States, Markets, and the States, Markets, and the Good SocietyGood SocietyState (central planning by government)

Market (free market)

What balance between states and markets most enhances people’s capability, the good society?

Market systemsMarket systemsMarket system = production for

profit intended for, coordinated through private exchanges (buyers and sellers)

More extensive (more international transactions) and more intensive (more social transactions)

States determine how extensive and intensive markets are

States States andand Markets MarketsLindblom: “...market system…

method of controlling and coordinating people’s behavior.”

Market systems require states (cannot exist without them)

Political economy = balance between political and market forces

Advantages of Market Advantages of Market SystemsSystemsDynamicProductiveEnhance prospects for democracy and political rightsSeparate economic from

political powerPlanned economies combine

economic and political power in state

Dark Side of MarketsDark Side of Markets

VolatileSocially destructiveInequalityHarmful spillover effects (externalized costs)

Shifting BalanceShifting BalanceMarket systems require rules

enforced by state to workStates steer economies toward

certain goals, interveneDegree of intervention source of

conflict◦1970s, rise of market advocates

(Reagan, Thatcher) -- spending, taxes, regulation work ethic, entrepreneurialism, taxes

divert income, public enterprises unproductive, inefficient

GlobalizationGlobalizationGlobalization = increasing flow of

money (investment), people, skills, ideas, and goods (trade) across borders (market extension)

“Washington consensus” (neoliberalism, “market fundamentalism”)◦Balance budgets, cut spending, open

markets to foreign trade/investments, privatize industries

◦Supported by large MNCs, US, and World Bank/IMF Economic assistance dependent on adoption of

neoliberal policies (Structural Adjustment Policies)

NeoliberalismNeoliberalismMarkets = efficiency, productivity,

growth, rising incomesCritics

Inequality between and within countriesPromotes corporations and powerful individuals

at expense of poor people and disadvantaged states

Crises, environmental destructionEmpirical record uneven

Widespread adoption of SAPs; little growth, development

Strong-state successes (e.g., India, China, S. Korea, Taiwan)

Effects of GlobalizationEffects of GlobalizationDeveloping countries

◦ Greater integration = more job opportunities for workers at all levels of development; workers in less developed countries at highest levels of economic development benefit most

◦ Workers in less developed countries = effect conditioned by level of economic development and economic/political institutions

Developed countriesFunction of different institutions and

governing coalitionsStates differ in government spending, union density,

welfareSome take advantage of globalization, others fail toSome ameliorate its effects, others fail to

State InterventionState Intervention Fiscal policy – budgets; overall revenues and expenditures

◦ Deficits/surplus; tax and spending States that tax more have more influence over how national income is used

and distributed Monetary policy – interest rates, cost of borrowing money

◦ Inflation/recession◦ Central banks/foreign exchange

States vary in influence/control over central bank (some insulated from political influence, e.g., U.S.; some state controlled (e.g., China, S. Korea 1970s)

Regulatory policy – rules that firms must follow◦ Manage competition, industry standards, certain business

practices Nationalization – state-owned and controlled public

enterprises◦ States control strategic assets, social criteria; vary in degree

States and MarketsStates and Markets Japan = state promoted mergers, cooperation

to create firms large, efficient enough to compete internationally

Germany = state brokered agreements among union and employer organizations

State-market balance product of political struggle◦ Market systems

States do not redirect as much income, exert influence on central banks; state regulations are not intrusive, public enterprises small

◦ State systems States redirect more income through taxes and spending, exert

greater influence over central banks; state regulations pervasive and directive, public enterprises control strategic industries

Markets and Markets and DemocracyDemocracyLiberal democracies have higher

degrees of economic freedomMarket systems do not guarantee

liberal democracyNo liberal democracies without

market systemsMore markets do not necessarily

mean more political freedomLack of strong market system

seems to preclude it

Markets and LiteracyMarkets and LiteracyLiteracy rates not strongly

associated with market economies◦High literacy rates among East

European countries◦Low rates among poor and wealthy

countries (e.g., African states and Arab states)

Appear to reflect cultural and religious values

Markets and SafetyMarkets and SafetyPolitical economy totally

unrelated to likelihood of warLittle correlation between

political economy and homicide rates

Type of economy has little influence on safety◦Citizens no safer in market-based

countries than state-led economies

Markets and Physical Markets and Physical Well-BeingWell-BeingStrong association between life

expectancy and market economies◦Countries with market systems are

more likely to live longer, with glaring exceptions Cuba and U.S. have same life-expectancy Zambians (with a market-based system)

can expect to live half as long as Israelis with strong state-led economy

Markets and CapabilityMarkets and CapabilityMarket systems may improve capabilities a

bit, but not consistently◦ Democracy not necessarily strong among market

systems◦ Not necessarily most literate◦ No safer◦ Longer life expectancy (with significant exceptions)

Markets not a panacea; must be supplemented to increase capabilities◦ Challenge: to develop a balance between states

and markets that promotes best qualities of markets (innovation, productivity), while avoiding worst effects (instability, inequality)