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Posts Tagged ‘markets’

Some of my economics colleagues were certainly unimpressed by the President’s focus on encouraging manufacturing in the United States, and his condemnation of the outsourcing of jobs. Economists tend to have a great deal of faith in market forces, and consider the market price an accurate reflection of “all relevant information.” In economics, aiming for insourcing or encouraging particular sectors of the economy (and not others) is “distortionary” because those policies distort prices and quantities from their market price, which (sometimes!) in theory yields the most efficient price and quantity. Generally, economists have little faith in the government’s ability to “pick the winners.”

However, I found Obama’s focus on manufacturing in America, “an economy to last,” as one of the more promising aspects of the address. As I have written before, we should not ignore the benefits of the manufacturing sector in the economy. A healthy manufacturing sector not only affords well-paying jobs, which fosters a middle class, but also leads to R&D spillovers in related industries that may not even exist yet. Why are Japan and South Korea leading in lithium ion battery technology? Because electronics industries fled to there throughout the 1980s and 90s, and when it became clear that battery development would be the next global challenge, they were already far ahead. The U.S. is trying to catch up, but we are starting for our own goal line.

A great deal of research supports these arguments. One of the classic works on global competitiveness is Alice Amsden’s Asia’s Next Giant, which challenges the conventional wisdom that liberalization and market forces caused South Korea’s economic boom. Amsden attributes Korea’s success to a strong government that supported the manufacturing industry and worked with firms to import key technologies and train workers with relevant skills.

And this brings me to a second key aspect of The President’s address: the relationship between market and government. He is the first president in my lifetime to recognize that it is not about government vs. the market. (Even Bill Clinton favored a small government and lower taxes.) Obama’s speech recognized that the market and the government needed to support each other in order for our economy to succeed. The two are intertwined, and by supporting each other can achieve higher economic outcomes and realize more competitive firms. The debate should not be about whether responsibility lies with the government or the private sector to create jobs; the economy should not be understood as something apart from or in opposition to the economy. Rather, the government can support and even initiate certain desirable industries, so that we may achieve a healthy and resilient economy:

Think about the America within our reach. A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs. A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off, and responsibility is rewarded.

*Third because the 2009 address shortly after Obama’s inauguration was technically not a state of the union.

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The blog Sleepykid posts an essay from a 2007 issue of Harper’s, by David Graeber, an anthropologist. I found the following section striking:

PROPOSITION I: NEITHER EGOISM NOR ALTRUISM IS A NATURAL URGE; THEY IN FACT ARISE IN RELATION TO EACH OTHER AND NEITHER WOULD BE CONCEIVABLE WITHOUT THE MARKET

First of all, I should make clear that I do not believe that either egoism or altruism is somehow inherent in human nature. Human motives are rarely that simple. Rather, egoism and altruism are ideas we have about human nature. Historically, one has tended to arise in response to the other…

Even today, when we operate outside the domain of the market or of religion, very few of our actions could be said to be motivated by anything so simple as untrammeled greed or utterly selfless generosity. When we are dealing not with strangers but with friends, relatives, or enemies, a much more complicated set of motivations will generally come into play: envy, solidarity, pride, self-destructive grief, loyalty, romantic obsession, resentment, spite, shame, conviviality, the anticipation of shared enjoyment, the desire to show up a rival, and so on, These are the motivations impelling the major dramas of our lives that great novelists like Tolstoy and Dostoevsky immortalize but that social theorists, for some reason, tend to ignore, if one travels to parts of the world where money and markets do not exist–say, to certain parts of New Guinea or Amazonia–such complicated webs of motivation are precisely what one still finds. In societies based around small communities, where almost everyone is either a friend, a relative, or an enemy of everyone else, the languages spoken tend even to lack words that correspond to “self-interest” or “altruism” but include very subtle vocabularies for describing envy, solidarity, pride, and the like. Their economic dealings with one another likewise tend to he based on much more subtle principles. Anthropologists have created a vast literature to try to fathom the dynamics of these apparently exotic “gift economies,” but if it seems odd to us to see, for instance, important men conniving with their cousins to finagle vast wealth, which they then present as gifts to bitter enemies in order to publicly humiliate them, it is because we are so used to operating inside impersonal markets that it never occurs to us to think how we would act if we had an economic system in which we treated people based on how we actually felt about them.

The sentence in bold particularly resonates with me. I feel like I’ve written this same thing before, but no matter. I think a lot of neoclassical economists have a creation story that starts, “in the beginning there were markets and market-oriented people.” This attitude has become the norm, and thus any activity that deviates from it is considered extra-normal. Behaviors that are altruistic or charitable are considered to be less economic in character. But what is an economy, if not a confluence of decisions on how to allocate resources, and the social substrate that binds these decisions together? If alternative economies arise, one would naturally expect behavior to change, because we are not simply hard-wired to behave as we do in a market economy.

It’s good to keep these alternative interpretations in mind as we think about what our economy is and what it could be.

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David Ruccio hosts an excellent guest piece by Richard McIntyre and Michael Hilliard, which takes a balanced and heterodox look at the work that merited a Nobel Prize this week. First, their positive take on search theory:

The idea that workers and jobs are heterogeneous and that it takes time and effort to match them is a useful idea. Sweden’s “active labor market policy” sought to reduce frictional unemployment even before the now classic papers on search theory were published. Perhaps this is why the Swedish Central Bank made this award, although speculation about the reasoning behind these awards is not terribly productive in our opinion.

Worker and job heterogeneity means that the metaphor of the market is not an accurate representation of the exchange of labor power for a wage. Because it never occurs to most economists that the analytical apparatus of the market IS a metaphor this is not the usual interpretation of search theory. But those interested in the literary aspects of economics could make something out of search theory.’

However, a critique through the lens of class shows that search theory may be more of a distraction than anything:

More important to us is what search theorists don’t do. As Marx and others have pointed out, it is in the labor process, not the labor exchange, that exploitation occurs. And here employers clearly have the upper hand. Further, many labor market and labor process outcomes—employment, remuneration, working conditions, training—reflect what employers choose to do, except perhaps during short-lived moments of full employment. Since the 1970s, in the United States at least, the rhetoric of labor problems has been mainly about workers rather than employers, and mostly with what workers should do to make their labor time more salable. At best search theory tells us that people are doing something useful while they are unemployed. But for the most part it distracts us from the fact that employers have the upper hand in the labor market and that there is no such thing as democracy inside the firm, where Americans spend most of their waking time.

Of course, approaches to economics that use a class lens are not seen as having the theoretical rigor of neoclassical economics. Thus, I think Ruccio is rather apt to refer to this award at the Nobel Prize in Neoclassical Economics, because the criteria they use to give the award seem to exclude any other approaches.

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I just finished reading Patrik Aspers’ Orderly Fashion (disclosure: I was given a review copy of the book by Princeton University Press), which analyzes the global fashion industry from a sociological point of view. Aspers begins by observing the relatively high amount of order among branded garment retailers (e.g. H&M) and their consumer base. He problematizes this ordered relationship, and ultimately situates the order in the context of social identities. Now, it’s not a huge leap to realize that the perceived value of fashion is socially constructed and socially entrenched. However, Aspers manages to zoom out to the industry as a whole to confront these dynamics at a deeper level.

Aspers argues that markets can either be ordered by status or by standard. Status ordering occurs in the consumption end, as the reflexive identities of both the retailers and the consumers interact. These identities are termed reflexive because they are concerned with internal desire, and can have dimensions ranging from the superficial (sheer looks) to the ethical (labor conditions). Under status ordering, the commodities exchanged derive meaning from “the interaction between the commodity and its wearers.” The status of both the consumer and the retailer is relevant.

Under standard ordering, more objective measures of quality and price are relevant. These play into status in the consumer market, but are most important on the production end, where a complex process leads to relationships between the retailers and the garment factories. Aspers doesn’t dig too deep into the distinctly capitalist production conditions, but accepts them as a given, and tries to explain how the wide range of producers and working conditions come to exist in relation with the retailers.

Aspers argues that the partial order within this production market interacts with the partial order in the consumption market, which both interact with the broader order in the capitalist market as a whole. However, he doesn’t delve too deep into this superstructure, and takes it as a given. Nor does he delve into the extent to which the fashion industry tends to reinforce the class and consumption structures within capitalism. What we have here, then, is a case study. Although superficial at times, I think it points economic sociology research in a useful direction by acknowledging micro-level social embeddedness as a starting point. Ultimately, though, this type of research will be more useful as it zooms out to the capitalist superstructure, and imagines alternative arrangements of consumption and production. I do hope that economists read this book and realize the potential that such descriptive analysis holds.

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Realizing that it is somewhat unadventurous to merely review and regurgitate other reviews of quality work, I decided to purchase, read, and review David A. Westbrook’s Out of Crisis: Rethinking Financial Markets. In that spirit, I also urge you to read the book for yourself and draw your own conclusions. This, I believe, is an important book for our times. Here are my (somewhat long) thoughts:

In one sense, this book is very modest in its aims. In the introduction, Westbrook admits that, “it is sociologically and psychologically implausible that our administrative agencies will rethink our financial markets at all well and except under extraordinary circumstances.” However, as the title implies, in order to get out of the crisis, we must move ourselves from the limited framework of thought that has dominated policy for decades. And, of course, we are in extraordinary circumstances. Even so, introducing a new paradigm of thought, even while acknowledging that it may fall on deaf or corrupted ears, is an ambitious undertaking.

Against the current backdrop, Westbrook’s rethinking seems quite necessary. Indeed, he argues that the crisis represents the birth pains of a transition to a new era of financial capitalism (replacing the era of portfolio management, which spanned three decades). Entering this era with anything less than a new framework of thought will leave policymakers two or three steps behind. As Westbrook argues, even our grammar and language for markets needs to be reshaped.

So, what are the assumptions with which we move forward in this bold rethinking? First, Westbrook seeks to dispel the somewhat irrelevant bifurcation between governments and markets. This key move is related to another predisposition, the idea the financial markets are intensely social entities. Third, related to this, Westbrook want us to understand finance from a legal perspective as a series of contracts, rather than a set of property rights. Finally, Westbrook seeks to reemphasize the importance of uncertainty (sharply distinguished from risk) in how our financial markets operate.

Early on, he dispels with what he terms “melodramatic narratives” of the crisis, ranging from securitization to monetary policy, all of which are intellectually conservative because they operate within the same structure of thought that led to the crisis. Not among their number is the exploitation-inequality-uneven demand explanation that is common in Marxian and institutionalist circles, and that I’ve trumpeted on this blog on many occasions. In many ways, Westbrook’s argument is tangential to this narrative, as he is primarily probing the financial crisis, which is one (albeit major) part of the economic crisis. As a law professor, it doesn’t seem to strike him as to whether his narrative of the broken framework is sufficient for a broad economic crisis; however, this wrinkle doesn’t make his argument any less relevant.

The path that the financial sector has taken in recent decades is broadly indicative of an attempt to move from uncertainty to risk, inserting knowledge as the previously missing link. As Westbrook argues, however, the contractual nature of financial instruments weakens the ability to execute knowledge in a way that constructs the more simple risk. The failure to see this disconnect has led to the false allure of diversification, in which risk is managed by spreading resources over a number of purportedly independent investments. Again, going back to contracts, Westbrook argues that diversification, or “portfolio management,” necessarily reduces transparency. This story echoes the mainstream account of subprime-based CDOs, but builds on it by arguing that a whole range of securities and derivatives can fall prey, and the underlying causes run deeper than a shock to housing prices or the like.

So where has the government been in all of this? Westbrook argues that the zero-sum conception of the government-market relationship has “legitimated” bureaucratic irresponsibility. He faults the free-market ideologues for insisting that market priorities supersede societal goals or human ramifications. However, he also cautions that much is unknowable for regulators, who thus should seek performance over design, so as to stay ahead of the curve. Markets must be approached as they are: existing in a social space.

It is at this point that Westbrook makes one of his most important contributions, urging a reshaping of our metaphors and grammar for markets, so that they don’t replicate the false dichotomy between government and markets. His most useful metaphor, I think, is “tensegrity”: a structure in which elements pull against each other, but the structure remains as long as the link are tight- the structure is “integrated by tension.” The tension, in this metaphor, is credit, underscoring the notion that credit is the lifeblood of the modern financial system. He also uses ecology as a metaphor, and says that we should think about markets not as a jungle but as a garden, a place “of both planning and necessity.”

Where does these intellectual move lead us? First of all, we shift our focus to systemic risk, as Westbrook argues, acknowledging that diversification is pretty much meaningless for our situation. His hope is that systemic risk “become a concept…that broadly organizes thought.” There will always be structural weaknesses in a regulatory regime; however, basically misguided policy puts us in a far more precarious position. Confronting uncertainty as a certain reality is a difficult-financially and politically-but necessary consequence of acknowledging systemic risk. Thus, while systemic risk appears to be moving to the forefront in intellectual discussions- I say this mainly on the basis of VoxEU articles in the last year- the discourse is not occurring in the radical (i.e. to the roots) way that Westbrook encourages.

We also must carefully consider the risk of constructing what Westbrook calls a “courtier economy,” in which the powerful use their money and influence to capture the (de)regulatory process. He sees the construction of this class as one of the first steps toward a protectionist and militarized world, as a courtier class inevitably will push national policies that engender international tension.

At first glance, Westbrook’s argument seems to push for a “balanced” approach to the economy in which more socially-embedded markets gain more influence. However, there is no blueprint for what a socially-embedded market looks like. We certainly know what it doesn’t look like; a Polanyian view of the last few decades easily exposes the failures of the market-utopian drive. However, there are no assurances that the markets of the future will actually be regulated as if they are socially constituted. Are we to trust that this rethinking will help us get things right next time, or that reconceived markets are even the right way forward?

Should it be the case that they are, I hope they are conceived from Westbrook’s framework: that class tensions, uncertainty, and complexity are confronted head-on; that bureaucrats acknowledge their role and consider systemic issues in their designs; that we have more garden and less jungle. In an e-mail, Westbrook points out that he hopes this book serves as a political intervention in our society. The measure of its success as such will inevitably be whether we begin to hear the words “social” and “markets” in the same sentence from regulators, and whether we observe a change in our metaphors and an acknowledgement of contradictions. Understanding this book requires that we make the leap in accepting the constitutive role that discourse has. This pill is easier to swallow for intellectuals than for the quants and paper-pushers, whose language has been handed to them, their jargon ingrained. Westbrook is aware of these difficulties, yet one cannot blame him for seeking something of a revolution in thought.

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It’s odd (but perhaps not unexpected) that I haven’t written much about Africa since it became my primary job focus. I found this piece by Jason Hickel in MRZine interesting as a follow-up to this poverty and human rights post from last June. In that post, I discussed Bill Easterly’s concerns with using human rights as an entry point for humanitarian aid. I concluded,

I have a hard time disagreeing with [Easterly] on these points. A human rights framework certainly provides ample motivation for fighting poverty, but it is lacking in the “how” area.

I think he misses one key point, though: social rights can inform approaches that emphasize the importance of subsidiarity in aid programs- having decisions made at the most local level possible. Of course, this effort must be combined with political and civil rights that build the capacity so that this type of process can actually happen.

Perhaps we can do better than rights, though. Hickel’s piece discusses South Africa’s transition from apartheid to democracy and the failings of the rights-based approach.

the state conveniently sidelines substantive questions of class…The reformers insist that the failures we sense are due merely to problems of implementation, that “rights” are the solution to social inequality.  South Africa has the most progressive constitution in the world, they remind us: it’s just a matter of realizing the rights that all citizens have been assigned.  If we can manage to beef up bureaucracy and expand service delivery, all will be well; the revolution lies therein.

The rights-based approach, as Hickel argues, reinforces state-based power structures with harmful class divides:

The state can grant people discursively constituted rights with one hand and strip them of the conditions for sustainable life with the other, without ever having to confront the contradiction.

In this sense, “rights” are a safe reformist option for a capitalist state with a progressive image to maintain.

Further, the rights that matter in the context of poverty alleviation are treated ambivalently:

socio-economic rights, however — such as rights to water, food, and housing — are only “progressively realizable,” according to the Constitution, and limited by the resources that the state has at its disposal…

When it comes to things like water and jobs, we need a fundamental paradigm shift, a transition from the notion of “rights” to the concept of “commons.”

South Africa has some basis for moving to this sort of concept. I’m not sure if it’s unique in that regard.

Hints of this hide in the Freedom Charter.  About natural resources it states, in paraphrase: “the national wealth of the country shall be restored to the people, and industry and trade shall be controlled to assist their wellbeing.”  Such words do not rely on the discourse of individual rights.  Nor do they hail the specter of command communism.  Instead, they assert the simple point that none has the right to possess and accumulate that which society holds in common.  Upholding this basic principle would not mean the abolition of private property or industry, but merely that certain public goods must be understood as commons, and that protections, profits, and benefits should accrue to people accordingly.

Conceptualizing socio-economic needs as drawing from a commons leads us to a radically different societal structure. As my former professor, David Ruccio, would often point out, we’ve made a choice as a society to not have explicit markets for things like human organs. Perhaps decommodifying water would also be reasonable. The knee-jerk neoclassical reaction to this idea is that water would then be inadequately provided. However, as many activists around the world has shown, water privatization has failed miserably.

And what about food? I can see the value of a market-based system because of the complexity that food production necessarily entails. However, the commodification of food has made it vulnerable to a host of “exogenous” shocks; many point to US biofeul legislation as the cause of the 2008 food price spike. In years past, OECD agro-subsidies have made it impossible for farmers in developing countries to produce food and expect a reliable return for their effort. I recently read the book Enough, which points out that the host of issues surrounding globally commodified food are the primary reason that Norman Borlaug’s Green Revolution hasn’t spread to Africa. Our society seems to be moving the wrong direction. Developed countries are seeking to commodify carbon as well, perhaps a dangerous prospect for technological progress in that area.

Developing countries, for their part, are mostly at the whim of the global economy on these issues. South Africa, because of its size, may be able to address these problems and move to a commons-based approach to basic necessities. Uganda, however, would likely lose conditional aid if it rolled back privatization. Many developing countries simply lack the resources to mobilize desires that their civil societies might have for restructuring their economies. In any case, rights don’t seem to be getting us very far, so at the intellectual level, I’d think we should begin to use the commons as our theoretical basis.

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I apologize for this post coming five days after it was promised in my post on the first review – other events intervened. I have two other reviews to cover on David A. Westbrook’s Out of Crisis: Rethinking Our Financial Markets. The first is by Lyman Johnson, a law professor at Washington & Lee University and University of St. Thomas. Johnson focuses on Westbrook’s suggestion that,

we break out of the conventional analytical dichotomy between emphasizing one or the other of “the (free) market” and “the (regulating) government.”  Rather, markets themselves are one mode of shared governance and they should be deliberately and democratically constructed to achieve certain societal goals and avoid certain perils.

According to Johnson, Westbrook’s book seeks to challenge mainstream accounts of the financial crisis.

what Bert calls the standard narratives [evade] a more fundamental examination of root causes, one not easily reducible to a clean storyline or obvious policy prescription.  Bert sees the crisis as an occasion of such colossal failure that it demands a bold rethinking of how we conceive finance, regulatory policy and modern capitalism itself…

The book, early on, states that it seeks to revive and extend a “social understanding of markets” running back to Veblen, Weber, Durkheim and other social theorists though, in fact, Bert later seems to equate “social” with “political,” a point to which I will return.  He also early on makes the critical, often lost, distinction between “uncertainty” and “risk,” and he clearly states why he is extremely skeptical of self-regulation grounded on claims of market efficiency and human rationality.

Johnson sees the book as an entry point into a broader discussion:

Bert’s wonderful book would be even better had he not emphasized only the government as a “social” actor.  Our social terrain – and so our thinking about markets – can be more intentionally and beneficially shaped by other civic institutions…Broadening the conversation Bert seeks will give more of us a voice in how to shape markets as well as heighten our own sense of responsibility…To democratize capitalism requires, to be sure, renewed thinking about government’s role in finance but it also demands fresh thinking about finance in many other venues.

Now onto the final review (I’ll comment on both at the end), by Larry Cunningham, Professor of Law at George Washington University. Cunningham sees the book as one that avoids ideological tugs-of-war between markets and regulation. This insight, according to Cunningham, is enabled by a broad methodology:

They are also insightful, offering perspectives not only from law and finance but from political science, sociology and philosophy…, it enables the book to develop and defend its broader thesis, a trait that distinguishes this book from most others attempting to explain the crisis and prescribe corrections.

What’s especially distinctive about Westbrook’s account is how it offers to locate both diagnoses and prescriptions arising from prevailing calamities in a broader framework of social and political organization and institutional design. It shows how inadequate attention to this larger conception misleads debate, both before and since the crisis, into false dichotomies…

The false dichotomies arise because of preconceptions about distinctions between government and markets. Those can obscure the deeper reality that both are products of social organization…

It conceives the relation between regulation and markets differently than prevailing talk. Markets do not arise or arrive bearing inevitable or immutable traits, rules or roles…

People must appreciate that markets are social and political products and that participants in effect choose what design features particular markets should offer. The book at this stage announces its modesty and does not labor over exactly what corrections or changes should be made or how…

There seems to be a consensus (at least among The Conglomerate‘s guest reviewers) regarding Westbrook’s broad (some might say eclectic) approach, as well as his efforts to show that the market and society are linked and that markets are not homogeneous entities. These aspects are extremely important, and I’d like to offer my own take on them after I read the book (which I will hopefully complete this weekend).

In an e-mail, Westbrook also emphasizes his desire that the book serve as a “political intervention.” Based on the reviews, Westbrook seems to offer more of a structural framework than a set of prescriptions. As a political intervention, this framework will prove invaluable.  Indeed, yesterday was a seemingly important day for regulation, as Obama proposed measures on the banks widely described as “populist.” However, a number of commentaries argue that the new regulations miss the point.

Probably more important was the SCOTUS decision, which could dramatically alter the way the corporations hold government policies captive. In a sense, this sort of direct advertising could enable banks, insurers, et al. to create markets of their own design. Rethinking the role of the government in markets is going to become a more pressing matter in years to come

Given these concerns, it is especially important that we begin with the correct premises on regulatory reform. Next week, I’ll offer my own take on how Westbrook’s book and how successful he is in challenging our current framework of thought and pointing toward a new one. I’d especially like to get a sense of the discursive elements of such a framework, although I fear I may be wading into the deep end…

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