Power, Employment and Accumulation

Social Structures in Economic Theory and Policy

Jim Stanford, Lance Taylor, Brant Houston

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780765606310
• eBook ISBN: 9781317462255
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides an interesting and refreshing collection of economic research conducted in the broadly heterodox tradition. A variety of topical issues are addressed, including labor market inequalities, welfare reform, interest rate policies, international trade, and global financial instability. What unites these diverse essays is their common perspective that social institutions and structures "matter" to the performance of economies, and hence should receive more attention from economists. Conventional economic thought focuses unduly on the functioning of so-called "free-markets." The persistent influence of social structures, institutions and practices - and the unequal extent to which differing social constituencies are able to exert power through those structures - often receives short shrift in this traditional research. However, this volume makes a significant contribution by helping to reverse this trend. The chapters, all written by top economists from around North America, address a range of topical issues, utilizing a rich variety of methodological techniques from empirical investigations to game theory and opinion surveys. Furthermore, the book, which is dedicated to the memory of David M. Gordon, has as its unifying theme the incorporation of structural analysis into economic science - an important goal for academics and students alike.

1

Jim Stanford

INTRODUCTION

POWER, EMPLOYMENT, AND ACCUMULATION

I. Social Structures and Economic Processes

Free markets. Free competition. Free trade. Free exchange.

These are the ideologically loaded buzzwords of conventional, market-oriented economics. The underlying assumption is that the private economy will function in an efficient and mutually beneficial manner, so long as it is allowed to operate free from government regulation, taxation, and other forms of interference. The choice of terms is not accidental: who could be opposed to “free” competition and “free” trade? Indeed, free-market economics has always been closely associated with philosophical liberalism, and in this tradition it is hard to imagine being “free” at all, without being able to truck and trade in a free private market.¹

The profession of mainstream “neoclassical” economics is premised on the propagation and elaboration of a huge and elegant complex of partial and general equilibrium models, all rooted within this core notion of free, utility-enhancing exchange. We start with an initial endowment of factor resources (capital, labor, and natural resources), the distribution of which is taken as some irreversible accident of chance. The model then proves how the well-being of individuals can be improved (all relative to that accidental, exogenous starting point) through mutual and voluntary trade. The resources can be traded directly in their original form, or indirectly through the process of production, which converts those initial resources into other, more useful commodities. Strangely (for a profession purportedly concerned with the output of actual goods and services), the concrete mechanics of those processes of production and work are seldom directly considered. Neoclassical production functions and other abstract conveniences allow the theorists to abstract from details like the organization and supervision of real work activity (mundane topics best left for the business school to deal with), focusing instead on the more interesting and pure processes of trade and exchange. Meanwhile, the allocative magic of flexible, competitive price determination ensures that supply and demand will always (absent misguided government interference or rare instances of “market failure”) match one another, ensuring the productive utilization of all offered resources. In return for their supplies of factor services, individuals receive compensation that reflects—thanks again to that competitive process of price determination—their true “value” from the perspective of those who are doing the buying. Everyone is employed, everyone is paid what they are worth, and everyone is better off than they were given their initial position (or “endowment”). Isn’t freedom great?

This approach to economics is fundamentally ahistorical and asocial. A “market” is seen as some natural, anonymous forum in which human beings productively interact. Economic history is reduced largely to a unidimensional process in which countries move at varying speeds along a continuum toward a state in which their citizens are able to fully participate in market exchanges to their mutual benefit. (It is not surprising, in this light, that economic history is rarely taught anymore within the economics departments of universities: it does not take too much research before this unidimensional approach to economic history is “all done,” having exhausted its potential lines of inquiry.) And since endowments are specified across individuals, and each individual possesses his own objective function which he will creatively and perpetually strive to maximize, the whole process is fundamentally atomistic in nature. Indeed, in the most perfect neoclassical vision of the world, there is no such thing as the study of macroeconomics (that is, the study of broader issues such as aggregate demand, expenditure, and unemployment). The microeconomic behavior of individual actors, in the context of free competitive markets, ensures that no macroeconomic problems (such as unemployment) can exist. Hence the “macro” is simply the sum of the “micros”—no more and no less.

In reality, of course, markets are not “natural,” “neutral,” or even rooted purely in the actions of “individuals.” Markets, rather, are fundamentally social institutions that took centuries to evolve, and that are fundamentally influenced by a complex set of economic and noneconomic factors (such as laws, attitudes, political processes, and culture) that determine who owns what, how much they get paid for it, and what they are and are not willing to put up with at the end of the economic day. The so-called free market is not the only means by which human beings have chosen to conduct their economic relationships with one another, and—the “end of history” notwithstanding—it is not likely to be the last. This sense of historical and systemic relativity, however, is almost entirely absent from the tradition of mainstream, free-market economics.

What we think of as free-market interactions are actually shaped by powerful social, institutional, and cultural influences. The “goal” of free markets may not necessarily be to “clear” (that is, to match every supply with a demand). Market exchanges do not usually occur between equal consenting parties. The exercise of power—in its economic and noneconomic forms—is an important part of explaining how economies work. Economists who focus too much on a reified model of pure exchange among equals are thus missing many features of the phenomena they are studying.

As an example of the potential errors produced by this myopic view on the economic world, consider the analysis of key labor market issues such as employment, employee turnover, and wage inflation. The words of Alan Greenspan, chairman of the U.S. Federal Reserve Board, are illuminating in this regard—perhaps accidentally so. Greenspan described the labor-market features that contributed to the success of the U.S. economy in the late 1990s as follows:

Increases in hourly compensation … have continued to fall far short of what they would have been had historical relationships between compensation gains and the degree of labor market tightness held….As I see it, heightened job insecurity explains a significant part of the restraint on compensation and the consequent muted price inflation….The continued reluctance of workers to leave their jobs to seek other employment as the labor market has tightened provides further evidence of such concern, as does the tendency toward longer labor union contracts…. The low level of work stoppages of recent years also attests to concern about job security…. The continued decline in the share of the private work force in labor unions has likely made wages more responsive to market forces…. Owing in part to the subdued behavior of wages, profits and rates of return on capital have risen to high levels. (Greenspan 1997)

The mechanisms described by Greenspan as being so crucial to the success of the U.S. economy are not, it seems, rooted solely in the competitive interaction of individual economic agents meeting in a faceless, neutral “marketplace.” Greenspan is speaking of matters of power, security, and fear—things that are not supposed to matter in a free-market exchange between free individuals. And hence any analysis of macro-economic issues that ignored these structural and institutional features would be missing, even according to Greenspan’s eclectically pragmatic view, important pieces of the story.

The late-1990s success of the U.S. economy is typically ascribed by mainstream economists to that country’s more deregulated, business-oriented economy. In the context of labor market policies, this deregulation is often described (with a typically misleading and non-neutral choice of words) as “flexibility,” and the U.S. labor market is now held up internationally as a paradigmatic example of this policy approach.² Yet many of the features highlighted by Greenspan reflect precisely a lack of flexibility in the labor market: a lack of response by compensation levels to tight labor markets, a reluctance of workers to leave their jobs, and the prevalence of long-term contracts that lock in employment arrangements for six or more years at a time. This suggests that something other than flexibility—something other than the anonymous interaction of consenting and equal adults through a free labor market—is a key ingredient at work. The unique features and functioning of the U.S. labor market may have more to do with forces of power and fear than with the freely flexible forces of supply and demand. American workers remain fundamentally insecure despite a relatively low unemployment rate, and hence compensation gains are muted. A consequent redistribution of income from labor to capital is part of the equation, reflected in strong business profitability and soaring stock markets. In this environment, the monetary authority is willing to allow the unemployment rate to fall below previously acceptable levels, with less fear of shrinking profit margins and accelerating inflation. Greenspan’s story is more about fear than it is about flexibility—and hence this famous quotation has come to be known as Greenspan’s “fear factor” testimony, in which he concisely described the importance of evolving labor market structures for his conduct of monetary policy. Any theory of monetary policy and interest rates that ignores these structural issues of economic power and its uneven distribution will be incomplete at best, misleading at worst.³

In this light, free-market economics can produce errors of at least two kinds: errors of description, and errors of prescription. In the preceding example, a lack of descriptive understanding of the institutional factors behind the relative acquiescence of U.S. workers during the latter 1990s would promote an incorrect prescriptive bias in favor of a tighter monetary policy to ward off wage-led inflation that was simply not on the horizon. Indeed, conventional economists, who did not comprehend the broad-based institutional disempowerment of American workers that was successfully engineered in the 1980s and 1990s, called repeatedly for monetary tightening as the 1990s recovery wore on and the unemployment rate dropped ever lower. Those calls, in retrospect, were premature. A richer institutional analysis of the U.S. labor market would help to explain not only why the feared wage-led inflation did not arise, but also why the distribution of the economic fruits of that recovery was so unbalanced. It was not until the U.S. unemployment rate fell to near 4 percent later in the decade that average American real wages began to grow at all—let alone by a pace that could possibly be considered inflationary, in relation to productivity growth.

On the other hand, this institutional or structural perspective on U.S. labor markets and monetary policy might also suggest that the happy confluence of low unemployment and low inflation attained in the U.S. in the late 1990s will not necessarily be a permanent state of affairs. Many pundits optimistically declared the advent of a “new paradigm” at the turn of the century, in which the economic magic of the Internet and other technological breakthroughs allows the economy to break free of former trade-offs between unemployment and inflation. In contrast to this happy view, the preceding structural analysis suggests perhaps that the combination of low unemployment and sluggish wage growth will persist only for as long as U.S. workers remain as precariously insecure as in Greenspan’s 1997 description. It is unlikely, however, that the workforce would remain permanently acquiescent in the face of growing inequality and continuing decline in real wages for many workers, and low unemployment should eventually have a positive impact on the economic and political confidence of U.S. labor. American unions, for example, increased their membership by more in 1999 than in any other single year in the past three decades. Once workers regain more confidence to demand and win a restored share of the economic pie, then the “old paradigm”—in which monetary policy proactively aims to maintain unemployment at levels sufficiently high to discipline the overall labor market—may suddenly find renewed currency.

Similar problems arise in the analysis of the complex of processes that is known as globalization. Ironically, in this case, the resulting errors of description are often shared by both the proponents and the opponents of the phenomenon. Globalization is typically interpreted as the breaking down of international barriers to economic activity, and the completion of more unified and harmonized international markets for both produced goods and productive factors (especially capital). In this context, globalization is viewed as involving both the strengthening and perfecting of market forces, and the weakening or dismantling of the ability of governments to interfere with those forces. Proponents and opponents of further international economic liberalization will naturally argue about prescriptive policy issues related to that process (with free-market adherents viewing it as desired and efficient, and critics viewing it as unwelcome and socially costly). But they seem largely to agree on what it is that is actually occurring.

But a closer reading of the institutional factors involved in the creation of this global economy suggests that this shared understanding of what globalization is might be less than complete. After all, it requires pro-active measures by national governments to undertake and enforce the trade and investment initiatives that have been heralded as the harbingers of this brave new global world. In many cases, it is not at all clear that governments have been disempowered by the process, or that the forces unleashed by globalization are rooted solely in the autonomous free-market interactions of private corporations and other agents (Panitch 1998). Think of the extensive new intellectual property provisions contained in many of the new trade agreements (including the NAFTA and the WTO agreements). These mandate far-reaching and aggressive forms of state intervention to protect and enforce private property claims over increasingly abstract and questionable terrain—ranging from music videos to pharmaceutical formulae to life forms. This hardly seems like the “powerless” state decried by many opponents of globalization; the problem is not a lack of state power, but rather a question of on whose side it is being exercised. Similar issues are at stake in understanding the tortuous, chaotic development of the post-Bretton Woods international financial system. One can take issue (as Lance Taylor does in chapter 10 of this volume) with the nature and terms of recent multilateral financial rescue efforts, such as those overseen by the IMF in response to the Asian financial crisis of 1997 and 1998. But one cannot deny that these quasi-state institutions are powerful, mobilizing incredible sums of wealth in the interests of preserving a particular, peculiar form of global financial “stability.” One would also be hard-pressed to deny that the current financial regime would have collapsed in the absence of those powerful interventions. So portraying the whole process of globalization as one that disempowers governments and further empowers private markets is, in many cases, quite wrong. For critics of the whole process, a richer analysis of the structural and institutional forces at play in the course of globalization should produce both a stronger understanding of the process itself, and a more convincing view of the ways in which progressive policy initiatives may be hindered (or helped) by that process.

It seems evident, then, that debates over labor markets, monetary policy, globalization, and many other pressing economic issues would be enriched by an economics that focuses on the influence and importance of nonmarket institutional structures, forces, and practices. In this spirit, this volume presents a selection of current research, both theoretical and empirical, motivated by an alternative understanding of the relationships between economic behavior and the broader social and institutional context within which that behavior occurs. The unifying theme of the essays presented here is the core notion that economies cannot be described solely as the interaction of autonomous market forces. Rather, social structures and nonmarket institutions, and the differing degrees of power that various constituencies are able to exert over those structures and institutions, play a fundamental and defining role in shaping how economies (even so-called free-market economies) actually function. The practice of economics badly needs to incorporate these issues into its field of vision.

One main feature of this broader, “structuralist” approach to econ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables and Figures
• Acknowledgments
• 1 Introduction: Power, Employment, and Accumulation
• Part I: Power, Work, and Distribution
• Part II: Power and the Macroeconomy
• Part III: Power and the Global Economy
• About the Editors and Contributors
• Index