Sunday, November 23, 2014

Balancing the Technocrats

ISTANBUL – A simplistic (actually, naive) view of markets is that they exist almost in a “state of nature,” and that the best of all worlds is one where they are free to operate without government interference. An equally simplistic view of democracy is that it is a political system in which periodic competitive elections give the winner the right to govern without constraint.

The reality is far more complex, of course. Markets can function only within an institutional and legal framework that includes property rights, enforcement of contracts, quality and information controls, and many other rules to govern transactions.

Similarly, while competitive elections are essential to any democratic system, a “winner-take-all” attitude to electoral outcomes, with the victor concentrating power, is incompatible with democracy in the long term. Well-functioning democracies are embedded in complex constitutional and other laws that separate executive, legislative, and judicial power, and that protect freedom of speech, assembly, and peaceful dissent by those who lose elections.

Regulatory institutions – such as bank supervisory agencies and bodies that oversee the telecommunications, food, and energy industries – play a vital role by maintaining the always-delicate balance between “free” markets and the actions of elected governments and legislatures. The central bank is perhaps the most important of these institutions, for it conducts monetary policy (and sometimes serves as the financial-sector regulator).

The policy and regulatory mistakes that contributed to the subprime mortgage crisis – and thus to the US financial system’s near-meltdown and the eurozone’s travails – have brought the issue of optimal economic regulation and its relation to democracy to the fore once again. In the US, a significant share of the Republican Party favor abolishing not only the Department of Energy and the Environmental Protection Agency, but also the Federal Reserve! In their view, markets and private initiative require no significant regulation. The role of politics is to elect majorities that can abolish regulations and regulatory bodies.

Others around the world similarly oppose regulatory institutions, but for very different reasons. They argue that politicians can regulate and supervise without intermediate bodies that have some degree of autonomy. In their minds, these bodies merely impede and constrain realization of the people’s will.

If an elected government wants a bank to offer cheap credit to a group of enterprises so that they can hire more people, why should a supervisor be able to obstruct this democratic will? If these enterprises are told to hire the governing party’s supporters as an implicit condition of obtaining subsidized credit, that, too, is the expression of electorally legitimized popular will.

At the other end of the spectrum are technocratic super-defenders of regulatory bodies who believe that politicians and electorates are hopelessly confused, uneducated, and often corrupt. Management of the economy should be entrusted to competent and independent experts, a group of “Platonic Guardians” empowered to act in the state’s higher interests, regardless of electoral outcomes or public opinion.

The International Monetary Fund, the European Commission, and the European Central Bank are often viewed as such technocratic institutions – and as supporting the technocratic element within states and societies around the world. At the height of the eurozone crisis, the IMF, the EC, and the ECB (not to mention financial markets) warmly welcomed the economists Mario Monti and Lucas Papademos as highly respected “technocratic” prime ministers for Italy and Greece, respectively.

Experience in recent decades has shown that a balanced and “moderate” approach is needed on these matters. Electoral cycles (and the accompanying political pressures) are such that monetary policy, banking, and many other areas of policy and economic activity must be overseen by those with professional competence and a much longer time horizon than that of politicians.

Day-to-day politics cannot dominate the regulation that markets need. The single most important institutional reform underlying price stability throughout the world has been the stronger independence of central banks.

But, if independent technocrats are allowed to determine long-term policy and set objectives that cannot be influenced by democratic majorities, democracy itself is in serious jeopardy. I find it undemocratic, for example, that the ECB can set the eurozone-wide inflation target unilaterally. How much inflation a society finds desirable or tolerable (taking into account other important variables, such as employment, GDP growth, or poverty) is an inherently political question that should be debated in parliament. The central bank should be consulted, but its role should be to implement the objective without political interference: independence in terms of policy tools, not goals.

Globalization and the increasing complexity of financial and other markets make it imperative that the domains of private activity, political decision-making, and regulation be clarified. The challenge is even greater because some regulatory agencies must be multilateral, or at least intergovernmental, given the global nature of much economic activity. The difference and the distance between markets and politics must be clear – and, for the sake of both effectiveness and legitimacy, it must be based on rules that are well understood and on popular consent.

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    1. CommentedJohn Nick

      "At the other end of the spectrum ..."
      Technocrats are not some kind of flawless gods. You admit the regulators "contributed" to the US crisis. They allowed private "technocrats", "professionals" to implement bad business policies and even more, to use fraudulent practices. The elementary wrong-doing was theirs.
      Every time we assign "technocrats" some task to be treated as technocratic as possible, we must take this into account.

    2. CommentedKubilay M Öztürk

      Well, the underlying argument - the elusive-balance between free markets and government - is hardly new. The observation that technocrats have come to the fore in dictating long-term government policy without democratic accountability is a bit of a strech. The latter part - lack of popular consent - is true, but technocrat kings are still hard to find. If we talk about technocrat governments, we should all remember how, for example, they had been formed in Italy and Greece (i.e. still with parliamentary consent) and the fact that they all paved the way for yet again democratic governments - though not smoothly. The case of ECB is also not an appropriate illustration, as the idea of passing the responsibility of national monetary policy to a single Euro-zone institution was the decision of maybe not this generation of elected governments but their predecessors, so still a democratic process. I guess this is a covert way to ask for some leeway (such as a higher inflation target for Eurozone or differing numbers for different countries) once it has become somewhat obvious that current design of the system is not working for all members. Yet, labelling this as the emerging political power of technocrats is a red herring. The issue is still related to the dominant power of Germany in the system and its willingness to preserve the status quo. Separately, I guess the third paragraph is a tacit criticism of current political situation in Turkiye, which is very spot-on.

    3. CommentedManuel Gomes Samuel

      Mr. Dervis, you are right! This is a complex issue, there is an implicit need to strike some balance between the fluctuant will of the people and stable scientific knowledge. Looking at the example you've given us, the ECB, one solution could be to add MEPs (Members of the European Parliament) to the composition of the ECB Governing Council (e.g. 6 members of the Executive Board, 17 governors of the Eurozone national central bank plus 23 MEPs from the Eurozone).

    4. CommentedEdward Ponderer

      I am reminded here of a particularly poignant political cartoon from a few years ago. There is a godzilla- esque fire breathing monster labeled "Big Business" destroying a city. A man at a window of one of the still-surviving building looks out into the distance and seeing the approach of an identical monster destroying everything marked "Big Government" approaching in the distance, cries out in joy to a woman in another window, "Thank Heaven -- help is on the way!" With the corruption of any power oligarchy at the helm, switching direction or remaining on one, continues to be at best a drunkards walk ever further from hope. We must change basic human relations at every level to one of mutual responsibility -- through basic integral education to a media campaign of altering societal values (the media can sell anything -- even this...). I recall in late 1973 or early 1974, seeing at a grocery checkout one of these small hype tabloids of "questionable" reliability stating that through hypnosis, Bud Abbott (of the Abbott & Costello comedy team) had determined that his tumors were benign. This may have given him some kind of confidence or hope, but in any case in died in April of 1974. And I can't help thinking, where is this tabloid any worse than the most respect paper and journals that blithely offer the confident predictions and approaches of economic and political pundits. Shall we do something real before our "April" -- or shall we learn the hard way on just what the flowers shall be blooming in May...

    5. CommentedZsolt Hermann

      The writer is right, everything is overly complicated within this human illusion we created. At one point, humanity driven by our inherent self-centered egoistic nature decided we are above, or outside of the natural system we evolved from, and we can create our own subsystems, our own laws, principles and started living accordingly. Until very recently it all seemed we were right, humanity developed, expanded, explored, invented and it seemed nothing could stop us, we would conquer space, travel beyond the moon, start controlling the weather, everything seemed possible. But today we are in a rude awakening, we were brutally reminded we are not above the system, not that we cannot control nature around us, we do not even understand where we are, the forces around us, we do not even know what is going to happen tomorrow, or later the same day. Today even the systems, institutions we ourselves created are slipping through our fingers, what worked yesterday does not work today, humanity is sliding into crisis, depression, emptiness, it is not enough we do not have high hopes for the future, we even fear the future and escape back to the past. But it does not have to be this way. We simply have to remember we evolved form nature, our biological body, our psychological makeup, our hormones, our whole being is still based on the same principles as nature, we are part of the system. The reason we hit the wall with our illusion is that humanity as a species has matured, we interconnected and merged into a single organism as any other species. Global world does not mean markets, financial institutions, global, integral world means a multi dimensional, totally interdependent network within humanity, and between our species and the rest of nature. If we left this artificial, and unsustainable illusion behind, if we changed our nature back to its original natural form, we could experience a very simple, effortless existence again, and as contrary to other animals humans would do this adaptation in full awareness, actively changing themselves, we would be consciously partnering the system, we could become its owners but not in an exploitative way, which turned out to be impossible, but in a complementary, benevolent way. Such an existence would go beyond anything we imagined within our dysfunctional illusion.

    6. CommentedStamatis Kavvadias

      This is the bigger problem caused by the "independence" of central banks, and its influence on political thinking. Technocrats have dominated the way the economy and democracy works, with their biased preference to private money.

    7. CommentedStamatis Kavvadias

      Nicely put, the argument of Kemal Derviş. The example of eurozone interest rates is not the most problematic for the western world and democracy, though. *All money is created in the private (banking) sector* in the form of unreliable credit (without reserves) -- in other words as debt. This is a gigantic problem for the public sector, that has to borrow money to operate, and it is *the primary* cause of the democratic deficit problem experienced everywhere in the western world. *Resources are always allocated first in the private sector*. For UK and US, this is a problem of not choosing to print public money; this is not the same in eurozone, which does not have anything corresponding to a government, to decide on the printing of more money and its allocation to productive activities. In addition, there is another problem with the operation of democracy in this money system. People do not understand this kind of money. They do not understand that credit-based investment does not come from savers.

      They do not understand that the public debt is a self-imposed burden, for the most part, in exchange for easier access to liquidity of building a house, buying a car, or starting a business, before we have the money for it.

      They do not understand that this behavior, taken too far as we have taken it, results in living on the expense of our children and destroying the planet! Finally, in this context, people and politicians become the object of political and economic manipulation respectively.

    8. CommentedJoey Cheung

      So Mr. Derviş, for you politics relate to democracy. And you stressed that politics should play a minimal if not zero role in market. Do you suggest that democracy is irrelevant in market?

    9. CommentedShane Beck

      In the global kleptocracy of off shore tax havens, the Russian, Chinese, British, American Elite etc. etc. all rub shoulders after looting their respective countries (or some other third world country if they can get away with it). And they wonder why we don't trust our elected representatives or the free market?