The Market and The State (2 February)

In this seminar we touch on the market/state debate; rather than looking at it in general terms, the papers ask questions about whether the conventional (neo-classical) approach to the debate is right, and try and reframe it in ‘institutionalist’ ways. This is trendy stuff.  One is by a lawyer (Lang), another by an economist (Chang) and one by a sociologist (Streeck).

READING

Ha-Joon Chang ‘Breaking the mould: an institutionalist political economy alternative to the neo-liberal theory of the market and the state’ (2002) 26 Cambridge Journal of Economics 539

Andrew Lang ‘The Legal Construction of Economic Rationalities?’ (2013) 40(1) Journal of Law and Society 155

Wolfgang Streeck, “The Crises of Democratic Capitalism” (2011) 71 New  Left Review 5-29

 

Further Reading

Fligstein ‘Markets As Politics’(1996) 61 American Sociological Review 656

8 comments on “The Market and The State (2 February)

  1. Fabrizio says:

    Lang is very clear in remembering that the law has a constitutive function, which is an under-researched dimension in neoclassical economics and law and economics (ex. what is an externality?). Chang adds an element by claiming that neoclassical economics offers analytical tools which have been absorbed by an external ideological approach coming from Austria. This narrative is a bit different from Harcourt’s one given that in the latter view the convergence is between two normative traditions. Nevertheless, it seems to me that Chang’s claim that economists call “intervention” what they dislike is something the three Authors could agree on.

    Focusing on Chang’s paper, I am not convinced by his strategy. He claims that neoclassical economics has been colonized and proposes to overcome it with what he calls Institutional political economics (IPE). Apart from a war of labels and the advantages of getting the comunity of researchers to use the expression you proposed, I do not see any gain in this move. Actually, if the problem with neoclassical economics is external (as he claims) then the goal should be a vindicating strategy of neoclassical economics. Neoclassical economics should be rescued from the Austrian contamination thereby regaining its status of pure analytical toolkit.

  2. Elias says:

    I found Lang’s article „The legal construction of economic rationality“ quite interesting since it tries in a similar vein as Harcourt’s analysis to denaturalize the concept of markets as independent and auto-regulatory sphere. In this regard, the author underlines beyond the regulatory role also the constitutive role of law for markets and economic practices. This enables us to overcome the dichotomy between the state and the market created by the overreliance on the regulatory role of law.

    However, the insight that law plays a constitutive role for the existence of markets is not a new discovery of legal realism or economic sociology / sociology of law. Indeed, authors such as A. Smith, the Ordoliberals of the Freiburg School and F.A. v Hayek point out in their writings the constitutive role of law for the existence of markets. Apparently, this insight is again „en vogue“. The most plausible explanation for this new trend lies perhaps in the overreliance of the mainstream (Chicago School) law and economics approach on the regulatory role of law which overshadowed the importance of law as constitutive bedrock of a market economy.

    In a second step, the author argues, by drawing on insights of the sociology of knowledge, that the economic rationality of market participants is shaped by socially constructed cognitive frameworks. The author finishes its paper by arguing that it is important to examine the role of law in shaping and constructing these cognitive frameworks of economic rationality. But he does not put forward any further-reaching claim or explanation. From this perspective the paper is quite disappointing. Perhaps it constitutes an interesting example for how to write a paper on an interesting research question / perspective without giving any substantive answer to the question, but only setting out some potential research agendas. It raises, however, the important question about the potential impact of the insights of this kind of research on legal studies and on the status-quo of economic law: To what extent does the insight that law shapes economic rationality in a certain way change the fact that law is always to a certain extent based on the presumption of a certain (allegedly created) rationality of individuals who are supposed to be able to choose between different alternatives and, therefore, bear the legal consequences of their actions?

  3. Ola Innset says:

    All three articles we have read for this session have the work of Karl Polanyi as an important backdrop. They all build on Polanyi’s denaturalizing critique of the market order, and Wolfgang Streeck also shares Polanyi’s view that the market order completely clashes with democracy.

    According to Streeck, “democratic capitalism” is ruled by two conflicting principles of resource allocation. One operating according to marginal productivity, and the other based on social need, as certified by democratic policies. Like Thomas Piketty, he sees the post-war decades as something of an anomaly, where the underlying problems of democratic capitalism where kept in check by enormous growth. For Piketty the underlying problem is that r>g, for Streeck it is the contradiction between democratic allocation and market allocation.

    Since growth started to falter in the late 60s, this basic problem has been attempted solved in various ways, first through having high inflation rates, which then became a proiblem in itself, solved through accumulation of public debt, which was then privatized, leading to the financial crisis of 2008. According to Streeck we are now in the fourth stage of the crisis of post-war democratic capitalism after the succesive eras of inflation, public deficits and private indebtedness.His point is that “the tectonic tension within democratic capitalism has migrated form one institutional location to the next”.

    I think there is a lot to be said for Streeck’s understanding of democratic capitalism as fundamentally contradictory. Ever since the democratic revolutions, liberal (and conservative) theorists have been engaged in recoding the language of freedom and democracy so as not to threaten the capitalist order. Ideas about The Market or The Economy as a separate sphere not to be meddled with by mere mortals and democratic politicians are obviously important in this, and I think Hayek and the other early neoliberal’s account of totalitarianism as a result of economic planning played a part in this rediscovery of laissez faire ideas, while at the same time inserting the doctrine of a strong state that, among other things, may “plan for competition”.

  4. Chris says:

    Streeck highlights an underlying tension in democratic capitalism between two principles of resource allocation: allocation by popular demand and allocation in line with market forces. He argues that governments tending towards either principle will almost inevitably undermine their popular support, either by failing to address the desires of the electorate or through market interventions leading to economic distortions.

    Had Streeck been writing this piece today, he may have wished to include one final example of his hypothesis in action, that of the recent elections in Greece where the Greek electorate chose to support a change in policy from severe austerity in line with the desires of Greece’s creditors to a more interventionist roll for the state.

  5. I was happy to see the introduction of the political dimension in Streeck’s piece. One the most powerful ways to understand the financialization that has occurred in the US and UK over the last 30 years is that it represents the vindication of the idea that markets are the best option not only for the distribution of goods, but also for deciding how institutions of production should be organized. Of course, in the Arrow and Debreu second welfare-theorem ideal, markets were involved not only distribution but in production, but the mode of production in their model was narrow in conception, thin in articulation and underspecified, reducing firms as profit-maximizing algorithms with exogenous, finite production functions to choose from. In the real world, the form and the particular decisions of the institutions that constitute and border the market (firms, regulators, contracts, courts, families, unions, private codes, associations of various sorts) are both the result of and the site of politics; financialization means that, more than ever, these political questions are idealized as answerable through deliberations in which voice is allocated by previous accumulations of claims universally (and increasingly, globally) convertible to currency.

    Debates that have borrowed from Polanyi to frame debates over economic organization in terms of the market-state divide generally render invisible the constitution of market power. Streeck makes vague gestures in this direction with his reference to Kalecki, but he is too interested in vindicating his particular reading of the last 60 years of history to walk through or pin down how much he reconciles the Kalecki explanation of market power (capital comes to this story pre-constituted, capable of deploying its power as a class and willing once real returns come under threat) and his neoclassical reading of labour markets. Lang, whose work I am a big fan of, seems uninterested in the power dimension. His big contribution is to reframe and tie together two criticisms of the explanatory power of the mainstream paradigm. He is interested in how law contributes to framing individual motivations and the constraints on; but individuals in this story have no class location, in the sense that the subjectivities arise in a reflective interaction with the market that (in Lang’s engagement) aren’t differentiated by how much the market is able to offer them.

  6. Florian says:

    I would like to comment on the article by Andre TF Lang. It is admirable that he brings attention to a part of economics that was perhaps disregarded for quite a while. Nonetheless, his paper leaves me unsatisfied, as if he wrote only half of it or should have put it into a greater context.
    In this regard my issues with the text are maybe also similar to those of Elias. He just points to the shortcomings, saying that Law and Economic research might benefit a lot by extending its scope to include insights from economic sociology of law. However, while I agree with this in principle, he does not actually show what conclusions might be drawn from this changed approach to say, the constitution of markets. As a result, he just gives vague pointers of research that might be, but not more. It might even be, that what he would like is not actually possible, or at least not today. This is because while it is always good to remind oneself that many terms frequently used are based on many assumptions and constituting factors, this might not change the actual research. This is because while it could be taken to account as an additional factor in the analysis or conclusion, it is very difficult or maybe today even impossible to accurately model it in an economic or law and economic system/model.

  7. stavros says:

    Chang’s IPE approach sheds light to the shortcomings of the current dominant neoliberal discourse. Up to a certain extent Chang’s approach is similar to Harcourt’s; he presents and criticizes a “physiocratic fallacy” (pp 542-551), which infuses confusion to the relationship between the market and the state due to its deficient conceptual framework. In particular, his main thesis is supported by demonstrating that (a) defining the relationship between the market and the state is a political exercise, in that it depends on the acceptance of a certain hierarchy of rights and obligations among the members of a society; (b) defining the content of “market failure” presupposes forming a theory of the market; (c) the market primacy assumption does not hold and implies that the state is a market-like contractual reaction to a collective action problem; (d) the state is constantly involved in creating new markets and establishing new rights and obligations structures; e) self-seeking cannot be the only or the dominant human motivation.

    He also displays how the neo-liberal naturalization of the markets, which seems to be grounded on an objective, scientific analysis of the reality, is politically motivated: by de-politicizing and neutralizing the markets it seeks to present each and every state intervention in the markets as external and susceptible to significant deficiencies (e.g. government failures, rent-seeking, regulatory capture). The purpose of this is to fortify a theoretical consensus towards a specific political boundary between the market and the state. Furthermore, Chang offers a useful insight regarding the scope of neoclassical economics. By citing Coase he explains that the market is only one of the many institutions that make-up the capitalist economic system, which consist of institutions of exchange, institutions of production, institutional design and informal institutions (p 546).

    The root of the neo-liberal approach lies in the unholy alliance between the Austrian tradition and neoclassical economics (p 540). To reverse this we may return to the non-committal nature of welfare economics. Moreover it is necessary to recognize that the market is a legal and economic arrangement, which is constituted partially by the state. By submitting that the de-politicization of the market is impossible and potentially corruptive for democracy, Chang meets Sandel who argues that in order to discover which are the pragmatic and normative limitations of the markets we should engage in empirical research and moral inquiry. In other words the issue of the relation of the markets and the state cannot be settled, unless we discuss how do we want to live, as Sandel puts it. Chang’s urge to politicize the issue goes hand in hand with a request for moral assessments concerning which societal values and to what extent could be satisfied by the state or the market. Nonetheless, even though Chang concedes that politicizing the market may prove unnecessary and inefficient (p. 551), he does not give us any hints on how to avoid unnecessary deliberations.

    Be that as it may the contribution of the article lies on IPE’s offering a more comprehensive conceptual framework to analyze the market and the state. Specifically, it accepts the complexity of the market and the constitutive role of the state regarding its forming (552-553), the dialectic relationship between individuals and institutions (553-554), and the political nature of market (555-557). However, this last point is the one that poses the most demanding questions and Chang does not offer any further guidance in this respect. In addition, his emphasis on the political element ignores the moral dimension of the issue and may imply that the solution could be found in procedural rules (e.g. a majoritarian rule of decision-making) or in political decisions, which could be always criticized as arbitrary or subjective. At this point, I think, we could borrow some useful tools from moral philosophy.

  8. Alice says:

    Democracy is expensive. I understand democracy as we conceive it in the western world since the XXth century. Streeck’s paper clearly emphasises that the major concern of democratic governments is to find means to finance social rights guaranteed by democracy since the end of the Second World War.
    To date capitalism has proved to be the economic system the most creator of wealth. After the Second World War, democracy and social rights have fully benefited from the unusual wealth created by capitalism. However, when the growth started to critically slow down in the 1970’s, tensions between capitalism and democracy started to unveil. The smaller wealth created by capitalism was not sufficient to finance both capital and social rights. As Streeck shows it, democratic governments started to find substitutes to growth successively through inflation, public debt and private indebtedness/ financial deregulation.
    Streeck stresses that democracy and capitalism operate according to different principles. Capitalism operates according to marginal productivity and democracy is based on social rights as certified by the collective choices of democratic politics. Democracy always puts restrictions to flexibility and freedom in markets, but in period of prosperity, everybody benefits from wealth and social rights are financed without distorting the market. The conflict between capitalism and democracy arose when providing social rights impacts negatively the market.
    Since, growth such as the one during the three post war decades is clearly exceptional, Speeck argues that a lasting reconciliation between social and economic stability in capitalist democracies is an utopian project.

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