurance and real estate) sector. Their lobbyists craft a demagogic rhetoric to attack progressive taxation, regulation and social spending programs by insisting that public management is inherently inefficient as compared to private ownership of basic infrastructure, banking and health care. Claiming that public services are not a proper function of government, they advocate privatization of state-run enterprises, roads and the post office.
Frederick Hayek’s Road to Serfdom (1944) argued that public planning to subsidize basic needs or regulate “the market” (rent extractors, banksters and fraudsters) to protect consumers and employees leads to socialist or fascist autocracy. His libertarian followers insist that government regulation violates their personal rights to charge whatever the market will bear. Their oligarchic alternative to big government is to roll back democratic reforms by attacking social spending programs, replacing progressive taxes with a low flat tax and sales taxes that fall on labor/consumers; abolishing minimum wage protection, Social Security and other public services; and privatizing public infrastructure to turn it into feudal-style rent-extraction opportunities. The aim is to un-tax the FIRE sector (mainly the One Percent) and eliminate the consumer protection and labor reforms put in place in the early 20th century Progressive Era. The meaning of the word “reform” has been inverted, using libertarian-style language coined in the late 19th century against Big Government under the control of aristocrats and other rentiers.
The real question is thus whether governments will be democratic or oligarchic. Will they subsidize the economy and undertake public infrastructure investment, or will they tax the population at large to subsidize the FIRE sector and other special interests?”
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 →
A key lesson from my reading of the volume ‘Systems of Production‘ is that economic policy-making must always look beyond the simplicities of ‘deregulation‘ as an ideology and concentrate instead on more effective regulation. In some instances this might mean a re-regulation of business and labour markets for example, in other words the removal of some laws and the creation of new ones, which are more appropriate to a changed environment, and which can stimulate productive efficiency and contribute to social progress.
‘Systems of production’ contains a number of chapters written with Frank Wilkinson‘s original 1983 article from the Cambridge Journal of Economics entitled ‘Productive Systems’ very much in mind. His chapter opens the main body of the book and a working paper with the same content can be downloaded here.
A point that several of the chapters in the book make is that cooperation between capital and labour in the productive process is necessary for efficiency and that adverserial industrial relations are likely to impede economic progress. What is more controversial is the form this cooperation should take. The authors of a number of the chapters clearly support trade unions and the role they can play in safeguarding social rights, ‘decent’ wages, and productive efficiency. Where wages sometimes need to be cut in a company or across an industry during a recession for example, trade union agreements can ensure a more equitable outcome in securing a ‘voice’ for labour. They can press for social rights in the workplace and help firms and economies adjust to structural change in which workers need to be re-allocated from declining to growing industries. Government has a role to play here too, in providing training and re-training, assisting with worker mobility and setting the macro- and microeconomic framework for the economy in which productivity grows and improves the standard of living of as wide a majority as possible.
In the chapter on German industrial relations, it is argued that what is often needed more than ‘deregulation’ is ‘re-regulation’; new laws should replace older ones to enhance the flexibility of the workforce and stimulate innovation. The productive system should therefore evolve from where it is rather than fit into a textbook prescription. In some ways this is a conservative view, in which history and past successes are taken very much into account in designing new policies and systems of regulation. Occasionally radical change may be needed however, but history and insitutions still need to be studied carefully in the process.
One of the important lessons from Wilkinson’s original article (see above) and the updated piece from 2003 is that history and institutions matter and should be analysed fully in formulating theories in economics and using those theories to make effective policy.