I apparently have offended Brent McClintock and my old friend
Jim Devine by saying I thought their arguments were weak. Sorry
about that. In the case of Brent, I don't see how pointing out
that an anecdote is an anecdote is "condesending," but sorry
anyway. As for Jim, I did, and do still think his representation
of Roemer was dismissive, and even misleading to our fellow pen-
lers. I never said Roemer's model was the last word--to his
credit, he himself says it is an exploratory discussion. But it
is a serious and sincere effort, and Jim seems poised to trash it
before even thinking about it. Which brings up my former classmate
Nancy Breen's very useful question about how the coupons get
distributed. The point is that the Roemer model is not an
historical model, so we just begin by saying that we have decided
on an egalitarian distibution of productive assets, and we
distribute coupons to everyone based on that assumption. On the
face of it, it is ahistorical. On the other hand, it is not really
so far-fetched a place to begin for Eastern European economies
where the state has owned almost all the productive assets and
they--along with many others, such as Jeffrey Sachs--are trying to
figure out what to do with them.
This whole approach brings up a whole range of questions,
which, in my opinion, need to be thought through carefully by many
of us. Rather than pursuing small quibbles that seem to lead to
big misunderstandings, I hope people don't mind if I just post the
introduction to the paper I've written on the subject--"Financial
Structures and Egalitarian Economic Policy." I will also arrange
for the whole thing to be placed in the pen-l archive. And to
address Brent M.'s query about the literature, I'd be happy to send
him or anyone else the paper's pretty long bibliography.
-- Bob Pollin
Intro to:
"Financial Structures and Egalitarian Economic Policy"
Bob Pollin
In various incarnations, egalitarianism has been a fundamental
concern of economic policy for most of the 20th century. The
egalitarian impulse--and its corollary, opposition to the stark
inequalities of free market capitalism--was embodied in both
Soviet-style socialism and social democratic Keynesianism as they
developed, primarily in the first quarter-century after the end of
World War II.
A substantial economics literature emerged around the
construction of both the Soviet and social democratic egalitarian
policy projects. More importantly, both models achieved major
successes in a range of countries, especially through the 1960s.
Countries with Soviet-type economies attained high growth rates and
the majority of people living in them enjoyed rising living
standards, including income, job, health and housing security. The
social democratic/Keynesian approach also succeeded in reducing
inequality, increasing security, as well as contributing to the
dampening of the capitalist business cycle.
However both models also contained several basic
contradictions. Among the most evident were the dictatorial
political foundations of the Soviet model and its related
incapacity to shift from an extensive to intensive development
path. For its part, the the Keynesian model has been unable to
operate effectively within an increasingly global environment.
The Soviet model has completely collapsed under the weight of such
contradictions and social democratic Keynesianism has been in
eclipse since the 1970s. Neither model now offers a viable basis
for a renewed egalitarian project.
Progressive political movements have been weakened by this
absence of coherent egalitarian economic programs. In this
absence, progressive movements are unable to specify a broad-based
policy agenda they support. Such a lacuna is especially damaging
given that support for the left has again begun to grow, as the
full implications of Reaganism, Thatcherism, IMF/World Bank
structural adjustment programs and Eastern European free market
shock therapy are no longer matters of speculation.
This paper pursues a new approach to egalitarian economic
policy. It is concerned with methods of bringing dramatic
increases in the democratic control over financial markets and the
allocation of credit, without sacrificing the basic sources of
organizational efficiency that are necessary for any viable
economic strategy. The focus here on financial issues is not meant
to suggest that there is less need for comparable policy measures
in other economic spheres, in particular the labor market and
related institutions. Nevertheless, the premise of this paper is
that policies focused on financial institutions and activities must
be a central feature of any renewed egalitarian policy project.
There are several reasons why this is so. To begin with, it
has been clear for some time that even the most mildly progressive
governments face formidable opposition to their programs from
powerful interests within financial markets. Some well-known
examples of this recurring phenomenon include the Labour
governments in Britain in the 1930s, 1960s and 1970s, the Mitterand
government in France in the 1980s, and, most recently, the Clinton
Presidency in the U.S. Third world governments regularly confront
even stronger pressures, especially since the 1980s, as the IMF and
World Bank have imposed deflationary structural adjustment programs
on terms established by the international financial
community.
But even assuming such political forces could be neutralized,
the tendency of financial markets toward speculation and
instability have also weakened the capacity of governments to
successfully implement egalitarian macroeconomic policies. The
primary instruments for conducting macro policy--deficit spending
and central bank monetary interventions--are both financial
mechanisms, and thus their ability to operate effectively depends
on how well policy initiatives can be transmitted through the
financial system. Financial market instability has increased
substantially since the early 1970s relative to the first phase of
the postwar period, including such period-defining events as the
collapse of the Bretton Woods system in the early 1970s, the Latin
American debt crisis in the early 1980s, and the merger and
takeover wave in the U.S. and U.K. in the latter part of the 1980s.
This rise of financial instability has weakened the transmission
mechanism from policy instruments to policy targets.
Given these considerations, it follows that egalitarian
movements will have to confront financial market pressures through
explicit programmatic measures. But, unlike the situation with
labor market issues, the left has for the most part failed to even
consider seriously the types of policies that might be effective
in addressing both the political and structural problems deriving
from financial markets.
There are also more positive reasons for egalitarians to give
new attention to polices focused on the financial system. Finance
is the conduit for all economic activity in market economies.
Because nothing happens unless it is financed, exerting control
over the financial system is an efficient way to influence the
widest possible range of activity with a set of relatively small
and simple policy tools.
Moreover, many researchers have now observed that there are
considerable differences in the financial systems operating within
the various capitalist economies. What has emerged from this
research is that some financial systems--in particular what we will
call the "bank-based" systems--have been more successful than
others--what we term the "capital market-based" systems--in
promoting long-term growth and financial stability. The basis for
the success of the bank-based systems is their reliance on non-
market arrangements in organizing financial institutions. These
non-market arrangements continue to operate, moreover, despite the
wave of financial market globalization and liberalization that has
been gaining momentum at least since the collapse of Bretton Woods.
While these bank-based systems have not been constructed to advance
egalitarian aims, the principle argument of the paper is that they
can be successfully adapted for that purpose once their central
operating mechanisms are understood and appropriately redeployed.
Following this introduction, the paper is organized into three
main sections. The next section considers the barriers to the
successful implementation of egalitarian economic policies through
traditional Keynesian fiscal and monetary policy tools. I mention
political obstacles, but focus on economic constraints, including
the systemic tendency towards instability in capitalist financial
markets; the effects of declining profitability and stagnation; and
globalization. By focusing on the limitations of Keynesian tools
as vehicles for promoting egalitarianism, this discussion points
toward the types of policies needed to overcome the existing
constraints.
Section three then surveys the literature on bank-based and
capital-market based financial systems. In general, this
literature finds that bank-based systems, such as those in Japan,
France, Germany and South Korea have been more successful than
capital market-based systems, such as in the U.S. and U.K., in
resolving the principal/agent problem between managers and owners
of large-scale corporate enterprises. Because of this, bank-based
systems are better equipped to promote longer time horizons and a
stable financial environment. Their structures also create more
conditions for activist government policy interventions, including
both traditional macro policies and public credit allocation
policies.
At the same time, the bank-based systems generally operate
through highly undemocratic public and private bureaucracies, which
is clearly inimical to any egalitarian policy project. The
challenge then is to develop policy approaches which can combine
the efficiency-promoting aspects of bank-based systems with a
degree of democratic participation in the financial system not yet
attempted in existing models.
Section four takes up this challenge. The angle through
which it approaches this issue is to reexamine the different
financial systems according to the exit/voice analytic framework
developed by Hirschman (1970). Within this framework, the
fundamental distinction between financial systems can be seen as
not whether they are bank- or capital market-based, but rather
whether they are dominated by exit or voice mechanisms. The bank-
based systems are voice dominated, and therefore provide more
effective channels for political interventions in financial markets
than do the exit-dominated capital market systems. Working from
this point, the principal concern in formulating egalitarian
policies can be recast: the issue is not the specific bank or
capital market institutions prevailing in a financial system, but
rather how all systems can be restructured to provide an effective
basis for the democratic exercise of voice.
Posing the question in this way then enables us to consider
various means of creating "democratic voice" mechanisms that also
retain the efficiency-promoting aspects of the existing bank-based
financial structures, i.e. the "elite voice" systems. Drawing
primarily from recent literature on the U.S. economy, I consider
proposals in the areas of corporate governance, community
reinvestment, pension fund management, and central bank
policy. However I also stress here that such democratic credit
policies can be effective within a range of institutional
frameworks and political environments. Indeed, the adaptability
of this policy approach is one of its most important strengths.
For example, while such proposals have operated successfully on a
limited scale within the contemporary U.S. economy, their
effectiveness would likely increase within an economy, such as the
French, where a high proportion of the major financial institutions
are publicly owned.
The final question explored in this section is how well
organizational efficiency can be sustained within financial systems
characterized by democratic voice mechanisms. The discussion is
premised on the assumption that such democratic voice systems will
differ in the extent to which they combine public and private
ownership of financial institutions. I approach the issue via the
new model of "bank-centric" market socialism developed by Bardhan
and Roemer (1992). Taking this approach provides an extensive
literature from which to explore the central matter of concern:
how efficiency can be sustained when markets are combined with
pervasive non-market interventions to achieve egalitarian ends.
The brief concluding section pulls together the main arguments
in support of such democratic voice financial policies as a
foundation for renewing egalitarian economic policies. In passing,
this section notes that globalization and liberalization of
financial markets pose new challenges to the viability of any bank-
based or voice-dominant financial system. At the same time,
experiences thus far suggest ways that the essential features of
a voice system can be retained without having to resist all aspects
of globalization.
