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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 DepressionWall Street Crash & Great Depression (1929 - late 30s): (1929 - late 30s):

stock market crash sparks bank runs & collapse of banking stock market crash sparks bank runs & collapse of banking system, with worldwide ramifications, e.g., a global downturnsystem, with worldwide ramifications, e.g., a global downturn Prompts gov’t intervention & regulation to protect workers & Prompts gov’t intervention & regulation to protect workers &

economyeconomy Shift to the STATE: 1940s – 1970sShift to the STATE: 1940s – 1970s

Energy Crisis of the 1970sEnergy Crisis of the 1970s (1973 – late 70s): (1973 – late 70s): oil embargo oil embargo of the Organization of Arab Petroleum Exporting Countries of the Organization of Arab Petroleum Exporting Countries leads to 1973-74 stock market fall and sharply falling profits leads to 1973-74 stock market fall and sharply falling profits in manufacturing in US and other advanced industrialized in manufacturing in US and other advanced industrialized countries, e.g., Germany & Japancountries, e.g., Germany & Japan Prompts deregulation, de-unionization, retreat of the gov’t Prompts deregulation, de-unionization, retreat of the gov’t

from economyfrom economy Shift to the MARKET: 1980s - presentShift to the MARKET: 1980s - present

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Shift to the STATE: 1940s-70s

KeynesKeynes = philosophical forefather = philosophical forefather Postwar advanced industrialized Postwar advanced industrialized

economies featured government economies featured government intervention, subsidies to key industries, intervention, subsidies to key industries, protection of labor rights, expansion of protection of labor rights, expansion of public spending (in education, public spending (in education, infrastructure, etc.) trade protectionisminfrastructure, etc.) trade protectionism Associated with postwar boom (1945 – late 1960s) , a long Associated with postwar boom (1945 – late 1960s) , a long

period of growth in GDP period of growth in GDP andand real median income real median income

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Shift to the STATE: 1940s-70s

The most successful newly industrializing The most successful newly industrializing economies in Asia and Latin America economies in Asia and Latin America also had considerable gov’t interventionalso had considerable gov’t intervention South Korea subsidized and protected “infant industries”South Korea subsidized and protected “infant industries” Brazil followed ISI (import-substitution industrialization) to Brazil followed ISI (import-substitution industrialization) to

reduce foreign dependency, erecting trade barriers against reduce foreign dependency, erecting trade barriers against cheap foreign imports while subsidizing the local production of cheap foreign imports while subsidizing the local production of industrialized productsindustrialized products

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Shift to the MARKET:1980s-present

HayekHayek = philosophical/theoretical = philosophical/theoretical forefather forefather

““Reagan revolution” in US begins 30-yr Reagan revolution” in US begins 30-yr wave of wave of deregulationderegulation, , proclaims faith in proclaims faith in free markets & mistrust of gov’tfree markets & mistrust of gov’t Labeled “market fundamentalism” by StiglitzLabeled “market fundamentalism” by Stiglitz

Neoliberalism, Neoliberalism, Washington Consensus,Washington Consensus, reigns supreme globallyreigns supreme globally

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Shift to the MARKET:1980s-present

Growth in the most advanced economies Growth in the most advanced economies increasingly based on increasingly based on financializationfinancialization

In the US:In the US: income & wealth inequality increases income & wealth inequality increases real median household income declinesreal median household income declines household debt increases household debt increases financial leverage (debt) overrides capital financial leverage (debt) overrides capital

(equity) in the corporate sector(equity) in the corporate sector

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Income inequality in the US(US Census Bureau data)

88

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Hyper-globalization

National Sovereignty

Democracy

The Political Trilemma of the World Economy (Dani Rodrik, 2010)

GoldenStraightjacket

Global Governance

Bretton Woods Compromise

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What is democracy?What is democracy?

Democracy is a certain class of relations Democracy is a certain class of relations between states and citizensbetween states and citizens

A regime is democratic to the degree that A regime is democratic to the degree that political relations between the state and its political relations between the state and its citizens feature broad, equal, protected and citizens feature broad, equal, protected and mutually binding consultationmutually binding consultation

DemocratizationDemocratization means net movement toward means net movement toward broader, more equal, more protected, and broader, more equal, more protected, and more binding consultationmore binding consultation De-democratizationDe-democratization is movement in the reverse is movement in the reverse

(Tilly, (Tilly, Democracy,Democracy, 2007)2007)

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"Has Globalization Gone "Has Globalization Gone Too Far?,"Too Far?,"Dani Rodrik, Ch. 28, pp. 241-246 (Excerpted Dani Rodrik, Ch. 28, pp. 241-246 (Excerpted from Rodrik, “Has Globalization Gone Too from Rodrik, “Has Globalization Gone Too Far?,” in Far?,” in Has Globalization Gone Too FarHas Globalization Gone Too Far?, ?, Institute for International Economics, pp. 2, Institute for International Economics, pp. 2, 4-7, 77-81.)4-7, 77-81.)

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GL is exposing deep fault lines b/w GL is exposing deep fault lines b/w social groupssocial groups

Those who have the skills & mobility to flourish Those who have the skills & mobility to flourish in global markets in global markets

Those who don't have these advantages or Those who don't have these advantages or perceive expansion of unregulated markets as perceive expansion of unregulated markets as a threat to social stability & deeply help normsa threat to social stability & deeply help norms

tension between the market and social tension between the market and social groups such as workers, pensioners, and groups such as workers, pensioners, and environmentalists, w/ governments in the environmentalists, w/ governments in the middlemiddle

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Sources of tension between the Sources of tension between the global market & social stabilityglobal market & social stability

1)1) Reduced barriers to trade/investment Reduced barriers to trade/investment increase asymmetry b/w groups that increase asymmetry b/w groups that can cross borders & those that can'tcan cross borders & those that can't

2)2) GL makes it difficult for gov’ts to provide GL makes it difficult for gov’ts to provide social insurance social insurance

3)3) GL engenders conflicts within and b/w GL engenders conflicts within and b/w nations over domestic norms and the nations over domestic norms and the social institutions that embody themsocial institutions that embody them

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1: Reduced barriers to trade & investment 1: Reduced barriers to trade & investment increase asymmetry b/w groups that can increase asymmetry b/w groups that can cross borders (directly or indirectly via cross borders (directly or indirectly via outsourcing) and those that can'toutsourcing) and those that can't

Those who canThose who can: owners of capital, highly : owners of capital, highly skilled workers, professionals free to take their skilled workers, professionals free to take their resources where they are most in demandresources where they are most in demand

Those who can'tThose who can't: many unskilled & semiskilled : many unskilled & semiskilled workers and most middle managersworkers and most middle managers their labor is their labor is elasticelastic, , substitutablesubstitutable, i.e., they are , i.e., they are more easily more easily

substitutedsubstituted by services of other ppl across national boundaries by services of other ppl across national boundaries most GL research has focused on the downward shift in most GL research has focused on the downward shift in

demand for unskilled workers rather than the demand for unskilled workers rather than the increase in the increase in the elasticity of demandelasticity of demand

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GL enables “substitutability,” transforms GL enables “substitutability,” transforms the employment relationshipthe employment relationship

Postwar “social bargain” b/w workers & employers (i.e., Postwar “social bargain” b/w workers & employers (i.e., steady increase in wages and benefits in exchange for steady increase in wages and benefits in exchange for labor peace) has been underminedlabor peace) has been undermined

SubstitutabilitySubstitutability has concrete consequences: has concrete consequences: Workers now have to pay a larger share of the cost of Workers now have to pay a larger share of the cost of

improvements in work conditions and benefits (i.e., bear improvements in work conditions and benefits (i.e., bear greater incidence of nonwage costs)greater incidence of nonwage costs)

They have to incur greater instability in earnings and hours They have to incur greater instability in earnings and hours worked in response to shocks in labor demand or labor worked in response to shocks in labor demand or labor productivity (i.e., volatility and insecurity increase)productivity (i.e., volatility and insecurity increase)

Their bargaining power erodes, so they receive lower wages Their bargaining power erodes, so they receive lower wages and benefits whenever bargaining is an element in setting the and benefits whenever bargaining is an element in setting the terms of employmentterms of employment

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2: GL makes it difficult for gov’ts to provide social insurance

social insurancesocial insurance is a central gov’t is a central gov’t function, which has helped maintain function, which has helped maintain social cohesion & domestic political social cohesion & domestic political support for liberalization over postwar pdsupport for liberalization over postwar pd

Gov’ts have used fiscal powers to Gov’ts have used fiscal powers to insulate domestic groups from excessive insulate domestic groups from excessive market risks, especially when they're market risks, especially when they're foreign in origin, but gov’t has been foreign in origin, but gov’t has been downsizing, reducing social obligationsdownsizing, reducing social obligations

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3: GL engenders conflicts within and 3: GL engenders conflicts within and b/w nations over domestic norms & b/w nations over domestic norms & social institutions that embody themsocial institutions that embody them

With international diffusion of technology, nations with With international diffusion of technology, nations with different values, norms, institutions, begin to compete different values, norms, institutions, begin to compete head on in mkts for similar goodshead on in mkts for similar goods presents opportunities for trade among countries at very presents opportunities for trade among countries at very

different levels of developmentdifferent levels of development Trade becomes contentious when it unleashes forces Trade becomes contentious when it unleashes forces

that undermine domestic normsthat undermine domestic norms e.g., plant closed in South Carolina for child labor in Honduras e.g., plant closed in South Carolina for child labor in Honduras

or French pensions cut in favor of Maastrichtor French pensions cut in favor of Maastricht Trade policy has redistributive consequences, among Trade policy has redistributive consequences, among

sectors, income groups, and individualssectors, income groups, and individuals

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The Role of National GovernmentsThe Role of National Governments

Policymakers must respond to these tensions Policymakers must respond to these tensions without sheltering groups from foreign without sheltering groups from foreign competition through competition through protectionismprotectionism::

1)1) Strike a balance b/w openness and Strike a balance b/w openness and domestic needsdomestic needs

2)2) Do not neglect social insuranceDo not neglect social insurance

3)3) Do not use "competitiveness" as an excuse Do not use "competitiveness" as an excuse for domestic reformfor domestic reform

4)4) Do not abuse fairness claims in tradeDo not abuse fairness claims in trade