Thursday, November 27, 2014

A New Progressive Political Economy

LONDON – In an article in Foreign Affairs entitled “The Future of History,” Francis Fukuyama pointed out that, despite widespread anger at Wall Street bailouts, there has been no great upsurge of support for left-wing political parties. Fukuyama attributed this – rightly, I believe – to a failure of ideas.

The 2008 financial crash revealed major flaws in the neoliberal view of capitalism, and an objective view of the last 35 years shows that the neoliberal model has not performed well relative to the previous 30 years in terms of economic growth, financial stability, and social justice. But a credible progressive alternative has yet to take shape.

What should be the main outlines of such an alternative? First, a progressive political economy must be based on a firm belief in capitalism – that is, on an economic system in which most of the assets are privately owned, and markets largely guide production and distribute income.

But it must also incorporate three defining progressive beliefs: the crucial role of institutions; the need for state involvement in their design in order to resolve conflicting interests and provide public goods; and social justice, defined as fairness, as an important measure of a country’s economic performance.

It was a great mistake of neoclassical economists not to see that capitalism is a socioeconomic system, and that institutions are an essential part of it. The recent financial crisis was made far worse by profound institutional failures, such as the high level of leverage that banks were permitted to have.

Empirical research has shown that four sets of institutions have a major impact on the performance of firms and, therefore, on a country’s economic growth. These include the institutions underpinning its financial and labor markets, its corporate-governance arrangements, its education and training system, and its national system of innovation (the network of public and private institutions that initiate and diffuse new technologies).

The second defining belief of progressive thinking is that institutions do not evolve spontaneously, as neoliberals believe. The state must be involved in their design and reform. In the case of institutions underpinning labor and financial markets, as well as corporate governance, the state must mediate conflicting interests. Likewise, a country’s education and training system and its national system of innovation are largely public goods, which have to be provided by the state.

It should be clear that the role for the state that I have been describing is an enabling or market-supporting one. It is not the command-and-control role promoted by traditional socialists or the minimalist role beloved by neoliberals.

The third defining belief of progressive thinking rejects the neoliberal view that a country’s economic performance should be assessed solely in terms of GDP growth and freedom. If one is concerned with a society’s wellbeing, it is not possible to argue that a rich country in which the top 1% hold most of the wealth is performing better than a slightly less wealthy country in which prosperity is more widely shared.

Moreover, fairness is a better measure of social justice than equality. This is because it is difficult to devise practical and effective policies to achieve equality in a market economy. Moreover, there is a real tradeoff between equality and economic growth, and egalitarianism is not a popular policy even for many low-income people. In my experience, trade unions are much more interested in wage differentials than in a simple policy of equal pay for all.

These are the core principles that I believe a new progressive political economy should embrace. I also believe that Western countries that do not adopt this framework, and instead cling to a neoliberal political economy, will find it increasingly difficult to innovate and grow.

In the new global economy, which is awash with cheap labor, Western economies will not be able to compete in a “race to the bottom,” with firms seeking ever-cheaper labor, land, and capital, and governments seeking to attract them by deregulating and shrinking social benefits.

The only way Western economies will be able to compete and improve their standard of living is by seeing themselves as being involved in a race to the top. That is, firms must improve their value added through innovation in existing industries, and by developing the capability to compete in new and more sophisticated industries, where value added is generally higher.

Companies will be able to do this only if governments abandon the belief that they have no role to play in the economy. In fact, the state has a key role to play in providing the conditions that enable dynamic companies to innovate and grow.

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    1. CommentedNM Wander

      We're still lying to ourselves.
      The world has never been divided into
      "Capitalism vs Communism"..........
      this is a lie we perpetrate on ourselves in order to oppose the Soviet Union during th eCold War.
      The entire world was revolutionized by the Industrial Revolution.....which required Mass production, Centralized Banking, salaried incomes, Housing Devopments, etc, etc.
      Keynes and Friedman just offered different corollaries of exactly the same model!! Socialism. Thats right. Socialism worked in the USA just as it did in the USSR! We were simply much more practical than the Soviets!
      Its now the 21st Century and the Central Planning Bureaucracy is no longer the paradigm.
      its breaking down and fighting hard to prevent the tides of time from wiping it out.
      The new machine age requires peer-to-peer instant communications......something that is horrifying to the layered hierarchical bureaucracy(especially the highly developed one inside the DC Beltway).

    2. CommentedSebastian Sarria

      Mr. Sainsbury seems to be contradicting himself in this paragraph when looking at the third one. If "the recent financial crisis was made far worse by profound institutional failures, such as the high level of leverage that banks were permitted to have," why does he mention in the third paragraph that the new alternative to the neoliberal economic view is that of an "economic system in which most of the assets are privately owned, and markets largely guide[d] [by] production and distribut[ional] income"?


    3. CommentedCarol Maczinsky

      "First, a progressive political economy must be based on a firm belief in capitalism"
      Sounds religious to me. The progressive"s question is rather "where to"? And then he develops some idea of reinventing ordoliberalism.

    4. CommentedZsolt Hermann

      I would like to take the oxymoron from the abstract of the article that is on the front page: "competing globally".
      It is not possible to compete in a global system.
      Global world means that the whole human society has become interconnected and interdependent on all levels of human activity, the whole global society has become a single, fully integrated system.
      While for example in Europe politicians, economists are still arguing about the level of integration they need to save the Union, the system we evolved into comes with "inbuilt" full integration.
      In other words we try to resist the evolutionary conditions we exist, we still pretend as each and every individual and nation would be separate and could do whatever they want.
      A global, integral system is based on and sustained by full, mutually complementing cooperation.
      Any ruthless competition the article and other experts still try to pursue is suicidal like preferring a cancer instead of a healthy organ.
      And this is not even on the theoretical level any more, the evidence is in the news every day, it is in the statistics, in the desperate helplessness of the G8, G20 meetings, any other summit or negotiations.
      We really have no choice in the matter except adapting to the system willingly or by forced as a result of suffering.
      If we choose the willing participation, we can unlock such potential in the global, integral and natural system around us that we could not even imagine before.
      Instead of the constant struggle, failures, waste we could exist effortlessly since we would be partnering the system and not constantly fighting against it.

    5. CommentedTomas Kurian

      The state definitely has a role to play:

      1. By making sure industries are not outsourcing jobs abroad due to lower productivity

      2: By regulating the pension age and its financing

      3. By defining appropriate working time, in line with technological development

      4. By implementing financial system, which will recycle the unmoving capital, causing the recessions.

    6. CommentedEmile B

      Excuse me: "validating all free-market economists(particularly Austrian economists)"*
      To correct my comment's typo.

    7. CommentedEmile B

      Because a Central Bank's monopoly over the money supply was such a central tenet of capitalism/neoliberalism? Banks have been inflating currencies (i.e., sapping value out of virtually each and every transaction), to then give to private banks for Keynesian-inspired demand-side growth. How is this remotely a free-market economic system? If anything, the collapse in 2008 is only vilifying all free-market economists (particularly Austrian economists) that we indeed have been under a centralized economy and it has created unstable inefficiencies and overwhelming risks. Mises was right. This progressive is removed from reality an his Rawlsian theory of 'justice as fairness' should by now be understood to be contrary to any truly free republic, as Nozick so scathingly concluded.

    8. CommentedGee Brian

      What could possibly go wrong by putting all the control in the hands of well meaning bureaucrats? This has to be one of the most hopelessly naive articles I have ever read. It expresses very well the fact that progressives do not deal in the realm of reality, but in their own fantasies.