GV441

Negative externalities and indeterminacy of state's role

1. No simple formula for assigning responsibility for negative externalities 2. Why not: people should pay for the consequences of their acts? 3. BUT: failure to avoid indirect effects is also an act -- it's all a problem of labelling 4. Is it my loud radio at fault, or the neighbours' unreasonably thin walls?

NPR, "The Giant Pool of Money"

1. The global pool of money. That's where our story begins. Most people don't think about it but there's this huge pool of money out there, which is basically all the money the world is saving now. It's a lot of money. It's about 70 trillion. 2. But to make it grow, they have to find something to invest in. So, for most of modern history, they bought really, really safe, really boring investments: things called treasuries and municipal bonds. Boring things. But then, right before our story starts, something changed, something happened to that global pool of money. This number doubled since 2000. In 2000 this was about 36 trillion dollars. 3. How's the world get twice as much money to invest? Lots of things happened, but the main headline is all sorts of poor countries became kind of rich making TVs and selling us oil: China, India, Abu Dhabi, Saudi Arabia. Made a lot of money and banked it. 4. And the world was not ready for all this money. There's twice as much money looking for investments, but there are not twice as many good investments. So, that global army of investment managers was hungrier and twitchier than ever before. 5. Alan Greenspan said he was going to keep the Fed Funds rate at the absurdly low level of one percent. It tells every investor in the world: you are not going to make any money at all on US treasury bonds for a very long time. Go somewhere else. We can't help you. And so the global pool of money looked around for some low-risk, high-return investment. And among the many things they put their money into, there was one thing they fell in love with. To get it, they called Wall Street 6. There are problems. Individual mortgages are too big a hassle for the global pool of money. They don't wanna get mixed up with actual people and their catastrophic health problems or debilitating divorces, and all the reasons which might stop them from paying their mortgages. So what Mike and his peers on Wall Street did, was to figure out how to give the global pool of money all the benefits of a mortgage - basically higher yield - without the hassle or the risk. So picture the whole chain. You have Clarence. He gets a mortgage from a broker. The broker sells the mortgage to a small bank, the small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street. Then Mike takes a few thousand mortgages he's bought this way, he puts them in one big pile. Now he's got thousands of mortgage checks coming to him every month. It's a huge monthly stream of money, which is expected to come in for the next thirty years, the life of a mortgage. And he then sells shares of that monthly income to investors. Those shares are called mortgage backed securities. And the 70 trillion dollar global pool of money loved them. 7. The problem was, to make a mortgage backed security, you needed mortgages, lots of them. So for Mike Francis to satisfy his demand, and take his quite hefty fee from the global pool of money, he needed to buy up as many mortgage pools as possible. 8. And to do that, he called a guy one link below him, on the mortgage backed security chain, a guy named Mike Garner, who worked at the largest private mortgage bank in Nevada, called Silver State Mortgage. And to give you a sense of how fast this business was growing, Mike got into the mortgage business straight from his previous job as a bartender. 9. And in the beginning, he'd only buy mortgages that were pretty standard and pretty safe. Mortgages where people had come up with a down payment and proven they had a steady income and money in the bank. And they sold so many mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified to get one .... had gotten one. But the pool of money had just gotten started. They wanted more mortgage backed securities. So Wall Street had to find more people to take out mortgages. Which meant lending to people who never would've qualified before. 10. So, All Mike cared about was whether or not his customers--the Wall Street investment banks--would buy those mortgages from him. And he was under pressure to approve more and more loans. Because other guys in his company--the actual guys cruising strip malls all across Nevada buying mortgages from brokers, their commission depended on selling more loans. And occasionally, those guys would hear about some loan that some other mortgage company offered that they weren't allowed to offer. And they'd complain to Mike. 10. As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent. But the problem with is there were all these new kinds of mortgages, given out to people who never would have gotten them before. So the historical data was irrelevant. Some mortgage pools, today, are expected to go beyond 50 percent foreclosure rates. 11. Ratings agencies relied on the wrong data. That same historic data that had nothing to do with these new kinds of mortgages. 12. And then things got even worse. The thing that took this problem and turned it into a crisis was something else that was new, something called a Collateralized Debt Obligation. A CDO. Let's translate some of that. A mortgage-backed security, you remember, is a pool of thousands of different mortgages. These are all put together and divided into different slices. Jim used the word tranche. Tranche is just French for slice - some of these slices are risky, some are not. OK, a CDO is a pool of those tranches. A pool of pools. 13. So, a CDO is sort of a financial alchemy. Jim takes that toxic stuff, these low-rated, high-risk tranches, puts them all together. Re-tranches them, and presto: he has a CDO whose top tranche is rated AAA, rock-solid, good as money. 14. And the CDO industry was facing the same pressures everyone else was at every other step of this chain. To loosen their standards. To make CDOs out of lower and lower rated pools. 15. From 2003 to 2006, the housing market was in a classic speculative bubble. Home loans were easy to get, so more and more people were buying houses. The increased demand for houses caused the price to increase. The rising prices created even more demand, as people started to look at homes as investments -- investments that never went down in value. In 2003 and 2004, 2005, they didn't. You could buy a house with no money down, turn around and sell it a year later for in some areas double what you paid. People who'd never invested in real estate before started buying multiple properties as investments. There were shows on TV about how to do it. 16. The problem was that even though housing prices were going through the roof, people weren't making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn't possibly afford, no matter what the mortgage machine tried, the people just couldn't swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they'd almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped. 17. The problem was that once property values starting going down, it set off a reverse chain reaction, the opposite of what had been happening in the bubble. As more people defaulted, more houses came on the market. With no buyers, prices went even further down, and as prices declined, Mike Francis cleared up a mystery. Remember, even though he didn't trust these NINA loans, the bonds that he turned them into, they performed well. Well, there was a reason. 18. The global pool of money still has no idea how much money they lost. How much went into the furnace. And because of that, they've totally changed their thinking. They used to be obsessed just with getting some profit, trying to make a slightly higher interest rate return. Now the global pool of money has the exact opposite obsession. It wants no risk whatsoever. It just wants safety. Suddenly, those US government treasury bonds--still near historic lows of 1 and 2 percent--are beautifully attractive. Because they're safe. They won't blow up like sub-prime CDOs did.

First week's reading

Block, Fred. 1994. "The Roles of the State in the Economy."

John Gerard Ruggie, "International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order"

Brief Summary: Ruggie focuses on how the regimes for money and trade have reflected and affected the evolution of the international economic order since World War II. In arguing against the theory of hegemonic stability, Ruggie develops the concept of "embedded liberalism" in order to depict international authority as reflecting a fusion of both power and legitimate social purpose, not only the distribution of interstate power alone. Main puzzle: Why did not the international free trade regime fall when the hegemon's power eroded, as predicted by the hegemonic stability theory? Main answer: Ruggie's analysis suggests that far more continuity can attend hegemonic decline than would be predicted by the hegemonic stability thesis, provided that social purposes are held constant. International regimes have been defined as social institutions around which actor expectations converge in a given area of international relations. Accordingly, as is true of any social institution, international regimes limit the discretion of their constituent units to decide and act on issues that fall within the regime's domain. The analytical components of international regimes we take to consist of principles, norms, rules, and procedures. The formation and transformation of international regimes may be said to represent a concrete manifestation of the internationalization of political authority. The model of the formation and transformation of international economic regimes. o The most common interpretation is neo-realist or the theory of hegemony stability: if economic capabilities are so concentrated that a hegemon exists, an open or liberal international economic order will come into being. In Ruggie's view, the theory of hegemonic stability is not wrong. But, it does not proceed very far in making people understand international economic regimes because it does not encompass the phenomenological dimensions of international regimes. Ruggie, then, develop three theoretical arguments as follows: 1. The hegemonic stability theory focuses only on power, but ignores the dimension of social purpose. This formulation of focusing on power may predict the form of the international order, but not its content. To say anything sensible about the content of international economic orders and about the regimes that serve them, it is necessary to look at how power and legitimate social purpose become fused to project political authority into the international system. This character of the international economic order is subsequently called "embedded liberalism." 2. Concerning the relationship between international economic regimes and developments in the international economy, particularly at the level of private transaction flows, Ruggie indicates that these regimes are neither determinative nor irrelevant as viewed by conventional Liberals and Realists respectively. Instead, they provide part of the context that shapes the character of transnationalization. 3. The occurrence of change in and of regimes is not solely a function of power, but also of purpose. As long as purpose is held constant, there is no reason to suppose that the normative framework of regimes must change as well. In other words, rules and procedures (instruments) would change but principles and norms (normative frameworks) would not. 1.The structure of international authority: The balance between "authority" and "market" fundamentally transformed state-society relations, by redefining the legitimate social purposes in pursuit of which state power was expected to be employed in the domestic economy. "The role of the state became to institute and safeguard the self-regulating market" (202). In sum, efforts to construct international economic regimes in the interwar period failed not because of the lack of a hegemon. They failed because, even had there been a hegemon, they stood in contradiction to the transformation in the mediating role of the state between market and society. 2.The compromise of embedded liberalism The task of postwar institutional reconstruction was to maneuver between these two extremes and to devise a framework which would safeguard and even aid the quest for domestic stability without, at the same time, triggering the mutually destructive external consequences that had plagued the interwar period. This was the essence of the embedded liberalism compromise: unlike the economic nationalism of the 30s, it would be multilateral in character; unlike the liberalism of the gold standard and free trade, its multilateralism would be predicated upon domestic interventionism. In sum, that a multilateral order gained acceptance reflected the extraordinary power and perseverance of the USA. But that multilateralism and the quest for domestic stability were coupled and even conditioned by one another reflected the shared legitimacy of a set of social objectives to which the industrial world had moved. 3.Complementary transaction flows International economic regimes do not determine international economic transactions. For determinants we have to look deeper into basic structural features of the world political economy. But, nor are international economic regimes irrelevant to international economic transactions. They play a mediating role, by providing a permissive environment for the emergence of certain kinds of transactions, specifically transactions that are perceived to be complementary to the normative frameworks of the regimes having bearing on them. 4.Norm-governed change If international regimes are not simply emanations of the underlying distribution of interstate power, but represent a fusion of power and legitimate social purpose, our cause and effect reasoning becomes more complex. For then, the decline of hegemony would not necessarily lead to the collapse of regimes, provided that shared purposes are held constant. 5.Stress, contradiction, and the future How enduring is embedded liberalism? A central ingredient in the success of embedded liberalism to date has been its ability to accommodate and even facilitate the externalizing of adjustment costs. There have been three major modes of externalization: o 1. An intertemporal mode, via inflation o 2. An intersectoral mode, whereby pressure on domestic and international public authorities is vented into the realm of private markets o 3. An interstratum mode, through which those who are 'regime makers' shift a disproportionate share of adjustment costs onto those who are 'regime takers.'

Asymmetric information:

when seller knows more about what good or service sold than buyer

Polanyi's project

"To trace the institutional mechanisms of the downfall of a civilization may well appear as a hopeless endeavor. Yet it is this we are undertaking." TGT, p. 4 Project unfolds in three phases 1. Rise of 'self-regulating' market governed by prices (last week) This week 2. Protective reaction 3. Catastrophic consequences of contradiction between markets and protection

Summers on 'secular stagnation'

'Full employment real interest rate' is falling (i.e., need lower and lower rates to make up for reluctance to invest)

Week 4: States and Markets in the Great Depression

(or, if you want to be all pedantic about it, States and Markets in the Interwar Period, 1918-1939, though we'll be focussing on 1924-1936 mostly; the Great Depression dates from late 1929)

Keynes' newspaper contest metaphor

1. "...professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees." 2. Focus on "We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be" 3. Keynes' discussion is prelude to Hyman Minsky, who suggested that financial market crashes don't just come from shifting sentiments: investors change their behavior through a cycle.

Terminology, II

1. "Classical" liberal ≈19th century liberal ≈ [in Europe] liberal ≈ [in contemporary U.S.] libertarian: supporter of "free markets" and civil liberties 2. [in contemporary U.S.] liberal = supporter of "government intervention" [often minor by European standards, though] and civil liberties

The subprime circle: risings assets, rising leverage

1. "Excess" collateral: encourages people to 2. Borrow more money to buy houses, or repay earlier loan (liquidity increases): as demand for houses increases 3. House prices rise, and there is once again, "excess" collateral Size of mortgage available depends on value of house. Forced refinancing means borrowers must keep 'rolling over' loans to keep current

Summary

1. "Highly artificial stimulants...": policies rapidly changed the status quo e.g. enclosures, mercantilism, Speenhamland, abolition of poor laws. Polanyi thought the state reconfigured circumstances to enable the rise of the self-regulating market. Marx described this process as "primitive accumulation." 2. Role of the state and particular ideas

The "double movement," cont'd

1. "Social history in the nineteenth century was thus the result of a double movement: the extension of the market organization in respect to genuine commodities was accompanied by its restriction in respect to fictitious ones." 2. Chapter 6

Hall & Soskice, 5

1. "The importance of strategic interaction is increasingly appreciated by economists but still neglected in studies of comparative capitalism. If interaction of this sort is central to economic and political outcomes, the most important institutions distinguishing one political economy from another will be those conditioning such interaction, and it is these that we seek to capture in this analysis. For this purpose, we construe the key relationships in the political economy in game-theoretic terms and focus on the kinds of institutions that alter the outcomes of strategic interaction." 2. That is to say, H&S focus on strategic interaction: 2 or more players/actors deciding on the basis of what they think others will do

Block's "new paradigm"

1. "[S]tate action always plays a major role in constituting economies" 2. Look not to quantity of state "intervention," but quality (character) of state activity Point of departure for this course I.e. people thought that if Soviet central planning discarded, markets would emerge. But markets require the centralization of functions such as money. Look at the fact that many people know who Janet Yellen is. This speaks to the centralization of the US market economy.

Why is deflation so bad? Debt deflation (Irving Fisher)

1. 'Fire sale' to pay debts leads to 2. Prices fall (deflation), which leads to 3. Deflation makes business fail, which leads to 4. 'Fire sale' to pay debts etc.

Timeline for Block and Crouch

1. 1970s: "failure" of Keynesianism/Fordism 2. Reliance on consumer borrowing secured by houses for demand e.g. US, UK, Ireland. Block and Crouch see this as a politics-driven choice e.g.Reagan/Thatcher 3. Financial Liberalization 4. Crisis of 2007/2008: note that reliance on consumer borrowing secured by houses for demand also feeds directly into the crisis in their view. Crouch's strange ending about corporate social responsibility doesn't have anything to do with aggregate demand. Block calls for a Green New Deal.

Douglass C. North, "Government and the Cost of Exchange in History"

1. A general transaction cost framework is developed to analyze the costs of exchange and the role of government in the costs of exchange. 2. Three general types of exchange are specified: personal exchange, exchange without third-party enforcement, and exchange with third-party enforcement. The framework is then employed to analyze government and the costs of exchange in history. 3. Transaction costs are the costs of specifying and enforcing the contracts that underlie exchange. 4. Personal exchange, characterizing small-scale production and local trade, has been the predominant form of organization throughout history. Cultural homogeneity (that is, a common set of values) and a lack of third-party enforcement (and indeed, little need for it) have been typical. Under these conditions transaction costs are low; but because specialization and division of labor are rudimentary, production costs are high. 5. Impersonal exchange without third-party enforcement covers an enormous variety of types of organization, spanning relatively large scale retail (and wholesale) trading, long-distance and cross-cultural trade, and forms of organization in which one party has overwhelming coercive power relative to another. The three have in common high costs of transacting and limited gains from trade. Specialization and division of labor tend to be limited to the specific form of organization and a specific type of economic activity. 6. The abstract notion of a third party impartially specifying property rights was set against the reality of very imprecise actual specification of property rights, and imperfect enforcement. Nevertheless, a society that would realize the productive benefits of great specialization can only do so with an elaborate structure of law and its enforcement. There are no cases of complex urban societies that do not have an elaborate structure of government. Impersonal exchange involves the high measurement costs of complex contracting necessary to realize the potential of the technology that comes from specialization. Neither self-enforcement by the parties themselves nor "trust" is a viable way of enforcing such contracts. It is not that ideology does not matter. It does; and as described above, immense resources are devoted to attempting to promulgate codes of conduct. But equally, the rate of return on opportunism, cheating, shirking, and so on also rises in such a context. 7. A coercive third party is essential. One cannot have the productivity of an industrial society with political anarchy. But while such a state is a necessary condition for realizing the gains from trade, it obviously is not sufficient. A state becomes the inevitable source of struggle to take control of it in the interests of one of the parties. The state then becomes the vehicle by which the costs of transacting are raised to capture the gains that will accrue to any interested party that can control the specification and enforcement of property rights. The point has been the subject of such an extensive literature that it appears to have obscured the key point. If you want to realize the potential of modern technology you cannot do with the state, but you cannot do without it either.

Hostile takeovers, explained

1. A hostile takeover is the acquisition of one company (called the target company) by another (called the acquirer) that is accomplished by going directly to the company's shareholders or fighting to replace management to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight. 2. The key characteristic of a hostile takeover is that the target company's management does not want the deal to go through. Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies, such as the poison pill, the crown-jewel defense, a golden parachute or the Pac-Man defense.

Junk bond

1. A junk bond refers to high-yield or noninvestment-grade bonds 2. Junk bonds are risky investments, but they have speculative appeal because they offer much higher yields than bonds with higher credit ratings. Investors demand that junk bonds pay higher yields as compensation for the risk of investing in them. If a junk bond manages to turn its financial performance around and has its credit rating upgraded, the investor may see a substantial appreciation in the bond's price.

Debt deflation

1. A situation in which the collateral used to secure a loan (or another form of debt) decreases in value. This can be detrimental because it may lead to a restructuring of the loan agreement or the loan itself. 2. Also known as "worst deflation" and "collateral deflation".

The case for convergence 1

1. According to "convergence theorists," varieties of capitalism destined to converge on especially liberal version of LME 2. This is true even of US and UK.

Barriers to labour's commodification

1. Act of Settlement and "parish serfdom": up until 1795, Act of Settlement required registration in a parish. Poor people could apply for parish relief. In practice, this meant that it was hard to change parish registration, so it was difficult for people to move about i.e. "parish serfdom." Speenhamland Act got rid of the Act of Settlement and also established a wage floor. 2. Speenhamland, 1795 A. Act of Settlement abolished B. Speenhamland establishes wage floor C. Floor becomes a ceiling: Polanyi suggests that employers paid less than the wage floor, because the government would top up the rest. Speenhamland went part of the way to commodifying labor. Townsend looked at Speenhamland and thought wage regulation was the problem, so paupers should be left to die. Poor laws were abolished and labor was subject to the price mechanism. D. Did Polanyi fall for a tendentious mythology? (Block and Somers 2003)

How did BFC come to shape policy? 2

1. After 2011, there's big shrinkage in Euro area deficit spending 2. The ECB insists on austerity 3. First Trichet then Draghi as head of ECB asked for austerity in exchange for EDB help

The Bretton Woods System

1. After WWII, rich countries instituted the Bretton Woods system 2. Bretton Woods institutions = World Bank, IMF 3. Bretton Woods system = system of many exchange rates: currencies convertible to dollars, dollars convertible to gold 4. Bretton Woods system aimed for macroeconomic autonomy and fixed exchange rates 5. The Bretton Woods system rested on sacrificing the free flow of capital, as exchange rates were fixed but adjustable

Why is it called real appreciation?

1. After inflation, today's peso is worth less (buys less) than yesterday's peso. 2. Call yesterday's peso a "real peso," and imagine today's peso is .95 * real peso (buys 5% less after inflation) 3. How does exchange value of real peso change with constant exchange rate, say $1=1 peso? • Yesterday 1 real peso = $1 • Today .95 real peso = $1, or 1 real peso = $1.053 • Thus, "real peso" now worth more $, "real appreciation" 4. Contrast with "nominal appreciation," a change in the exchange rate, so eg 1P=1$ goes to 1P=$1.05 5. Both nominal appreciation and real appreciation hurt domestic goods' competitiveness against foreign goods

The Effect of Agency Theorists

1. Agency theorists thought about corporate managers using corporate jets, taking long lunches. They wanted to align incentives of managers with shareholders, and so executive compensation goes from 40:1 to 400:1. 2. In the WorldCom scandal, the company's CEO inflated company revenues to inflate company stock. Effect of high-powered incentives didn't lead to real value creation in this case.

Asymmetric information as a barrier to entry 2

1. Akerlof, George A. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism." The Quarterly Journal of Economics 84, no. 3 (August 1, 1970): 488-500. 2. Hill, Claire A. "Securitization: A Low Cost Sweetener for Lemons." Washington University Law Quarterly 74 (1996): 1061.

Hall and Franzese 1998

1. Also examining coordination problem, this time around wages in firms 2. Important whether wages keep up with inflation

Summers on 'secular stagnation': why is it happening?

1. Among other reasons: structural changes suggest no increased demand to make investments pay off • "Slower population and possibly technological growth means a reduction in the demand for new capital goods to equip new or more productive workers." • "Rising inequality operates to raise the share of income going to those with a lower propensity to spend." • "Closely related, a rising profit share operates to transfer income to those with a lower propensity to spend." 2. 'Privatised Keynesianism' and other 'regime of accumulation' arguments can be regarded as analyses of political reaction to secular stagnation

Stakeholder expropriation

1. Andrei Shleifer and Lawrence Summers 1987: "hiring and entrenching trustworthy managers enables shareholders to commit to upholding implicit contracts with stakeholders. Hostile takeovers are an innovation allowing shareholders to renege on such contracts ex post, against managers' will. On this view, shareholder gains are redistributions from stakeholders, and can in the long run result in deterioration of trust necessary for the functioning of the corporation." 2. That is to say, hostile takeovers are profitable, because they tear up the implicit contracts old managers had with their workers.

Postwar (Post-WWII) Economic Order

1. Answer to a question: how to reconcile external and internal economic stability? 2. Today: A Explore why such reconciliation was and is difficult B. Some of the reasons why the first post-war solution broke down by 1971 C. Domestic politics of international monetary policy

Peter A. Hall, David Soskice, "Varieties of capitalism: the institutional foundations of comparative advantage"

1. At the core of the VoC perspective is the importance of "system coordination", and the idea of "institutional complementarities". In simplest terms, institutional subsystems - which govern capital and labour - mould capitalist models, and when present in the "right" form, mutually reinforce each other. The VoC approach posits that the presence of "correctly calibrated" sub-systems (i.e., financial system, labour market, training system, and inter-firm relations) increases the performance, or the so-called "comparative institutional advantage" of the firm. Taken from the economic concept of comparative advantage in trade, the basic idea is that the institutional structure of particular political economy provides firms with advantages for engaging in specific types of activities. The presence of comparative institutional advantage enhances the survival chances of the system as a whole, producing specific adjustment paths to pressures for change. 2. The core insight of the VoC approach is portrayed in terms of two major types of capitalist models distinguished by the degree to which a political economy is, or is not, "coordinated". The coordinated market economy (or CME) - dependent on non-market relations, collaboration, credible commitments and deliberative calculation on the part of firms - is diametrically opposed along all of these dimensions to the liberal market economy (or LME), whose essence is described in terms of arms-length, competitive relations, competition and formal contracting, and the operation of supply and demand in line with price signalling 3. VoC argues that institutional complementarities deliver different kinds of firm behaviour and investment patterns. Hence, in the LMEs, fluid labour markets fit well with easy access to stock market capital and the profit imperative, making LME firms the "radical innovators" they have proven to be in recent years, in sectors ranging from bio-technology through semi-conductors, software, and advertising to corporate finance. The logic of LME dynamics revolves around the centrality of "switchable assets", i.e., assets whose value can be realised if diverted to multiple purposes. In the CMEs, by contrast, long-term employment strategies, rule-bound behaviour and durable ties between firms and banks underpinning patient capital provision predispose firms to be "incremental innovators" in capital goods industries, machine tools and equipment of all kinds. In contrast to the LME, the logic of the CME revolves around "specific or co-specific assets", i.e., assets whose value depends on the active co-operation of others

David M. Woodruff, "Governing by Panic: The Politics of the Eurozone Crisis"

1. At the end of 2014, economic output in the Eurozone was still 1 percent below its level in 2007, and was only expected to equal the 2007 level at the end of 2015. These lost eight years compared unfavorably even with the Great Depression. During this period, policymakers used both fiscal and monetary policy instruments to ward off vicious circles of declining growth or financial implosion, yet did not turn these same instruments to promoting virtuous circles of expansion and avoid austerity. As late as 2014, Draghi found himself at once announcing deflation-fighting measures and defending deflation's necessity for adjustment. In short, there was a very deep intellectual incoherence at the core of the Eurozone's reaction to the crisis. 2. The virtue of a Polanyian analysis is that it accounts for this paradoxical outcome, illuminating its political roots in the use of market panic as a tool to eliminate the space for democratic choice about economic policy. Despite the operation of institutions and attitudes reflective of Polanyi's protective countermove, the joint effect of the Brussels-Frankfurt consensus and German Ordoliberalism, politically empowered by the irreplaceable role of the central bank as a tool against market panic, was to push austerity and deflationary adjustment. "The market" did not demand these policies. (A particularly revealing incident in this regard occurred in early 2012, when the credit rating agency Standard & Poor's downgraded the bonds of a number of European states because of fears that austerity could become counterproductive because of the contraction of demand.) The collapse in Eurozone interest rates after the introduction of OMT decisively illustrated once again what had long been obvious: there was no direct connection between data on budget deficits and growth prospects and the mood of the markets. Eurozone debt as a share of GDP continued to grow even as interest rates plummeted. There is no sense in which the austerity agenda was imposed by market forces; it was a political choice that governing by panic was used to implement. 3. Of the traditional explanatory triumvirate of ideas, institutions, and interests, this explanation emphasizes the first. If the thinking behind the Brussels-Frankfurt consensus had been less deeply embedded in European institutions, if Ordoliberalism's rule-consequential style of thinking were less prevalent in Germany, a deadlock could have been avoided and breakthrough to sustained stimulus would have been possible 4. Institutions were not irrelevant. Treaty provisions and the veto power Germany held over many potential actions at the European or Eurozone level contributed to the credibility of the ECB threat to stand aside in the face of market panic. However, these institutions only facilitated the pursuit of particular aims; they did not specify these aims. Flexibility was possible. The extensive creation of new treaty arrangements (such as the fiscal compact) in the course of the crisis, as well as the ECB mission creep involved in its detailed policy recommendations and adoption of a lender-of-last resort role, illustrate the potential flexibility of the rules. The possibilities for approving more extensive deficit spending created by treaty references to "structural" deficits could have been exploited to a much greater extent than they were. There is no sense in which the austerity agenda was imposed by European or Eurozone institutions; it was a political choice. 5. As for interests, this was certainly a case where they did not "come with an instruction sheet." Consider two of the relevant interests often cited. The politicians of creditor countries, such as Germany, could have focused on the benefits of stimulating demand for exports rather than on the costs of bailouts. And the taming of the bond market panic after 2012 suggests that the options for addressing financial-sector difficulties were certainly not limited to austerity. 6. Despite the disasters it chronicles, it is possible to read TGT in an optimistic vein: the spastic crisis-fighting innovations of the interwar period could be the harbingers of a new form of enlightened economic management; the demise of financial panic as an ultima ratio in class conflict would reveal that tensions between markets and democracy were not inherent to these two institutions

Forms of demand stimulus

1. Automatic stabilisers: these increase demand in a recession • Tax income tends to go down in a recession • Expenditure tends to go up (unemployment insurance) ➡Budget deficits increase: nevertheless, there was only a short-lived increase in the budget deficit 2. Explicit stimulus: new policies to reduce tax income or increase spending. It takes a long time for economies to recover. US did the biggest stimulus and recovered the fastest.

Manufacturing output, 1928-36 (1928 = 100)

1. Back to peak: US: >7 years, UK 6 years, Germany 8 years 2. It took a long time for manufacturing to recover 3. Only comparable to 2008

Adjustment under the gold standard (Hume) 2

1. Balance of payments surplus -> gold inflow 2. Gold inflow -> more money -> higher prices & lower interest rates 3. Higher prices -> less competitiveness -> trade and balance of payments surplus shrinks or reverses -> gold outflow 4. Lower interest rates -> gold outflow 5. Gold outflow -> less money -> lower prices & higher interest rates -> competitiveness and capital inflow restored 6. Note: Part of Polanyi's "self-regulating market" Hume's metaphor was communicating chambers. Hume thought gold standard would work as an automatic mechanism. This is part of Polanyi's self-regulating market.

Adjustment under the gold standard (Hume) 1

1. Balance of payments surplus -> gold inflow 2. Hume thought this was a good thing, because it offered a way to balance trade.

Aside: some (rough-and-ready) definitions

1. Balance of trade, trade balance: total price of exports minus total price of imports 2. Balance of payments: Balance of trade plus any net movement of money for other reasons (paying out loans, receiving payments on loans, for example) A. Under the gold standard, gold flows out when negative (payments deficit), in when positive (payments surplus)

J. Lawrence Broz, "Origins of the Federal Reserve System: International Incentives and the Domestic Free-Rider Problem"

1. Before 1914 the United States faced two major problems of financial organization. On the one hand, it experienced panics and severe seasonal interest-rate fluctuations long after other nations had found solutions to these problems. Indeed, the nation experienced panics in a period ''when they were a historical curiosity in other countries.'' On the other hand, the dollar lacked international currency status, and major U.S. banks did not participate in financing international trade. Domestic institutions and regulations not only failed to produce stabilizing expectations at home but also kept the dollar a purely national currency, even as the nation's advancing global position generated worldwide demand for dollar-denominated financial services. 2. From a national welfare perspective, domestic financial instability involved wasted resources, since panics and large seasonal fluctuations in interest rates rebounded negatively on financial intermediation services and on real economic activity. Yet simply because society would benefit from a better financial system did not make its provision easy or automatic. Provision was problematic because any effort to improve the system was itself a public good and, therefore, subject to the dilemmas of collective action. Fortunately, New York bankers were willing to expend resources lobbying for the improvements contained in the Federal Reserve Act. Why this group worked to make all of society better off is explained by the joint products model. Internationalizing the dollar and reducing domestic financial instability were two distinct but interdependent goods that differed in ''publicness''—the former offered excludable, localized benefits, whereas the latter presented diffuse, general benefits. National welfare was advanced because the production of the concentrated private benefits required production of the general public benefits. Hence, it was rational for the small group seeking the private international benefit to design and lobby for institutions that simultaneously advanced the provision of both goods. 3. With the establishment of the Federal Reserve, the domestic financial system became markedly more stable, notwithstanding the banking crisis of the 1930s. In addition the dollar began to compete seriously with sterling as an international currency, and New York began to challenge London as an international banking center. By 1916 the dollar had largely replaced the pound as the means of payment, not only for U.S. exports and imports but also for most of Europe's trade with Latin America and Asia. By 1919 the total volume of dollar acceptances outstanding had reached $1 billion, approximating London's prewar level. The New York discount market eroded London's dominant position as reserve center by offering relatively cheap credit facilities for borrowers as well as reliable investment opportunities for foreigners seeking a stable store of value. In short the United States emerged as a nascent ''world banker,'' providing dollar-denominated liquidity to the international system. Nonresidents accumulated dollar balances to maintain liquidity and/or undertake investment, to pay for imports invoiced in dollars, and to service loans for capital development that were denominated in dollars. America's halting, tentative first steps as financial ''hegemon''in global affairs date from this period.

Markets in history 2

1. Before commercial society, had adjunct role 2. Internal (national) market distinct and unusual A. Competitive not complementary B. Requires dismantling of barriers via "highly artificial stimulants" Note: competitive markets require construction. The parallelism with Garcia-Parpet's story of building the strawberry market is instructive.

A Note on Differences between Polanyi and Marx

1. Both Marx and Polanyi were impressed by the productivity of the capitalists system. 2. Marx focused on enclosures and mercantilism as distributional tools. 3. Polanyi focused on the rise of the market economy. Marx thinks history is about class struggle. 4. Polanyi just thought that change needs to be managed. Marx thought ideas didn't matter. 5. Polanyi thought history could have turned out differently: Townsend's ideas mattered.

Williamson's "markets and hierarchies" paradigm

1. Boundaries of firm—set up to minimize transaction costs 2. Asset specificity and the credible commitment problem Note: Williamson's argument has had an influential impact on comparative political economy. Williamson trying to understand why there are firms when you could rely on a decentralized model. Williamson argues that firms specialize to minimize transaction costs.

Roots of the post-crisis Eurozone demand model

1. Brussels-Frankfurt consensus (BFC) focused on • Micro-economic liberalisation (especially labour markets), 'competitiveness' • Fiscal balance 2. BFC involves implicit demand model: BFC centered on labor flexibility and weak labor unions and depends on external demand. This begs the question: if up until crisis, Eurozone relied on domestic demand, why didn't they try to restart this? • Stimulate investment and exports by 'favourable business environment' (lower labour costs, moves toward fiscal balance) • Requires sacrificing consumer demand and fiscal stimulus Note: Brussels, home of the European Commission; Frankfurt, home of the European Central Bank.

"Hold-up with specific assets" 2

1. Buyer has incentive to try to renegotiate price ("hold up" seller) because of seller's weak fall-back position 2. Buyer commitment to pay original price not credible: focus on last bit of WIlliamson's article that touches on labor markets

Karl Polanyi, "The Great Transformation," Chapter 11

1. By the turn of the nineteenth century—universal suffrage was now fairly general—the working class was an influential factor in the state; the trading classes, on the other hand,whose sway over the legislature went no longer unchallenged, became conscious of the political power involved in their leadership in industry. This peculiar localization of influence and power caused no trouble as long as the market system continued to function without great stress and strain; but when, for inherent reasons, this was no longer the case, and tensions between the social classes developed, society itself was endangered by the fact that the contending parties were making government and business, state and industry, respectively, their strongholds. Two vital functions of society—the political and the economic—were being used and abused as weapons in a struggle for sectional interests. It was out of such a perilous deadlock that in the twentieth century the fascist crisis sprang. 2. From these two angles, then, we intend to outline the movement which shaped the social history of the nineteenth century. The one was given by the clash of the organizing principles of economic liberalism and social protection which led to deep-seated institutional strain; the other by the conflict of classes which, interacting with the first, turned crisis into catastrophe.

Wade's argument regarding the role of capital inflows in increasing financial fragility (Stream 3)

1. CAPITAL INFLOWS -> (arrow unless otherwise noted) 2. Government fiscal deficit falls (if it's engaging in a a countercyclical fiscal policy) 3. Banks lend more to firms to make up for loss of income from reduced government borrowing 4. 'Extrapolative expectations' (i.e. euphoria) lead firms to reduce their reserves with which to counter a downturn NOTE: This has direct and indirect effects on financial fragility. DIRECT: RISE IN FINANCIAL FRAGILITY INDIRECT (1) 1. Government responds by raising interest rates to slow demand 2. In a context of euphoria, firms respond to increased interest rates by diverting retained earnings into interest-bearing assets, and they have to then borrow more to offset the fall in retained earnings 3. RISE IN FINANCIAL FRAGILITY INDIRECT (2) 1. Government responds by raising interest rates to slow demand 2. Attracts more foreign capital inflows 3. Central Bank's foreign exchange reserves rise 4. Absent effective sterilization programme, increased foreign exchange reserves give rise to increased domestic money supply 5. RISE IN FINANCIAL FRAGILITY

Wade's argument regarding the role of capital inflows in increasing financial fragility (Stream 1)

1. CAPITAL INFLOWS -> (arrow unless otherwise noted) 2. Imports Rise 3. Cost of domestic goods increases relative to cost of foreign goods (inflation outstrips deflation) 4. Causes the profits of exporters to fall 5. RISE IN FINANCIAL FRAGILITY

Wade's argument regarding the role of capital inflows in increasing financial fragility (Stream 2)

1. CAPITAL INFLOWS -> (arrow unless otherwise noted) 2. Increase in investment outstrips increases in the output of goods and services (Investment/GDP ratio) 3. Proportion of investment financed by debt rises (rather than retained earnings or sale of equity) 4. Debt/Equity ratio rises 5. RISE IN FINANCIAL FRAGILITY

Financial fragility revealed

1. CDO/MBS tranches widely spread through the financial system • Lower-rated, higher risk: sold broadly - often to buyers who use leverage (asset-backed commercial paper) to buy them • Banks themselves kept a lot of AAA • Not much money to be made on them • High rating (low risk) means low capital provision 2. When subprime starts to go bad, financial fragility revealed • Banks in a terrible position, curtail lending • Collateral implosion: reduced availability of lending -> sales of collateral -> lower prices

The slightly less, but still very bad case for austerity

1. Can't run up national debt forever 2. Prospect of future tax rises • Stifles business confidence • Consumers reduce spending in anticipation

Karl Marx, "Capital: a critique of political economy," Chapter 27

1. Capitalist appropriation of peasant lands began in the late 1400s 2. From the end of the 15th century to the start of 16th century, the British government, as he put it, "fought in vain" against these then small-scale acts of larceny 3. Following the Glorious Revolution of 1688, however, the state, now under the direction of William II and his allies in Parliament, sided with the industrialists. The British government not only turned over its massive landholdings to capitalists but also used the law as "the instrument of the theft of the people's land." Parliamentary acts of enclosures transformed communal lands into the private property of landlords. In so doing, these acts forced the peasants who once inhabited these grounds on to the labor market, as they no longer had any holdings on which to rely for their subsistence

Eurozone Crisis

1. Change in real interest, not structure, drove trade imbalances 2. This is Woodruff and Scharpf contra Hall 3. Euro ends the possibility of devaluation: thus, Italian consumers get richer and their goods less competitive 4. When EMU was set up, monetarism had displaced Keynesianism 5. Germany kept costs down in a seemingly virtuous manner: one could argue that it deserves to make sales. You need high wages to have consumers buy goods and services. 6. Germany's low wages stimulated demand in the rest of the Eurozone. Germany's strategy worked only because of external conditions. 7. The solution: fiscal stimulus!

North: Where do transaction cost reducing institutions come from?

1. Changed prices change bargaining power between rulers and constituents 2. Ideology that facilitates collective action and defines current arrangements as unfair Together, these lead to institutional change

Week 8

1. Changes in Varieties of Capitalism 2. Lazonick believes trends still going on 3. Hall's piece goes right up to the Eurozone crisis

Where does rise of shareholder value come from? 2

1. Changes in executive compensation - Agency theory: agency theory led to stock compensation 2. Changes in management ideology - Conglomerates -> financial management -> think financially, undo conglomerates: After WWII, there was strong antitrust regulation, so firms built conglomerates full of different business lines e.g. breakfast cereals and farm equipment. There was a sense that you need someone with a financial background to run this. Savvy financiers then realize that breaking up conglomerates is quite profitable, and leads to a focus on shareholders. 3. Institutional investors -> activist shareholders e.g. pension funds, endowments. Diffuse ownership can't sway management. Institutional investors can get big blocks of stock and make it hard for company to ignore shareholders. This practice is encouraged by ERISA and spreads abroad. - US export

Relative backwardness: Gerschenkron, cont.

1. Changing agents of finance and industrialization A. Early industrialization: self-finance (LME) B. Later industrialization: big banks (CME) C. Still later industrialization: state 2. Changing ideologies as well

John Maynard Keynes, "The general theory of employment interest and money," Chapter 12

1. Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology, its analogies to beauty contests, and more. 2. Its essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer, and that the conventions men use to pretend that they know what they are doing are subject to occasional drastic revisions, giving rise to economic instability 3. Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. 4. Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.

2nd critique of V.o.C. anticonvergence arguments: slights influence of political institutions

1. Cioffi and Höpner 2006 2. That is to say, political institutions don't respond functionally

Polanyi's "fictitious commodities", cont'd

1. Commodity = produced for sale 2. Not true of land, labour, money 3. Role in book more complicated than this summary suggests. Fictitious commodities motivate "double movement," encapsulate A. Polanyi's belief in a fabric of society that could potentially be shredded B. The class structure of society C. Potential loci of interference with the gold standard adjustment mechanism (the self-regulating market)

Polanyi's "fictitious commodities"

1. Commodity = produced for sale 2. Not true of land, labour, money 3. Role in book more complicated than this summary suggests. Fictitious commodities motivate "double movement," encapsulate A. Polanyi's belief in a fabric of society that could potentially be shredded B. The class structure of society Note: the fictitious commodities 1) motivate double movement, 2) constitute fabric of society, 3) summarize class structure of society: trading, working, landed. Deflation can cause big problems for productive organizations.

Bargaining space

1. Consumer wants to pay between 10p and 8p for a strawberry 2. Farmer wants to sell it for between 10p and 12p

International economic trend: the rise of ideology of 'shareholder value'

1. Content: corporations ought to be run in the interests of the shareholders to the exclusion of other considerations 2. Naïve question: isn't maximizing shareholder value just what corporations do, unless the owners are getting robbed? 3. Sophisticated answer: any corporation acts within legally influenced bargaining environment that shapes how they can pursue shareholder value

Could/should central banks prick bubbles?

1. Conventional view: only if asset bubble was going to create inflationary pressures outside asset market, because • No real bubbles: valuations represent best experts can do • Hard to detect - when is there a real bubble? • Hard to understand how dangerous a bubble is • Monetary policy not be best instrument 2. But will action by other agencies win any political support?

'Process tracing' Hall's argument (North)

1. Coordinated wage bargaining leads to 2. Wage gains in line with productivity leads to 3. Export success, given fixed exchange rate

Coordination problem

1. Coordination problem = to get to the best outcome, 'players' have to make coordinated decisions 2. H&S A. Firm success depends on "the quality of the relationships the firm is able to establish, both internally, with its own employees, and externally, with a range of other actors that include suppliers, clients, collaborators, stakeholders, trade unions, business associations, and governments." (p.6) B. Raises Williamson-type coordination problems Note: these relationships only work if everyone works together

John W. Cioffi, Martin Hopner, "The Political Paradox of Finance Capitalism: Interests, Preferences, and Center-Left Party Politics in Corporate Governance Reform"

1. Corporate governance reform and the development of finance capitalism across the advanced industrial countries are frequently characterized as neoliberal or right-wing political projects, and the center-left is represented as goaded by labor and as standing in opposition to the empowerment and protection of shareholders. This understanding does not withstand closer scrutiny of the political dynamics of reform. In countries with such varied political economies as France, Italy, Germany, and the United States, the center-left has supported pro-shareholder corporate governance reforms while the right has consistently resisted them. This realization forces us to rethink how contemporary party politics functions and how class politics has been transformed over the course of a generation. 2. The analysis developed here illuminates several critical aspects of contemporary political economic development. First, political economic change over the past fifteen years has provided the foundations for an evolving paradigm of finance capitalism in which the interests of investors have become far more important in terms of law, policy, and private economic decision making. One important catalyst of reform, in all the country cases save that of the United States, was the privatization of state-owned enterprises. This factor was especially prominent in France and Italy, but also present in Germany as well. Induced by chronically poor economic performance of state-owned firms and the resulting drain on public resources, European political economic integration under EU auspices further exacerbated these fiscal pressures and impelled privatization. Corporate governance reform and associated minority shareholder protections provided a precondition for successful privatization programs. These reforms also reflected the political and practical difficulties in formulating and implementing alternatives to dispersion of shareholding through privatization. Leftist political resistance to allocations of shares that would directly benefit and reinforce the power of powerful financial institutions and blockholders, along with practical difficulties revealed by the French failure to establish a German-style stable cross-shareholding network, left the more regulatory, law-based variant of corporate governance reform as the most plausible policy course. The regulatory state and newly activated conflicts among between managers, capital, and labor are central to this new form of political economic organization. 3. Second, structural change is both widespread and deep. Corporate governance reform has expanded the scope and capacities of the regulatory state, just as it has reshaped the structure and power relations within the corporate firm. In each case, regulation has grown more stringent, extensive, and centralized, while penetrating into corporate form to favor shareholders and constrain managers. These common elements of corporate governance and cognate areas of securities regulation have become entrenched features of governmental policy and political economic organization, enduring in the face of subsequent electoral shifts and persistent conflicts. 4. Finally, and most central to this paper, corporate governance reform is inseparable from a historic shift in national party politics and interest group preferences that has induced center-left parties to advance pro-shareholder and pro-reform policy agendas. Center-left political actors have taken the lead in advancing corporate governance reform, rather than unions, shareholders, or other interest groups. Shareholders are too poorly organized (as in the United States) or too few in number (in Continental Europe) to constitute an effective coalition partner, while labor remains somewhat ambivalent and peripheral to the politics of financial system and corporate reform. Though private interests may have been favorably disposed to pro-shareholder legislation and regulation, state actors on the center-left initiated corporate governance reform in each country case and have been instrumental in fashioning new interest group alliances.

Areas Where Coordination Problems Arise For VoC 2

1. Corporate governance system (relationship between owners and managers of firm) A. Aside: agency theory 2. Industrial relations system 3. Education and training system 4. System of inter-company relations i.e. strawberry growers had strong interest in cooperation around the brand

Ways of reducing transaction costs so exchange can go forward 2

1. Costs reduced by "Coining" or standardisation A. Measuring valuable attributes of transacted good/service Costs reduced by "Coining" good behaviour 1. Protecting rights 2. Policing and enforcing agreements Note: state reduces transaction costs, because state protects property and enforces contracts

From financial crisis to the collapse in demand

1. Credit crunch: Financial sector not lending, makes even ordinary business operations (trade credit) more difficult 2. Balance sheet effects: Businesses tended to have accumulated a lot of debt in pre-crisis period (when credit was easy). They won't want to borrow (and banks won't want to lend to them) until their debt-to-equity ratio is lower i.e. businesses were overlevered 3. Applies to consumer borrowing as well 4. Also, simple feedback effects (unemployed people don't buy anything -> more unemployed people; businesses not investing means no prospective sales -> business not investing, etc.)

Week 11

1. Crisis in the Eurozone 2. Last week, 2007-2008 financial crisis 3. Eurozone crisis was secondary effect of US housing bubble

Differences between Block and Crouch

1. Crouch wouldn't argue with Block about ersatz regime: he'd say it's entirely different 2. Crouch doesn't believe the regime is ersatz: he wants to work within the system, unlike Block, who wants to reform the whole thing

Polanyi: gold standard not abandoned earlier - why?

1. Currency very volatile and subject to runs 2. Panic could be a source of leverage for financial interests, which govern by panic 3. Reluctance to give up panic weapon is one reason for persistence of gold standard 4. In 1931, British government accedes to Morgan Stanley's request for cutting unemployment benefits in exchange for loans

Why would you have a system promoting asymmetric adjustment?

1. Cut-off of loans may force adjustment on Country 1 (net importers) • Non-market sources of loans (multilateral institutions) tend to impose consumption reduction as condition e.g. IMF may impose austerity 2. Very difficult to force adjustment on Country 2 (net exporters) i.e. export surprlus countries have no need to cut back. 3. In a world of more than two countries, exporters may view their success as a result of 'competitiveness', not systematic demand imbalances e.g. Germany thinks of its trade surplus as reflecting its general competitveness 4. 'Original sin' of Bretton Woods system, where most powerful country (US) also a big exporter when it was set up i.e. Bretton Woods never solved this problem 5. Urgency of systemic resolution reduced by large and very sustained US trade deficits, capacity to finance them for very long periods i.e. this allowed instability to build up

Why is deflation so bad? 2

1. Dampens consumer spending: why spend today if prices are going to be lower tomorrow? 2. Not all prices fall proportionately: some are nominally rigid A. Debts ordinarily specified in nominal terms, no price level correction B. Wages ordinarily nominally rigid THUS In deflationary environment, business can fail to cover costs (receipts real, obligations nominal) Note: if there's a lot of inflation, wages can be cut and debts are inflated away. Workers' obligations are defined in nominal terms. Businesses' income is real, but obligations are nominal. This gap poses trouble in times of deflation.

Why is deflation so bad? 1

1. Dampens consumer spending: why spend today if prices are going to be lower tomorrow? 2. Not all prices fall proportionately: some are nominally rigid

The displacement: changing home lending practices 3

1. Default rates going down in early 2000s • Lenders design mortgages that A. Make loans available to "subprime" borrowers B. Because they only make sense if refinanced a. In effect, make it easier for people to buy houses they "can't afford" by relying on future appreciation b. Supercharged collateral cycle c. Thus, homeowners engaged in Minsky's "speculative finance" 2. Lenders get money for loans from securitisation A. "collateralised debt obligations" B. in particular, "mortgage backed securities"

Political challenges of bubble-pricking

1. Definition: procyclical = state action that fuels a boom or deepens a recession. Antonym is countercyclical 2. Why is countercyclical policy difficult during a boom? A. Diffuse and unaware beneficiaries of regulation versus concentrated potential losers B. Involves thoroughgoing rejection of market rationality, idea that market income - just deserts C. "Surfing" the bubble offers lots of distributive opportunities

How commodification happened

1. Deliberate project to build a "self-regulating market": by self-regulating market, Polanyi means a market that would adjust itself to price signals and supply and demand changes without human intervention 2. "A market economy is an economic system controlled, regulated, and directed by market prices; order in the production and distribution of goods is entrusted to this self-regulating mechanism."(Chapter 6) 3. Polanyi thought that commodification happened, because economists thought this would be a good idea. NOTE CENTRALITY OF ECONOMISTS IN STRAWBERRY AS WELL AS EUROZONE STORY. Polanyi thinks that later thinkers such as Malthus and Townsend had natural metaphors that were influential.

Privatized Keynesian (Block's 'ersatz' regime)

1. Demand: borrowing (especially collaterized with houses) or defence-spending deficits 2. Investment: downsize & distribute, per Lazonick and O'Sullivan 3. Finance: speculation, per Keynes 4. International arrangements: postponed and/or symmetric adjustment Crouch discusses the replacement of government as the key deficit spender. Crouch and Block argue that if government relies on borrowing for demand, it needs to deregulate finance.

Ronen Mandelkern, "Explaining the Striking Similarity in Macroeconomic Policy Responses to the Great Recession: The Institutional Power of Macroeconomic Governance"

1. Despite remarkable political-economic variation, macroeconomic policy evolved in the countries discussed above in a similar fashion. In all cases, central banks poured liquidity into financial markets immediately and decisively, while concurrently, as economic conditions deteriorated, governments made sure that automatic stabilizers were operating without interruption. Both policies were not implemented just because they were "the obvious thing to do" but also because they conformed to the prevailing structure of macroeconomic governance: "Automatic" fiscal expansion did not undermine the logic of limited politicians' discretion and extensive monetary expansion conformed well to central bank independence. 2. At the center of political contention stood discretionary fiscal expansion. In many respects, governments' attitudes to that policy issue conformed to prevailing insights regarding the impact of various political and economic variables on fiscal expansion. For example, at the height of the crisis, in a context of severe uncertainty regarding the scope of the recession, the rightwing Swedish government was much more reluctant to adopt fiscal expansion than the left-wing Australian government. Similarly, while both the United Kingdom and the United States were severely hurt by the financial meltdown, the U.K. Labour government was much more willing to adopt counter-cyclical fiscal measures than its U.S. counterpart was, especially before a Democratic administration was inaugurated. In other words, electoral and interest-based politics were not completely shut out and did influence the specific size of discretionary fiscal expansions. 3. Nevertheless, and crucially, prevailing macroeconomic institutional logic eventually directed all governments to follow a similar pattern of policy expansion that did not hinder the "rules-based" logic of fiscal policy and its basic subordination to monetary policy. In most cases, governments were willing beforehand to follow the "right" route, and when they were not—in the British case—the central bank effectively intervened. 4. Finally, the macroeconomic instruments that were left available were those placed in the monetary policy basket, and more importantly, in the hand of the central banks. Policy instruments were utilized by central banks to match the economic stress each country suffered, and were accordingly utilized more extensively in the United States and the United Kingdom and less so in Australia and Sweden (although in these two cases too monetary expansion was unprecedented). Indeed, there seems to be a close link between the decisive action of central banks at the beginning of the crisis and the legitimacy they enjoyed later on when further conducting monetary expansion.

Sabel And Zeitlin, "Historical Alternatives To Mass Production." 1

1. Division of labour, specialization, and economies of scale via mass production not the only route to industrialization 2. Alternative is flexible specialization or craft economies A. Jacquard loom

Sabel And Zeitlin, "Historical Alternatives To Mass Production." 2

1. Division of labour, specialization, and economies of scale via mass production not the only route to industrialization 2. Alternative is flexible specialization or craft economies A. Jacquard loom B. Industrial district 3. Skilled rather than unskilled labour 4. Niche markets rather than mass ones

Week 5

1. Domestic and International Money 2. How to understand the postwar order

Institutions defined

1. Douglass North: Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange. 2. Note: other definitions stress expectations and imply that institutions contain scenarios. These definitions have a rule built in. Institutions are required for a market economy, but not transactions.

Measurement costs illustrated

1. E.g. value easier to ascertain with silver coin, silver necklace than with silver ore 2. Very different costs associating with divining value 3. Hunk of silver ore: hard for Woodruff to ascertain value 4. Same thing with antique Central Asian necklace 5. But with Maria Theresa coin, easy to tell 6. Same with M+S sandwich, but don't have to worry about poisoning 7. One way of reducing measurement costs is standardization e.g. coinage. But doesn't just apply to money

Class Structure: Fabric of Society

1. Each class defends its corresponding piece of the social fabric, but success derives from broad support 2. Polanyi thinks classes are successes, when they express general interests beyond their own

Why not just get rid of gold?

1. Economic reasons: for many countries, tantamount to dropping out of international economy 2. Political reasons: threat of currency panic (when currency holders convert paper to gold en masse) is a useful political tool

Marx v. Polanyi on enclosures and mercantilism (Marx)

1. Economically progressive? Yes 2. Primary significance: Distributional: Property accumulation and class differentiation 3. Moral lesson: Eliminate class structure

Marx v. Polanyi on enclosures and mercantilism (Polanyi)

1. Economically progressive? Yes 2. Primary significance: Institutional: national market and its regulation 3. Moral lesson: Manage change

Polanyi's Core Beliefs

1. Economy usually, and appropriately, "embedded" in social relations A. Human interests: ideal not material; status not class i.e. People, he believed, wanted to be seen as good people. B. Reality of society: society exists as a social fact over and above the individuals that constitute it 2. Basis: extensive and intensive reading Note: Polanyi grew up in Vienna. He was a social Democrat activist. He wasn't a scholar, but did scholarly things. He wrote TGT in his 50s. He had beliefs about society. He's got good arguments about attitudes towards social protection. He charts the emergence of commercial society

North & Weingast 1989: Where does credible commitment to transaction-cost reducing institutions come from?

1. Efficient institutions a matter of luck 2. Key dilemma ("Weingast problem"): Organisation powerful enough to reduce transaction costs/protect property rights also powerful enough to raise transaction costs/confiscate property 3. Solution to dilemma: States that are constrained--eg, Monarch checked by Parliament after England's Glorious Revolution (1688). Only these make can make credible commitment to policy continuity i.e. solution emerges out of a constitution, as a constitution constrains rulers. The monarch was blockec from changing property rights rules by Parliament. 4. Explains flourishing of Britain in 18th-19th centuries Note: a commitment is credible, if you believe it will be followed e.g. bring money in morning, and chairs will be brought in the afternoon.

embeddedness

1. Embeddedness, in social science, the dependence of a phenomenon—be it a sphere of activity such as the economy or the market, a set of relationships, an organization, or an individual—on its environment, which may be defined alternatively in institutional, social, cognitive, or cultural terms. In short, analyses using the concept of embeddedness focus on the different conditions within which various modes of social action take place and upon which they depend. 2. Most prominently, the economic historian Karl Polanyi argued that the functioning of an economy could not be understood disassociated from the social world in which it was embedded. Specific organizations and institutions, and ultimately the economy as a whole, need to be understood as parts of larger, historically derived, institutional, or social structures.

Two transformations 2

1. Enclosures and mercantilism (16th-18th centuries) A. Enclosures--privatization of common land B. Mercantilism--creation of tightly regulated national market Reading question: Why did this happen? Note: enclosure goes together with mercantilism. Think about what drove mercantilism.

Elements of recovery, 1932-, cont'd

1. End of the gold standard: UK 1931, US 1933 A. In U.S., enables break in expectations and sharp monetary expansion 2. 'Demand stimulus' -- outside of Germany, probably less important than often assumed

Elements of recovery, 1932-

1. End of the gold standard: UK 1931, US 1933 A. In U.S., enables break in expectations and sharp monetary expansion a. FDR, October 1933: "Finally, I repeat what I have said on many occasions, that ever since last March the definite policy of the Government has been to restore commodity price levels. The object has been the attainment of such a level as will enable agriculture and industry once more to give work to the unemployed. It has been to make possible the payment of public and private debts more nearly at the price level at which they were incurred." b. Dollar put back on gold at lower level in January 1934, gold inflows drive price rises through rest of the decade Note: end of the gold standard allows for the resumption of inflation, though demand stimulus was not the key to ending the recession.

Equity

1. Equity = what would be left if sold (liquidated) all assets and paid all liabilities 2. Assets = Equity + Liabilities

What happened? Inflation

1. Euro area has been slightly higher than US inflation 2. Wait, what?

What happened? GDP % change since 2008

1. Euro area takes longer to recover from 2008 than US and UK. 2. Europe in face of crisis practiced austerity

Will QE be effective? Possible mechanisms

1. Exchange rate weakness (export stimulus) 2. General expectations effect 3. 'Portfolio balance effect' • ECB buys safe assets, former owners invest in riskier ones, easing credit conditions and facilitating real-sector investment 4. Indirect consumption stimulus • Rising asset prices and easier credit fuel consumption • Likely was crucial to effectiveness of US QE, but unlikely to have this effect in Eurozone

The "double movement," cont'd 2

1. FOR A CENTURY the dynamics of modern society was governed by a double movement: the market expanded continuously but this movement was met by a countermovement checking the expansion in definite directions. Vital though such a countermovement was for the protection of society, in the last analysis it was incompatible with the self-regulation of the market, and thus with the market system itself. 2. Chapter 11 3. Note: Polanyi's theory: attacks on fabric of society by self-regulating market will be fought by classes.

Class Structure: Fabric of Society (Land)

1. Fabric of society ("general human interests"): Natural environment, local community 2. Class structure: Landed classes

Class Structure: Fabric of Society and Gold Standard Adjustment Mechanism (Land)

1. Fabric of society ("general human interests"): Natural environment, local community 2. Class structure: Landed classes 3. Gold standard adjustment mechanism: Free trade/trade barriers protective countermoves that interfere with self-regulating market

Class Structure: Fabric of Society (Money)

1. Fabric of society ("general human interests"): Productive organizations (going concerns) 2. Class structure: Capitalists, employers, financiers

Class Structure: Fabric of Society and Gold Standard Adjustment Mechanism (Money)

1. Fabric of society ("general human interests"): Productive organizations (going concerns) 2. Class structure: Capitalists, employers, financiers 3. Gold standard adjustment mechanism: Deflation/price level management protective countermoves that interfere with self-regulating market

Class Structure: Fabric of Society (Labor)

1. Fabric of society ("general human interests"): Social status, dignity, humane working conditions 2. Class structure: Working class

Class Structure: Fabric of Society and Gold Standard Adjustment Mechanism (Labor)

1. Fabric of society ("general human interests"): Social status, dignity, humane working conditions 2. Class structure: Working class 3. Gold standard adjustment mechanism: Price flexibility/ nominal rigidity protective countermoves that interfere with self-regulating market

Some critiques of V.o.C.

1. Fail to perceive globalisation of production (international commodity chains) and their significance 2. Why should these systems cohere on a national basis? i.e. US economy works differently in different places and focus on manufacturing is dated 3. Political conflict read out i.e. workers and management are often at odds 4. 'Coordination mechanisms' too abstract to capture substantive problems 5. Typology too narrow to capture many cases, or leads to misreading of some i.e. most people had at least 3 types of economies. VoC is almost too grand, too neat, too simplified a description of reality.

Transactions without a market

1. Farmer offering strawberries to consumer with a willingness to pay (WTP) of 10p. 2. Sale of strawberry does not mean that there is a market 3. Market implies competition, usually between sellers 4. Competition is a function of market entry. 5. For market entry to be possible, the price has to be attractive to consumers. 6. It's possible for there to be barriers to market entry. 7. Can't have significant barriers to entry in markets e.g. a Russian in Moscow can't cut an Englishman's hair in London (logistical barrier)

Wade on Financial Fragility

1. Financial inflows -> (arrow unless otherwise noted) 2. Banks full of liquidity 3. People invest a lot 4. Investment outstrips GDP 5. Debt increases NOTE: This has direct and indirect effects on financial fragility. DIRECT: RISE IN FINANCIAL FRAGILITY INDIRECT 1. Government borrows less 2. More money goes to banks 3. Banks lower reservers 4. More speculative investment 5. RISE IN FINANCIAL FRAGILITY

Mundell-Fleming Trilemma 3

1. Fixed exchange rate + free flow of capital = Gold standard (and Euro) 2. Fixed exchange rate + macroeconomic autonomy = Bretton Woods 3. Macroeconomic autonomy + free flow of capital = Post-1971

Mundell-Fleming Trilemma 2

1. Fixed exchange rate + free flow of capital = no macroeconomic autonomy 2. Why? Lower interest rates, for instance, could prompt outflow of capital and threaten exchange rate: raising interest rate is the only choice 3. That is to say, central bank has to defend the exchange rate, not the domestic economy

Limitations of the credible commitment approach

1. Focusses on constraints on powerful states, not where they come from in the first place i.e. how is it that the British state acquired the power to sustain the market economy? 2. Assumes that markets and protecting property rights go hand-in-hand, but often property rights can interfere with competitive markets and market integration e.g. can't build a national canal without eminent domain. This is not just a matter of limiting the state: what did the state positively do to creat the national market in the UK. 3. This week's readings analyse the role of the state in market-building in Britain

ECB 'mission creep' in the course of the crisis

1. From the "hard money" side • De facto financing of government borrowing, supposed to be ruled out by Eurozone treaties • Covert intra-country transfers via government bond purchases, other forms of secured lending 2. From the "soft money" side • Explicit and implicit conditionality of lending (lending only made if conditions on austerity met) turns ECB into unelected instrument of government 3. More Europe or less?

Marie-France Garcia-Parpet, "The Social Construction of a Perfect Market: The Strawberry Auction at Fontaines-en-Sologne"

1. Garcia-Parpet's study of the introduction of a computerized market for strawberries at Fontaines-en-Sologne, a French village. 2. This market came to an economist's dream with relatively homogenous commodities, low barriers to entry, competitive buyers and sellers all with fairly complete knowledge about the quantities and prices on offer. 3. Garcia-Parpet examines how the market was shaped to meet the economists' ideal vision. The market was a deliberate, planned creation: one of its architects was an economist. 4. Surprisingly, buyers and sellers became even closer as a result of the formation of the market. That is to say, it did not atomize them, but social bonds remained.

Ordoliberalism

1. German variety of neoliberalism, but sees state action as key to building markets 2. Emphasises that state action should be bound by rules to ensure promotes rather than undermines markets 3. Key influence on German negotiating position over EMU • Stability and Growth Pact • Independent central bank

Dualization in Europe

1. Germany got dual labor markets, because unions were committed to job protection and lack of labor mobility. 2. Hall emphasizes that Sweden stressed mobility from firm to firm. This focus on retraining and relocation led to "flexicurity," namely flexible security. This is true of Denmark, Sweden, Norway where there's protection from unemployment but not in employment. 3. There's no dual labor market in Britain, because there's less protection in hiring and firing.

Implications of the equation of exchange 2

1. Government which does not control the money supply may have to tolerate deflation and associated economic destruction 2. Central banking as a protective countermove (Polanyi, part of his "double movement" discussed later in lecture) That is to say, for Polanyi, central banking is a reaction to the dangers of economic liberalism.

Germany 2000-2008

1. Hall think these trends continue after the introduction of the Euro. 2. Germany 2000-2008 had a massive trade surplus, accounting for a huge share of its growth. 3. Wage coordination not possible in Southern model, says Hall. Hall's argument is a bit misleading

V.o.C. on the defensive

1. Hall's Modifications 2. He tries to shift the terrain of the debate 3. Hall says other things matter in VoC

'Process tracing' Hall's argument

1. Hall: "export-led growth strategies were not practicable in the context of the institutional structure of the southern European economies. In the absence of a trade union movement and employers' organisations structured so as to make sustained wage co-ordination possible, preventing the increase in unit labour costs that led to a deterioration in the trade balance would have required fiscal policies so austere that they would have stifled growth." 2. Unit labour costs: the share of labour costs in the price of output. The lower it is, the higher the productivity of labour Note: Hall fails to discuss adequately the problem of differential inflation rates. Hall relies on a comparison of nominal unit labor costs, which is a weird indicator. How are labor costs rising relative to inflation?

Hold Up Problem

1. Hold-up arises when part of the return on an agent's relationship-specific investments is ex post expropriable by his trading partner. The hold-up problem has played an important role as a foundation of modern contract and organization theory, as the associated inefficiencies have justified many prominent organizational and contractual practices. 2. Investments are often geared towards a particular trading relationship, in which case the returns on them within the relationship exceed those outside it. Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges. For instance, workers and firms often invest in firm-specific assets prior to negotiating for wages. Manufacturers and suppliers often customize their equipment and production processes to the special needs of their partners, knowing well that future (re)negotiation will confer part of the benefit from customization to their partners. Clearly, the risk of the investor being held up discourages him or her from making socially desirable investments.

Mark Granovetter, "Economic Action and Social Structure: The Problem of Embeddedness"

1. How behavior and institutions are affected by social relations is one of the classic questions of social theory. 2. This paper concerns the extent to which economic action is embedded in structures of social relations, in modern industrial society. 3. Although the usual neoclassical accounts provide an "undersocialized" or atomized-actor explanation of such action, reformist economists who attempt to bring social structure back in do so in the "oversocialized" way criticized by Dennis Wrong. 4. Under- and oversocialized accounts are paradoxically similar in their neglect of ongoing structures of social relations, and a sophisticated account of economic action must consider its embeddedness in such structures. 5. The argument is illustrated by a critique of Oliver Williamson's "markets and hierarchies" research program. 6. "oversocialized conception of man in modern sociology"-a conception of people as overwhelmingly sensitive to the opinions of others and hence obedient to the dictates of consensually developed systems of norms and values, internalized through socialization, so that obedience is not perceived as a burden. 7. Classical and neoclassical economics operates, in contrast, with an atomized, undersocialized conception of human action, continuing in the utilitarian tradition. The theoretical arguments disallow by hypothesis any impact of social structure and social relations on production, distribution, or consumption. 8. In this article, I have argued that most behavior is closely embedded in networks of interpersonal relations and that such an argument avoids the extremes of under- and oversocialized views of human action.

Hyman Minsky's theory of financial crises 1

1. How do people fund their bets on what everybody else is going to do? 2. A theory on how changes in balance sheets (assets and liabilities) drive phases of boom-bust cycle

Indeterminacy of state's role in macroeconomic stabilisation

1. How much unemployment is too much? 2. How much inflation is too much? 3. How to reconcile decisions on domestic value of currency and international value of currency? (Note: these are not drawn from Block, who stresses instead multiple ways macroeconomic stabilisation might be pursued)

Keynes: Psychological and sociological features of liquid investment markets

1. Ideally, investment decisions should be effort to overcome "the dark forces of time and ignorance which envelop our future" i.e. ideally investments are based on fundamentals. 2. But on a liquid market prices will depend on what other participants think i.e. in reality prices reflect popular opinion →Predominance of "speculation" (hope for capital gains based on shifting sentiments) over "enterprise" (expectation of dividends or appreciation deriving from future profits): Keynes worried that speculation would triumph over search for solid fundamentals. Speculative security markets focus on popular sentiment, not fundamentals.

How did BFC come to shape policy? 1

1. Immediately after the crisis, deficit spending increased. 2. In 2011, however, there's a crisis in government bond markets. 3. It turns out Greece's budget deficit is much worse than previously disclosed. 4. After financial crisis, borrowing rates spread between countries.

Current account, Germany vis-a-vis the Eurozone

1. In 1999, Germany's trade deficit turns into a trade surplus. 2. The Euro created and multiplied competitive differences 3. Hall says this happened because of VoC

Terminology, I

1. In Europe (and usually in social science) A. "Government" = ministers presently at head of executive authority B. "State" = public authorities as a whole 2. In U.S. A. "Government" = public authorities as a whole B. "State" = one of 50 in the federation

Sabel And Zeitlin, "Historical Alternatives To Mass Production," more clearly explained

1. In contrast to what they perceived to be an overly-deterministic model, Sabel and Zeitlin repeatedly emphasized a "many-worlds history of industrialization" that shifted attention toward a more protean approach to technological development, an approach based principally upon the recognition that a "craft alternative" continued to thrive in "industrial districts." 2. These districts developed a self-reinforcing dynamic. In them, small firms used highly skilled labor and adopted new technology; they were as likely to cooperate as they were to compete; and they successfully produced a wide range of products for a variety of differentiated markets. 3. Moreover, these districts constructed an alternative community of sentiments in which children brought up to a trade acquired a set of tacit rules governing their conduct. These rules promoted forms of "fair" competition at the same time that they attached moral sanctions to destructive economic behavior. 4. Therefore, these districts tended to be characterized by hitherto unrecognized forms of collaboration both between employers and employees and among the small firms themselves.

Fred Block, "The Roles of the State in the Economy"

1. In it, Block implicitly charts his own intellectual conversion through an attempt to theorize what he labels the 'old ' and the 'new' paradigms that define the role of the state in the economy and, in a quite revealing manner, tells us why political economy is decidedly very marginal for the new economic sociology 2. The 'old' paradigm, Block argues, is based on the assumption that the state and the economy are 'analytically separable entities', so states can interfere more (socialist, developmental state) or less (public goods, macroeconomic stabilization state) in the economy. 3. This gives ideal types (the mid-point is the social rights state). 4. This paradigm, Block claims, was based on two relatively unresearched 'prejudices' that states are parasitical and wasteful (the neoliberal prejudice) and that markets produce inequality and dehumanization (the socialist prejudice). 5. Submerged by literature on state inefficiency and corruption on the one hand and the inadequacies of the market on the other, some might be surprised to learn that these issues 'now appear as glaring omissions from the research agendas fostered by the old paradigm but it is not so difficult to agree that the 'old' paradigm is exhausted. The 'new' paradigm 'recognizes that economic activity will always involve some combination of state action and markets . . . because states are needed to constitute economies . . . markets represent a logical and useful device for aggregating [individual] choices' (p. 697). 6. This is the market reconstruction paradigm - it is also something of a Fred Block reconstruction paradigm too - and it clearly makes a great deal of sense for the new economic sociology defined, as we have seen above, to exclude virtually no social forces or institutions from a part in explaining and understanding 'the economic process'. 7. So it is not surprising to find the influence of Polanyi in the historical genesis of the new paradigm, for it is the embeddedness of the economy in social relations writ large, particularly the roles of the state, that is at the heart of the new paradigm.

transaction cost

1. In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on. 2. More succinctly transaction costs are: A. search and information costs B. bargaining and decision costs C. policing and enforcement costs

Hill, Claire A. "Securitization: A Low Cost Sweetener for Lemons."

1. In recent financial crisis, banks buying big packages of loans. Packaging made it possible to hide bad loans.

G-7 Government Spending

1. In the G-7, government spending went up a bit but not enough to make up for the shortfall in demand 2. The recession was long and tough to get out of

Joel Mokyr, John Nye, "Distributional Coalitions, the Industrial Revolution, and the Origins of Economic Growth in Britain"

1. In the first two hundred years or so of the movement, those who lost their land to enclosure had no recourse, legal or otherwise, to recover it 2. Mokyr and Nye are unique in labeling enclosure as an efficient outcome through which ownership shifted to the innovative, the productive and the successful 3. This praise of efficiency extends more generally to their analysis of the Glorious Revolution and its socioeconomic ramifications. The Revolution plays an important role in their narrative, because it "removed the contestability of rule-making from the British polity" and established Parliament as "a body that was receptive to both changing needs and changing ideology" 4. More specifically, the watershed event brought Britain the rule of law and a Parliament that responded to Enlightenment ideas as well as its wealthy constituents. With its enclosure acts, for instance, Parliament pleased the rising capitalist elite as well as the landholding aristocracy by making it easier for both of them to seize land. The duo sees actions such as these as efficient, because they built political support for industrialization and pushed Britain closer to a market economy. 5. Be that as it may, the legislative body did more than just advance the agenda of ascendant national industrialists at the expense of the incumbent local interests. With these distributional questions resolved, Parliament could reify nascent Enlightenment ideas about the proper operation of the free market and transform Britain into the economic superpower of the 18th and 19th centuries.

The 2008 crisis: lending collapses

1. In the run-up to the 2008 crisis, there were many exotic financial instruments and there was more borrowing of asset-backed commercial paper (ABCP). 2. ABCP: Borrowing on collateral of CDOs, etc. 2. After July 2007, it became harder to borrow, as collateral lost value and there was deflation.

The vicious circle: falling assets, falling leverage ("deleveraging")

1. Insufficient collateral: encourages people to 2. Sell assets to pay back loans: as the supply of assets increases, 3. Asset prices fall, and there is once again, insufficient collateral

Problems with adjustment under gold standard and the post-WWII order (International coordination problems:)

1. International co-ordination problems: A. "scramble for gold" B. U.S. (and to some extent France) as central banker to the world, "one size fits all" monetary policy A second problem, not fully resolved, contributes to breakdown of system

Problems with adjustment under gold standard 2

1. International co-ordination problems: A. "scramble for gold": money supply depends on amount of gold. If countries accumulate gold, other countries will have to run a tighter monetary policy. B. U.S. (and to some extent France) as central banker to the world, "one size fits all" monetary policy: in interwar period, US and France controlled most gold. 2. Polanyi A. Can imply severe deflation B. Competitiveness strains may prompt trade protectionism

Aside: Sterilisation under the gold standard

1. Irwin: "The increase in US interest rates attracted gold from the rest of the world, but the gold inflows were sterilised by the Federal Reserve so that they did not affect the monetary base." 2. Under the gold standard, the US sterilized the capital inflows resulting from its trade surpluses. 3. With no sterilization, the Treasury bought gold flowing in for dollars and issued a gold certificate to the Fed, which in turn increased the monetary base. 4. Under sterilization, the Treasury bought gold and didn't issue a gold certificate, so the Fed didn't expand the monetary base. In other words, Treasury spends dollars to buy gold, but doesn't create new gold backing for them, implying money supply must shrink elsewhere

Controversy over bond purchases

1. Is it consistent with Eurozone treaties? • These forbid direct ECB purchases of government debt; some think this should be interpreted to forbid secondary market purchases as well • Treaties ECB only with price stability • Consistent German objections 2. 'Blunted incentives' argument • "There's also a risk that you mute the incentives that come from the market. Recent experience has shown that market interest rates do play a role in pushing governments towards reforms. You have seen that in the case of Italy quite clearly." Jens Weidmann, Bundesbank, November 2011, 3. 'Moral hazard' argument

Peter Hall, "The Evolution of Varieties of Capitalism in Europe."

1. It argues that cross-national divergence in institutional practices and patterns of economic activity of the sort emphasized by VoC approaches persists over time, and that those approaches are important for understanding change in the political economy because they direct our attention to the ways in which the institutional structures of the political economy condition it. I argue that the institutional structures constitutive of distinctive VoC have influential effects, not only on the actions of firms and governments, but on the response of political economies to socio-economic challenges.While never fully determining that response, these structures and the strategies they engender at the firmlevel tend to push political economies along distinctive adjustment paths. This perspective generates a dynamic conception of VoC that sees them, not as a set of institutional differences fixed over time, but as bundles of institutionalized practices that evolve along distinctive trajectories. Seen from this angle, institutional change of the magnitude that attracts attention today is not an uncommon occurrence or a sign that VoC are dissolving, but a continuous feature of VoC. 2. institutional change in the political economy is not a new phenomenon and VoC are best seen, not as a set of stable institutional models, but as a set of institutionally conditioned adjustment trajectories displaying continuous processes of adaptation. Indeed, some of the features most associated with contemporary models of capitalism appeared in the 1970s rather than the 1950s. However, similar socio-economic challenges rarely called forth identical national responses. Over six decades, the challenges have not swept away important cross-national national differences in the organization of economic activity. 3. As Mark Twain might have said, rumours of the death of CMEs are greatly exaggerated. In some countries, such as Sweden, they are performing reasonably well. Even in Germany, where the headlines stress high levels of unemployment, reorganization in the corporate sector has been profound, as in France. Many of Germany's firms are highly profitable, and its exports have reached record levels. Although intensified by the challenges of reunification, its adjustment process has been protracted but highly effective in some respects. I read the loosening of sectoral coordination as an adjustment that preserves many of the strategic capacities inherent in German institutions. It is not surprising that wage coordination should operate differently when unemployment, rather than inflation, is the main economic problem. However, it is undeniable that France and Germany are suffering from high levels of unemployment that depress their rates of growth. Their institutions have been better at improving productivity than at creating jobs, and that fact is creating political, as well as economic, dilemmas. 4. Today, however, the conflict is about the distribution of work, and the approaches nations are taking to the problem are creating distinctive political dynamics. Building on institutions developed in the 1960s and 1970s, Sweden is promoting labour mobility and secure public sector employment oriented to general skills. The effect has been to lower the institutional divisions between economic insiders and outsiders, making it more feasible for the Swedish social democrats to build cohesive political coalitions. 5. By contrast, France and Germany are building dual labour markets that create a growing number of temporary or part-time positions at relatively low wages alongside those in the industrial or public sectors that offer higher levels of wages and job security. In each economy, more than four million people now hold such jobs. From the perspective of job creation, the strategy has merit, and it may not seriously damage the capacities for strategic coordination elsewhere in the German economy. But the political effects of such strategies may be more deleterious. They drive a wedge between insiders with relatively secure jobs and outsiders in precarious employment 6. In these countries, the class compromise that underpinned post-war institutions is fraying at the edges, and governments face problems that are as intractable in political terms as they are in economic ones. More is at stake than economic performance. The effort of the European Union to find a new legitimating ideal in a commitment to open markets is failing in the large economies at its heart, even as that commitment makes it difficult for their governments to experiment with alternative formulae.

Problems created by externalities

1. Items with negative externalities overproduced or overconsumed (eg pollution) 2. Items with positive externalities underproduced or underconsumed (eg employers benefit from educated workforce, but purchases of education don't reflect)

Gold standard and deflation

1. June 5 1933: US abandons gold standard 2. Deflation in US reverse after US abandons the gold standard

The politics of austerity

1. Kalecki: Business prefers a situation in which its confidence drives investment, as this gives it political influence 2. Hard to convince people it works, because in individual country must rely on 'counterfactual' (without stimulus, things would have been even worse) 3. International coordination problems (how to make surplus countries stimulate) 4. Long-term decay of explicitly theorised demand stimulus as a tool of governance, reliance on central banks, propped up by implicit demand stimulus (privatised Keynesianism) ➡Reliance on central banks

The case for convergence 2

1. Key mechanism: globalisation of production and finance touches off "race to the bottom" in multiple spheres e.g. low transport costs, easy to relocate mobile capital. There's a race to the bottom in which capital goes to the place of least constraint. A. Wages (threat of production relocation bids down wages) B. Financial regulation (capital flows where it's regulated most lightly) C. Taxation (capital flows where taxes are lightest) → crisis of welfare state funding 2. Empirical support controversial: there's mixed support for this hypothesis. It's unclear what drives the reduction of regulation. Cioffi and Hopner say changes in corporate governance have little to do with the mobility of capital.

"Rumours of the death of CMEs are greatly exaggerated." (Hall 2006, 82)

1. LMEs cannot become CMEs, but CMEs can become LMEs (H&S) 2. Exogenous shocks can break coordination equilibrium in CME, but only temporarily: A. complementarities, institutional comparative advantage prompt re-creation of coordination B. Politicians ultimately responsive to demands of economic model, political institutions, party systems secondary That is to say, CMEs sustained through action of politicians.

Institutions of Exchange

1. Last week, focused on the fact that market economies are constituted by the state e.g. even illicit markets run on cash created by the state. 2. This week, you don't get a market without institutions supported by the state 3. Institution is a vexed word in social science.

Rise of "shareholder value" 1

1. Lazonick and O'Sullivan 2000: from "retain and reinvest" to "downsize and distribute" 2. Lazonick and O'Sullivan focus on rise of shareholder value, idea that the mission of the corporation is to maximize stock value 3. In CMEs, stakeholders have advantages over shareholders 4. Why weren't shareholders already getting this? Ownership isn't absolute 5. Lazonick and O'Sullivan see shift in corporate thinking beginning in the 1980s when firms start to think about paying out biggest dividends 6. Idea of maximizing shareholder value is very vague, with no specific time horizon. 7. Around 1980, US corporation start to think in short-term perspective re: shareholder value. 8. In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they've paid out more than all of them. In 2006, for example, nonfinancial corporations had after-tax earnings of $800 billion, and paid out $365 billion in dividends and $565 in net stock repurchases. In 2007, earnings were $750 billion, dividends were $480 billion, and net stock repurchases were $790 billion. (Yes, net stock repurchases exceeded after-tax profits.) In 2008 it was $600, $470, and $340 billion. 9. Repurchases drive stock prices higher. Until 1980, profits exceed net dividends. This flips after 1980. Profits no longer retained and reinvested. This led to deindustrialization and anger and Trump. Lazonick and O'Sullivan see this as the end of the old bargain. US corporations had a mismatch between their legal and their actual obligations. Entrepreneurs exploit this through hostile takeovers.

Rise of "shareholder value" 2

1. Lazonick and O'Sullivan 2000: from "retain and reinvest" to "downsize and distribute" 2. Represents - from "left" side: redistributive undoing of old bargains: Corporations, in other words, had implicit obligations, per Summers and Shleifer. - from "right" side: freeing capital for more productive uses

More on Lazonick and O'Sullivan

1. Lazonick and O'Sullivan are really focused on changes in the US economy, changes that really challenge Hall and Soskice's model of persistent VoC as well as Cioffi and Hopner's trajectory of center-left reform in the 1980s. 2. Hall and Soskice really don't account for change in the US economy. 3. Lazonick and O'Sullivan are saying that once US companies no longer dominant, they gained competitiveness through downsizing, not reinvesting in high skills. US firms didn't want to give workers more control over production: you can see the outlines of what Hall and Soskice argue. Unions in the US aren't strong enough to stand their ground, unlike Swedish unions.

New paradigm roles for the state (things modern states always do)

1. Legal framework A. Property rights ("rules governing use of productive assets") B. "recurring relations, such as those between employers and employees" i.e. contracts 2. Create and supervise monetary system ("means of payment") 3. "Manage the boundary between their territory and the rest of the world" That is to say, market is determined by what the state does. Btw, course focuses on European countries.

The GSAM & Political Stalemate, cont'd

1. Liberal policy: free trade, money supply contraction, wage level to drop A. Protective countermove B. Labour strife (eg, 1926 general strike in UK), unemployment insurance C. Trade protectionism D. Replacement of gold reserves by other means 2. Either A. Political upheaval, fascism and other forms of the eclipse of democracy OR B. Abandonment of the gold standard

Margaret Weir, Theda Skocpol, "State Structures and the Possibilities for "Keynesian" Responses to the Great Depression in Sweden, Britain, and the United States"

1. Like Swedish reform initiatives, the U.S. New Deal depended on political support from both farmers and industrial workers, yet the dynamics of cooperation differed substantially in the two countries. The Swedish Agrarian Party was drawn early in the 1930s into a strategy for national economic recovery proposed by Social Democrats and economic experts operating at the apex of an already centralized and socially interventionist state. Thereafter, the momentum of economic recovery and political success strengthened the party of industrial labor and the expert public policymakers in Sweden. 2. In the United States, meanwhile, the direction of change in the 1930s and 1940s was much less favorable for industrial labor, urban-liberal Democrats, and expert policy planners. The stubborn persistence of Congressionally centered policymaking made New Deal trade-offs between farmers and workers temporary and unstable. As the 1930s progressed, organized farm interests became steadily more conservative and gravitated toward alliances with business in opposition to further extensions of the federal government's role in American society. At the height of the New Deal political possibilities for joining government spending and social welfare seemed very close at hand. But appropriate alliances and governmental means could not be fashioned within the American state structure. The vision of an American social Keynesianism was therefore to remain unfulfilled.

What kinds of barriers to entry can there be?

1. Logistical: costs of getting good to potential customer 2. Coercive: someone (eg state, criminals) uses force to raise costs of getting good to potential customer Note: these logistical and coercive barriers aren't necessarily absolute. Nevertheless, in the presence of certain kinds of barriers to entry, markets don't arise. 3. Transactional

Reacting to the model's failure

1. Looser and looser monetary policy to stimulate investment and fight 'lowflation' 2. By 2014, recognition that monetary policy has been 'pushing on a string' • Cheap money has no impact on the economy if no-one wishes to borrow and invest • TLTRO and other asset purchases, ultimately QE 3. Very mild relaxation of fiscal rules (slower austerity, not demand stimulus), coupled with continued liberalisation push

Monetary Equations

1. MV = Money times Velocity i.e. Amount of money out there *number of times it's spent 2. PQ = Price times Quantity i.e. Average price per item * quantity of items sold 3. MV = PQ

The "Equation of Exchange"

1. MV = PQ 2. P = MV / Q 3. If V and Q are constant, changes in the price level reflect changes in money supply: A. more money = P [the average price per item] goes up = inflation B. less money = P goes down = deflation Note: V does change quite a bit

David M Woodruff, "Background on Money and Exchange Rates"

1. MV = PQ 2. P = MV/Q 3. The two implications of this form of the equation of exchange that people like are: 1. More money means higher prices ("inflation"). 2. The faster money is spent the higher prices will be. 4. If prices are going up, the value of money is going down.. So people will try to spend it faster, leading V to increase—and prices to go up. When P is rising very quickly, this sort of thing can lead to hyperinflation. 5. Deflation has the opposite effect on money velocity. When prices are falling, money spent tomorrow will be worth more than money spent today. So people tend to hold onto money, and V goes down. Businesses find it harder to sell stuff—and prices go down. Monetary policymakers are especially scared of deflation, because it makes the main thing they can do—create more money—an ineffective tool of policy. If people just hold onto any new money that's pumped into the economy, waiting to spend it when prices are lower, you can't get anywhere by pumping in more money. 6. Under gold standard, a trade deficit thus is deflationary, and a trade surplus inflationary. 7. NOTE: this explains why seeking to support the a currency's gold parity is deflationary. If more people are selling the currency for gold than are selling gold to buy the currency, the price of gold tends up, that of the currency down. If the central bank wants to make the currency worth more in terms of gold, it sells gold—increasing the supply of gold decreases its price. When it's selling gold, it's taking in (high-powered) domestic money. So M shrinks, and prices tend down.

The GSAM & Political Stalemate

1. Market liberal policy: free trade, money supply contraction, wage level to drop, austerity 2. Protective countermove A. Labour strife (eg, 1926 general strike in UK), unemployment insurance B. Trade protectionism i.e. this helps explain the the drop in international trade C. Replacement of gold reserves by other means 3. Either A. Political upheaval, fascism and other forms of the eclipse of democracy Note: something's got to give in this situation: forces persisted in stalemate. In Germany, the battle against inflation resulted in Hitler. Avoid this by giving up on the gold stand (cough, Euro)

Process Tracing View of the Double Movement

1. Markets threaten the fabric of society: leads to 2. Class-led protective response: leads to 3. Interference with gold standard adjustment mechanism (self-regulating market)

"The institutional mechanisms of the downfall of a civilization"

1. Markets threaten the fabric of society: leads to 2. Class-led protective response: leads to 3. Interference with gold standard adjustment mechanism (self-regulating market): leads to 4. Catastrophic stalemate 5. Fascism and war

Political Conflicts in the 18th and 19th Centuries

1. Marx: capitalist class drives Glorious Revolution and enclosures 2. Mokyr and Nye: 18th Century British state enthralled to business interests that wanted to break down local monopolies 3. Polanyi: functionalist view that there was a need for state in face of international competition and local monopoly

Transaction costs (per D. North) are costs of

1. Measuring valuable attributes of transacted good/service 2. Protecting rights 3. Policing and enforcing agreements

Costly Things

1. Measuring valuable attributes of transacted good/service 2. Protecting rights: need to secure property e.g. diamonds 3. Policing and enforcing agreements: how do I ensure timely and compliant delivery? These things are costly BECAUSE OF 1. Fear of malfeasance ("self-interest with guile") 2. Asymmetric information

Ways of reducing transaction costs so exchange can go forward

1. Measuring valuable attributes of transacted good/service 2. e.g. costs reduced by "Coining" or standardisation

More Disagreements and Agreements

1. Mokyr and Nye agree with Polanyi about the rise of the external state. 2. The duo talks at length about Olson as well as North and Weingast. 3. Polanyi as well as Mokyr and Nye focus on the supply side: is everything available to you to produce? 4. Marx focuses on the demand-side e.g. cottage industry wiped and there was space for big entrepreneurs thanks to technology and market change. Demand becomes clustered in cities and is easier to serve in Marx's view. 5. Marx thinks ideas don't matter. 6. Mokyr and Nye think ideas of Adam Smith and ideas of rule of law become more important in late 18th Century, as state power is centralized by rent seekers. And this centralized power in turn operates in an Enlightenment framework. 7. Polanyi distinguishes between Enlightenment and the ideas that bring about competitive market: need bloodier ideas of Townsend, Malthus to lead to expropriation to make people hungry

More on Mokyr and Nye

1. Mokyr and Nye discuss significance of state "non-interference" 2. They give the impression that state got out of the way, but they make clear that the state rearranged property rights 3. Polanyi takes the view that liberal writers (e.g. Mokyr and Nye) have an inconsistent position 4. Polanyi thought competition could lead to monopoly by predatory pricing

Gold standard(s), 1870s-1930s

1. Most hand-to-hand currency is banknotes, convertible to gold at bearer's demand 2. Three kinds of gold standard, ultimately similar in monetary consequences A. Gold specie standard -- coins circulate B. Gold bullion standard -- gold in vaults "backs currency" at specified ratio, so bank could only issue notes with sufficient backing. This was the most common. Backing was always less than 100%. If everyone came asking for gold, the government could change the gold ratio or suspend the convertability of money into gold. C. Gold exchange standard -- currency backed by gold in vaults AND/OR other currencies that are convertible to gold Note: for all 3, the amount of money available to the public depended on the amount of gold in vaults.

Boom-bust effects of differential inflation rates

1. Multiple stimuli for investment & capital inflows in countries with above-average inflation • Real interest rates low, borrowing (including government borrowing) very attractive. THUS: eventual fiscal crisis in Greece • Low competitiveness, high purchasing power tends to fuel trade deficit, inflows to cover • One-way bets based on predicted inflation • THUS: housing booms in Ireland, Spain 2. Note that process works in reverse in countries with lower inflation rates If bank loans money at 10% interest, concerned about real, not nominal returns. Interest rate set by the ECB is the same across all the Eurozone, but there are different rates of inflation across the Eurozone. The real interest rate is lower in places where the inflation rate is higher. Higher inflation promoted more borrowing, spending and more inflation. This decreased competitiveness. This resulted in a housing bubble in Ireland. It worked in reverse in Germany.

Economic consequences of interference with GSAM

1. No adjustment of trade imbalances 2. Unemployment when wages above competitive levels leads to rising unemployment payouts Together, these forces result in 1. Accumulation of debts in trade deficit states, which in turn leads to 2. PRESSURE FOR AUSTERITY as well as intense political conflict WHEN INTERNATIONAL LENDING COLLAPSES

Why does one need institutions to get a market economy?

1. No market if barriers to entry are pervasive 2. Transaction costs mean barriers to entry are pervasive absent impersonal institutions A. Personalistic solutions to transaction cost problems a. not capable of dealing with complex, specialised economy e.g. division of labor is good. Don't want a professor as a barber. As soon as you have a division of labor, you have asymmetric information and measurement costs b. constitute barriers to entry in their own right 3. The state is the crucial source of impersonal transaction-cost reducing institutions Note: for market to expand, need impersonal exchange.

Critiques of V.o.C. (Streeck)

1. No role for politics: bargaining power fades to the background, workers not forced to make involuntary choices A. Williamsonian arguments based on voluntary transactions B. Welfare state "economised," no distributive struggle i.e. welfare state seen as a result of functional need, functional argument obscures distributive struggle in which labor fought against business for welfare provision 2. Dualism: are there really only two kinds? A. Are even the UK and US that similar? They're very different B. Japan and France as state-influenced market economies [SMEs?] 3. No systematic discussion of change A. US and UK post Reagan, Thatcher not what they were before B. Broad international trend to LME? 4. Complementarity overestimated: THIS IS A POTENTIAL EXAM QUESTION re: welfare state, labor, training. See whether complementarities proposed actually exist. Note: Lazonick and O'Sullivan argue that US capitalism changed a lot after the election of Reagan. Same applies to UK after the election of Thatcher.

Nominal versus real prices

1. Nominal prices are the prices actually charged (or the amount of debts actually owed) as of some date 2. Real prices are nominal prices adjusted for changes in the general price level (inflation or deflation) since some date 3. Changing nominal prices and unchanging real prices = prices keeping up with inflation/deflation 4. [Downward] nominal rigidity characterises prices (or debts) that don't easily fall to match changes in general price level

Nominal Unit Labour Costs, 2000=1, 2000-2013

1. Nominal unit labour costs = unit labour costs * price index 2. But labor's share was stable in almost every European country 3. It was up only slightly in Portugal and Ireland 4. Both Spain and Germany see wage gains well under productivity 5. It's worth noting the huge gap between Germany and the PIIGS

Financial Fragility more broadly

1. Note similarity between Minsky's explanation in Kindleberger, Asian financial crisis and Eurozone crisis 2. Here's Woodruff 3. This pattern of international financing came to an abrupt halt in the autumn of 2008, but it was to have an important legacy thereafter. The run-up to the Eurozone crisis saw the accumulation of multiple forms of what Minsky termed "financial fragility," fueled by international credit. Borrowers in trade-deficit countries, including the governments of those countries, came to rely on the continued availability of incoming financial flows. Banks on the other side of these transactions could thus be assured of receiving expected repayments only as long as general credit conditions remained easy. Meanwhile, in two Eurozone countries, Ireland and Spain, a boom emerged in housing markets. Low Eurozone interest rates were probably a facilitating condition in kicking off the booms, though not a sole explanation (Portugal and Italy did not see similar booms). They were fueled by the classic Minskyian collateral-appreciation /credit-easing cycle, backstopped by the recycling of German export receipts. The resulting economic growth swelled tax revenues, and the fiscal position of the two countries became much stronger—but also more fragile, in that the positive fiscal balance implicitly relied on the speculative finance that was fueling the housing booms

Liabilities

1. Obligations to pay out money to others, ordinarily at a particular time 2. Focus on "at a particular time"

Ordoliberalism (Woodruff)

1. Ordoliberalism is a specific variant of neoliberalism that emerged in Germany in the interwar period and received canonical formulation in the post-WWII era, especially in the works of Walter Eucken and Franz Böhm. Like other market liberals, Ordoliberals extolled the role of the price system in coordinating economic action. To make the price system work they advocated market competition: businesses and individuals struggling against one another to make sales to sovereign consumers. However—and the point is crucial to the entire Ordoliberal project—the economic system cannot be counted on spontaneously to evolve to ensure this outcome. Only state action will bring it about 2. Nonetheless, Ordoliberals, like other market liberals, sought to ensure that state powers necessary to underpin markets were not turned to purposes of which they did not approve. To this end, the economy should be governed by an "economic constitution" which should ensure that the state's actions are constrained to take the form of general rules, an Ordnungspolitik or ordering policy

I. A very short course in monetary economics

1. Over any period, amount money spent = value of stuff bought 2. Note that money can be spent more than one time in a period--I spend a pound, and the person whom I gave it to spends the pound again, etc

How a CDO works

1. People formed companies to get loan payments 2. The companies then sold rights to a share of those payments 3. Ratings agencies will assign different ratings to not only the MBS that make up a CDO but also the CDO itself 4. Rating agencies gave many CDOs a AAA rating. This led investors to believe that they're protected by diversification. But what if everyone can't pay? Note: CDOs are securities that hold different types of debt, such as mortgage-backed securities and corporate bonds, which are then sliced into varying levels of risk and sold to investors.

"Why has it been so hard to devise international monetary institutions that facilitate international trade and investment without exacerbating the risks of national macroeconomic crises?"

1. Polanyi 2. Money memo 3. Ruggie 4. Wade 2000 5. Miller 6. Hay 7. Woodruff 8. Scharpf 9. Block 10. Kindleberger

Democracy vs. markets

1. Polanyi describes tensions rising specifically from the gold standard 2. Weir and Skocpol overlook monetary policy and thus are able draw very different portraits of US and Sweden

Period: Pre-WWI ~1870-1913

1. Power: Great Britain, hegemonic 2. Purpose: liberalism 3. Resultant International Regime: classical liberalism

Period: Interwar period

1. Power: No hegemon 2. Purpose: No agreement on purpose 3. Resultant International Regime: classical liberalism, no regime?

Period: 1971-1980s

1. Power: No hegemon 2. Purpose: embedded liberalsim 3. Resultant International Regime: Bretton Woods lite

Period: Post-war to 1971

1. Power: US hegemon 2. Purpose: embedded liberalism 3. Resultant International Regime: Bretton Woods

Period: 1980s-2000

1. Power: US hegemon 2. Purpose: neoliberalism (or Wall Street-Treasury) 3. Resultant International Regime: neoliberalism

Debt-to-GDP ratio and interest rates

1. Pre-crisis: debt-to-GDP ratio has no effect on interest rates 2. Post-crisis: debt-to-GDP ratio has inconsistent effect on interest rates

The liquidity trap in the context of the lecture

1. Profit makers saving, rather than spending or investing 2. This leads to low interest rates, as there are lots of savings available Are investors willing to accept some risk? 1. If yes, then investment is stimulated 3. If not, there is a flight to safety and the liquidity trap In 2008, investors fled to safe assets

Bubbles and Interest Rates

1. Raising interest rates is a broad brush tool to deal with bubbles 2. International liquidity inflated Northern Rock, which depended on repo sales

Enablers of securitisation

1. Ratings agencies, which use crude formulas (Gaussian copula) that don't allow for possibility of general downturn • ...and regularly overrode the formulas to please big issuers 2. Sellers of "credit default swaps" (CDS), a form of insurance against default, especially AIG

Polanyi, The Great Transformation (1944)

1. Really brilliant 2. Polanyi writing in the context of WWII, as the downfall of Western civilization seems imminent.

Politics of the exchange rate in a world of mobile capital

1. Recall Mundell-Fleming Trilemma 2. Bretton Woods (BW) system is unsustainable, because one country needs to feed the world economy 3. Even when exchange rates are floating, governments often care a lot about what the exchange rate is 4. Governments want a lower exchange rate to benefit domestic industry 5. Governments intervene to do this: this policy, known as exchange rate protectionism, helped fuel the Asian financial crisis 6. This is very important for Japan and other developing countries

Eek! They're printing money! Inflation coming?

1. Remember P = MV / Q 2. Nevertheless, if money not spent, it doesn't turn over quickly 3. No matter how much liquidity there was, there was little increase in investment Note: with interest rates very low, opportunity cost of holding cash is low = liquidity trap

Personal solutions to problem of cooperation 2

1. Repeated dealings 2. Pooled information on reputations (aka gossip) 3. Group reputation A. Religion/Ethnicity e.g. pariah entrepreneurs dominant in one economic sector B. Professional societies, etc., goods of particular origin: they do the same to reduce transaction costs NOTE THAT THESE ARE ALSO BARRIERS TO ENTRY

Themes for this week's reading and seminar

1. Restoration (1924-1926) and subsequent breakdown (1931-1936) of international gold standard (guaranteeing convertibility of major international currencies into fixed quantities of gold) 2. Government efforts to fight depression

Cioffi and Höpner 2006

1. Right-wing parties do seek to conserve existing varieties of capitalism 2. but centre-left parties find corporate governance reform politically useful So what would Hall and Soskice expect? That complementarities would kick in

Week 3 Lecture Will Focus on

1. Rise of 'self-regulating' market governed by prices Next week: 2. Protective reaction 3. Catastrophic consequences of contradiction between markets and protection

Note about Periods Described this Week

1. Ruggie: 1930-1979 2. Wade: 1979-200s

Minsky process: Boom and liquidity increase

1. Secured borrowing requires collateral. During a boom, collateral becomes more valuable. 2. In the 1920s in the US, people used stock as increasingly valuable collateral. This is reminiscent of the Big Short in which a stripper in run-up to crisis owned 5 condos.

Trigger for the collapse - declining quality of loans

1. Securitisation makes money available to predatory lenders, who "originate and distribute" 2. Eventually run out of remotely suitable buyers, keep pressing on to unsuitable ones 3. Had to blow up, and does, in August 2007 In 2007, mortgage companies started lending to people who were absolutely unable to pay. These people start defaulting right away. Junior tranches start defaulting, and investments become worthless. Because these were rated as excellent, banks had no protection.

Securitisation's idea: pooling uncorrelated risk

1. Securitization seemed like a good idea, because US regional house prices weren't correlated with each other prior to 2008. 2. But if everyone's betting on house prices rising everywhere, then prices will move together.

Birth of "political economy" 2

1. Shadow of Speenhamland decisive A. Increased wealth and increased poverty seem to go together B. Natural metaphors as the solution a. vs. Smith 2. Enables commodification of labor "The creation of a labor market was an act of vivisection performed on the body of society by such as were steeled to their task by an assurance which only science can provide." TGT

Complementarities 1

1. Solutions to coordination problems in one sphere have implications for solution to coordination problems in another sphere 2. I.e. firm that relies on short-term capital can't guarantee long-term employment in the same way firms dependent on long-term financing can

Complementarities 2

1. Solutions to coordination problems in one sphere have implications for solution to coordination problems in another sphere 2. THUS Coherent interlocking of institutions and practices in different spheres, gives rise to "Variety of Capitalism" 3. US and Germany are paradigmatic cases

Block and Somers 2003

1. Speenhamland refers to a town in Berkshire County, England, where the county squires decreed in May 1795 that the poor should be entitled to a specific quantity of assistance depending upon the price of bread and the size of the family. This form of provision is often called aid-in-wages because when the gap between wages and the price of bread widened, the parish used poor relief funds to supplement the wages of workers and their families. As the program spread (although it is a subject of debate as to how widely it was practiced) among England's parishes, it generated controversy. It was perceived by critics that all precedent had been violated by providing relief not just to the infirm, the aged, or the dependent but also to the "able-bodied." These criticisms were further fueled by the dramatic increase in local poor rates (taxes) and by the findings of a series of Parliamentary reports that played a considerable role in shaping public opinion. 2. Joseph Townsend's Dissertation on the Poor Lawappeared in 1786, and it used the fable of dogs and goats on an island in the Pacific to make its case against poor relief. Townsend argued that just as the populations of goats and dogs reached an equilibrium as they each adjusted to the changing food supply, so would the population of the human poor naturally reach equilibrium were it not for the artificial intervention of poor relief. 3. When Karl Polanyi began to explore the Speenhamland episode in the 1930s virtually all of the historical sources available to him affirmed that the Speenhamland episode had degraded the rural poor. Nevertheless, Polanyi was determined to challenge the use that market liberals—especially the Austrians von Mises and Hayek—had made of Speenhamland. They had argued that Speenhamland precisely prefigured the disastrous consequences of state interventionism in the late nineteenth and early twentieth centuries. They claimed that all efforts to use government to improve the life chances of the poor would end up undermining the economy's vitality and would ultimately hurt the people that the policies had been intended to help. As a supporter of the achievements of municipal socialism in Vienna, Polanyi was determined to demonstrate the flaws in the historical parallel that these free market theorists had developed. 4. Criticism: I think that all through this chapter [7] you treat Speenhamland as much more universal than it was, and also make much too light of county differences in wage policy

Self-defeating austerity?

1. Spending cuts and tax increases lead to 2. Slow Growth, Rising Unemployment, Declining Aggregate Demand, Falling Profits lead to DIRECT EFFECTS: 3. Falling Tax Revenue, Rising Transfer Payments 4. Rising Deficits and/or Missed Targets lead to 5. Spending cuts and tax increases INDIRECT EFFECTS 3. Fears of Government Default, Sell-offs of Government Debt: Falling Tax Revenue, Rising Transfer Payments also contribute to this as well: lead to 4. Interest Costs Rise: Falling Tax Revenue, Rising Transfer Payments also contribute to this as well: lead to 5. Rising Deficits and/or Missed Targets lead to 6. Spending cuts and tax increases

Comparison of Marx, Polanyi, and Mokyr and Nye (Marx)

1. State crucial to creating home market: Yes 2. Creation of home market good for people: Yes 3. Ideas matter for change: No 4. Enclosures good: No 5. Do states protect people from change? No 6. Was creation of the home market inevitable? Yes 7. Did international trade help create the home market? Yes

Comparison of Marx, Polanyi, and Mokyr and Nye (Polanyi)

1. State crucial to creating home market: Yes 2. Creation of home market good for people: Yes 3. Ideas matter for change: Yes 4. Enclosures good: No 5. Do states protect people from change? Yes 6. Was creation of the home market inevitable? No 7. Did international trade help create the home market? Yes

Comparison of Marx, Polanyi, and Mokyr and Nye (Mokyr and Nye)

1. State crucial to creating home market: Yes 2. Creation of home market good for people: Yes 3. Ideas matter for change: Yes 4. Enclosures good: Yes 5. Do states protect people from change? No 6. Was creation of the home market inevitable? No 7. Did international trade help create the home market? Yes

Week 3

1. States and Market Building 2. Last week, things on a micro-scale. Some institutions necessary for a recognizable market. 3. This week, rise of a national, integrated market in Britain and the role of the state in creating this market.

Sterilization, formally defined

1. Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply. Sterilization most frequently involves the purchase or sale of financial assets by a central bank, and is designed to offset the effect of foreign exchange intervention. The sterilization process is used to manipulate the value of one domestic currency relative to another, and is initiated in the foreign exchange market. 2. Sterilization requires a central bank to look beyond its borders by getting involved in foreign exchange. For example, the Federal Reserve purchases a foreign currency, in this case the yen, and the purchase is made with dollars that the Fed had in its reserves. This action results in there being less yen in the overall market - it has been placed in reserves by the Fed - and more dollars, since the dollars that were in the Fed's reserve are now in the open market. To sterilize the effect of this transaction the Fed can sell government bonds, which removes dollars from the open market and replaces them with a government obligation. 3. Emerging markets can be exposed to capital inflows when investors buy up domestic currencies in order to purchase domestic assets. For example, a U.S. investor looking to invest in India must use dollars to purchase rupees. If lots of U.S. investors start buying up rupees, the rupee exchange rate will increase. At this point the Indian central bank can either let the fluctuation continue, which can drive up the price of Indian exports, or it can buy foreign currency with its reserves in order to drive down the exchange rate. If the central bank decides to buy foreign currency it can attempt to offset the increase of rupees in the market buy selling rupee-denominated government bonds.

International trade and prices under the gold standard

1. Suppose: Price of British goods is not competitive compared to U.S. goods (as after resumption of gold convertibility in Britain 1925) 2. Under the gold standard, what options do British policy makers have to change the balance of prices? A. Make prices of British goods fall (deflation), especially through driving down wages i.e. in 1925, British prices were still 10 percent too high B. Protection C. That's it -- devaluation is not an option

Balance sheets

1. T-diagram 2. Assets on the left e.g. stock shares, real estate 3. Liabilities + equity on the right e.g. bank loans, bonds: Equity = Assets minus liabilities

Triffin dilemma, defined

1. Testifying before the U.S. Congress in 1960, economist Robert Triffin exposed a fundamental problem in the international monetary system. 2. If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could pull the world economy into a contractionary spiral, leading to instability. 3. If U.S. deficits continued, a steady stream of dollars would continue to fuel world economic growth. However, excessive U.S. deficits (dollar glut) would erode confidence in the value of the U.S. dollar. Without confidence in the dollar, it would no longer be accepted as the world's reserve currency. The fixed exchange rate system could break down, leading to instability.

The really bad case for austerity

1. The "Treasury View" -- government can only move spending around, not increase it • Grover Norquist: "The idea that if you take a dollar out of the economy and then — from somebody who earned it, either through debt, or through taxes — and give it to somebody who's politically connected, that there are more dollars around, that if you stand on one side of the lake and put a bucket into the lake, and walk around to the other side in front of the TV cameras, pour the bucket back into the lake and announce you're stimulating the lake to great depths. We just wasted $800 billion on stimulus spending that added to debt, that killed jobs." 2. The whole problem in a recession is that money is not getting spent. It's not M that's at issue, but MV

Appendix: Quantitative Easing (QE) In The Eurozone

1. The BFC's implicit demand model doesn't work! (huge growth in trade surplus does little to power aggregate growth) 2. ECB can't give money away 3. Monthly change in consumer prices (6-month moving average): inflation is low

Bretton Woods System, defined

1. The Bretton Woods system is commonly understood to refer to the international monetary regime that prevailed from the end of World War II until the early 1970s. 2. Taking its name from the site of the 1944 conference that created the *International Monetary Fund (IMF) and *World Bank, the Bretton Woods system was history's first example of a fully negotiated monetary order intended to govern currency relations among sovereign states. 3. In principle, the regime was designed to combine binding legal obligations with multilateral decision-making conducted through an international organization, the IMF, endowed with limited supranational authority. 4. In practice the initial scheme, as well as its subsequent development and ultimate demise, were directly dependent on the preferences and policies of its most powerful member, the United States.

After The Financial Crisis: The Political Use Of Fiscal Crisis

1. The ECB emerges as a lender of last resort, but its price is austerity 2. The ECB is central to understanding the crisis

Robert Wade, "WHEELS WITHIN WHEELS: Rethinking the Asian Crisis and the Asian Model"

1. The East Asian economic crisis of 1997-1999 had its causes not mainly in the "East Asian model" nor even in departures from the model, but in international capital markets and the governments of the core economies, especially the United States and Japan. 2. The post-Bretton Woods system, without any link between the dollar and gold, allowed the United States to finance persistent external deficits by creating US government bonds. 3. These bonds raised the foreign reserves of the surplus countries, notably Japan and East Asia. The rise in reserves triggered credit booms that generated asset inflation and industrial overcapacity. 4. The booms gave way to crisis. 5. The East Asian variant differed from the earlier Japanese one by being fueled by very large capital inflows in the early to mid 1990s from recession-hit Japan and Europe, as well as from the United States. This perspective, which highlights causes outside of East Asia, suggests that emerging market economies will remain vulnerable to such crises in the absence of capital controls, a different system of international payments, and a more equal world income distribution. 6. How do we know that the culprit is private capital inflow surges blowing out a credit boom, and not bad bankers or the other villains of the Asian cronyism story? The first part of the answer lies in the striking correlation, mentioned above, between capital flows across emerging markets. During the 1990s, private capital inflows to developing countries typically grew at 10-20% a year. But they surged twice, in 1993 and in 1996, both times doubling the inflow of the previous year. Each surge was followed the next year by major financial crisis in emerging markets, the first time in Mexico and Latin America, the second time in Asia 7. Second, it is well known that bank regulation and enforcement of prudential limits becomes very difficult in the face of a capital inflow surge, even in a sophisticated, rule-based (not relationship-based) financial system with skilled financial managers. There is no need to resort to Asian specifics to explain why, given the inflows, Asian bank regulators were less than effective. The inflow process itself undercuts the ability of regulators to regulate 8. Third, the entire financial system of the typical emerging market economy is no bigger than an average American regional bank. Tiny changes in the share of world capital flows going into a particular country can swamp the system, however skilled and uncronyistic the bankers and monetary authorities. 9. If private capital inflows were the main culprit, how do we know that opening the financial system was the crucial factor behind the inflows? How do we know the crucial factor was not lack of transparency, weak prudential regulation, moral hazard, or those other faults that, according to the usual story, led responsible, rational foreign bankers and investors to lend more than they would have lent had they known the truth, and had they not had grounds to believe the loans were implicitly guaranteed? As shown above, the usual story falls down at the first nudge, above all because these factors do not differentiate the countries that had a crisis from those that did not. The most affected countries (Korea, Thailand, Malaysia, and Indonesia, which all had negative growth in 1998) were not worse in these respects than the least affected countries (China, Taiwan, India, and the rest of South Asia, which had positive growth in 1998). What does differentiate the most and the least affected countries is capital mobility. All of the most affected countries opened the financial system to capital flows more or less fully by the mid 1990s. The least affected have in common restricted capital mobility, with capital transactions more limited to trade and direct investment. During the 1990s, the countries with restricted capital flows did not experience anything like the capital inflows of those with open capital accounts; their short-term debt to foreign exchange reserves remained much lower, and their corporate sectors were less vulnerable to exchange rate, interest rate, and investment shocks, so they experienced less outflow. 10. If this evidence is not sufficient, try a thought experiment. Would Korea have been better off with short-term debt to foreign exchange reserves in mid 1997 at, say, 50% than above 200%? Yes. Would it have lost much in terms of social profit by cutting back its short-term inflows? No, because by the mid 1990s, most of the inflows were fueling a speculative industrial capacity bubble. But putting a ceiling on the ratio would have required the government to limit the inflows produced by uncoordinated decisions of private entities that did not have to take account of the social risks to which their private decisions exposed the rest of the society. 11. In short, Asian governments are deeply implicated in the crisis for opening the financial system quickly in the 1990s without linking the pace of the opening to the build-up of effective rule-based (rather than relationship-based) governance of financial markets, including institutions of accounting, auditing, rating, and legal cases and codes, in the false belief that if the capital was moving private-to-private it must be safe. Certainly company performance was deteriorating by the mid 1990s across the region. But the major problem was domestic financial structures not robust enough to handle the heavy shocks to which they were exposed by precipitous financial opening in conditions of surging world capital markets. Had the governments not abandoned some basic principles of the East Asian model—above all, the principle of strategic rather than open-ended integration into world financial markets—the economies would probably not have experienced a serious crisis, although they would also have grown more slowly. 12. On the other hand, the deeper causes of the Asian crisis lie in the core economies and their governments, especially that of the United States, and in the kind of international financial system they have created. The US decision to break the link between the dollar and gold (rather than cut expenditure for the Vietnam War and the Great Society) allowed persistent imbalances to build up in the world economy because increases in surplus countries' reserves were no longer matched by falls in reserves of the United States, the main deficit country. The United States' reluctance to rein in its external deficits, and its preference to finance them by creating debt that other countries accumulated as foreign exchange reserves, then produced (given the post-Bretton Woods payments system) a surge in world liquidity that eventually produced excess capacity and financial fragility worldwide. Both Japan's boom and bust and the later Asian miracle and bust were manifestations of the same systemic process. Explanations that locate the causes within the crisis countries occlude this basic point.

Conclusions on QE

1. The Eurozone is presently wedded to an unworkable demand model • Government consumption: pressed by austerity • Private consumption: pressed by 'competitiveness' push, treating labour as a cost to business rather than business' customers • Investment: not responding to efforts to create 'favourable business climate' nor to ultra-low interest rates • Leaving only exports as a success story - but this is not enough 2. In this context, QE is unlikely to be very effective without a political breakthrough changing demand model 3. This breakthrough is itself very unlikely

Karl Marx, "Capital: a critique of political economy," Chapter 32

1. The German philosopher believed society consisted of two classes: those with capital and those without it 2. Because capitalists owned the means of production, they were able to leave their workers with only enough to survive and keep for themselves handsome profits 3. On to this static model, Marx added a dynamic element. He imagined that ownership of capital would become increasingly concentrated until the growing number of dispossessed individuals seized the means of production and put an end to their exploitation 4. That is to say, elimination of the class structure founded upon an unequal distribution of assets represented the only solution for Marx.

Week 10

1. The Politics Of (Aggregate) Demand 2. I.e. how much people buy 3. Analysis of demand is central to macroeconomics, but demand plays a relatively insignificant role in comparative political economy

How hostile takeovers work

1. The acquirer issues junk bonds to fund the purchase. The money from the acquirer goes to the shareholders of the target. 2. The combined entity of the acquirer-target is collateral for bonds. In this process, companies often end up going bankrupt.

Paul Krugman, "Accounting Identities"

1. The background to the world economic crisis is that we went through an extended period of rising debt. Now, one person's liability is another person's asset, so rising debt made the world as a whole neither richer nor poorer. It did, however, leave the borrowers increasingly leveraged. And then came the Minsky moment; suddenly, investors were no longer willing to roll over, let alone increase, the debts of highly leveraged players. So these players are being forced to pay down debt. 2. The process of paying down debt, however, must obey two rules: A) Those who pay down debt must do so by spending less than their income. B) For the world as a whole, spending equals income. It follows that those who are not being forced to pay down debt must spend more than their income. 3. To avoid all this, we'd need policies to encourage more spending. Fiscal stimulus on the part of financially strong governments would do it; quantitative easing can help, but only to the extent that it encourages spending by the financially sound, and it's a little unclear what the process there is supposed to be. 4. Oh, and widespread debt forgiveness (or inflating away some of the debt) would solve the problem. 5. But what we actually have is a climate in which it's considered sensible to demand fiscal austerity from everyone; to reject unconventional monetary policy as unsound; and of course to denounce any help for debtors as morally reprehensible. So we're in a world in which Very Serious People demand that debtors spend less than their income, but that nobody else spend more than their income.

Geoffrey P. Miller, "The Role of a Central Bank in a Bubble Economy"

1. The bubble economy in Japan during 1988-90-when Japanese land and share prices more than doubled-was one of the most remarkable examples of financial speculation in modem times; it was possibly the largest speculative event in the history of the world. The peak of the Japanese bubble economy lasted only about two years; the bubble popped in 1990. Between 1990 and 1992 the Nikkei 225 average lost over 60% of its value, and land prices plummeted by about 50%. This had an adverse effect on the Japanese economy: the country entered a recession of unusual duration and severity, corporate bankruptcies soared, and the banking sector suffered severe "bad loan" problems that are still far from being resolved. 2. The Bank of Japan (the "Bank" or "BOJ") played a role in the bubble economy. During the period immediately before, as well as during the bubble, the BOJ kept interest rates low and adopted a loose monetary policy. The Bank finally began to tighten policy in the spring of 1989 and continued to tighten throughout 1990-actions that may have contributed to economic collapse in 1990. As early as 1987, the Bank was aware that asset prices might be growing at an excessive rate and that real estate lending posed potential dangers to the banking system. If the Bank had acted earlier to tighten monetary policy, some of the subsequent costs might have been avoided. In the words of one distinguished Japanese economist, the Bank's failure to act was a "major mistake." 3. Why did the Bank delay? I conclude that the Bank delayed for many of the reasons outlined above. The Bank faced technical, legal, and political problems which made it exceedingly difficult to intervene earlier than it did. The case history suggests, consistent with the theoretical analysis, that central banks are poorly situated to respond to price bubbles in particular industrial sectors. The BOJ's role in responding to these phenomena was accordingly problematic. 4. In general, one can conclude that the central bank should not be charged with principal responsibility for policing against price rises in discrete industrial sectors. That responsibility should be exercised by other authorities, with awareness of the general social utility of allowing the price system to operate free of government intervention. If these authorities do intervene, they should use regulatory tools targeted at only the affected sector and not elsewhere. 5. At the same time, central banks have a legitimate role to play in controlling bubble economies. Because central banks monitor economic developments in their respective economies, they should track asset prices in different industrial sectors. If the central bank observes a problem in a particular area, it can alert the appropriate authorities. In rare cases, where a bubble becomes so large as to pose a threat to the entire economic system, the central bank may appropriately decide to use monetary policy to counteract such a bubble, notwithstanding the effects that monetary tightening might have elsewhere in the economy. 6. When confronting a bubble economy, a central bank has a special set of technical, legal, and political problems. As we have seen, from a technical point of view, the bank may be uncertain whether the observed price rises represent a bubble economy or merely the natural interplay of supply and demand in the underlying economy. Even if the bank decides that a bubble economy is under way, it faces severe constraints on its actions. The bank's authority to act against the bubble is suspect, because the bubble may not show up in the aggregate statistics on which the bank relies in formulating monetary policy. Moreover, the bank's weapon against a bubble economy-tightening monetary policy-is broadbased, and even if it is effective against a price bubble in one sector, it may have adverse consequences elsewhere. Other constraints come from external relations. Because equity markets around the world are closely linked, a central bank cannot take strong action against a price bubble in domestic equity securities without considering the implications for other world markets. International negotiations on exchange rate and fiscal policies may also impede the bank's freedom of action. If the bubble is due partly to the excessive supply of credit to a particular sector resulting from changes in financial market regulation, the central bank may not possess the necessary tools to control the underlying forces giving rise to the bubble. Finally, because speculative bubbles tend to be popular in their early phases, and because interest groups develop to support the continuation of the bubble process, a central bank may face political opposition to monetary tightening, a problem that can be exacerbated if central bank lacks the unswerving support of the ruling political party, or if the central bank does not enjoy legal and practical independence from other parts of the government. 7. All these factors taken together suggest that the central bank's role in combating asset or equity price bubbles is problematic. In general, one can conclude that the central bank should not be charged with principal responsibility for policing against price rises in discrete industrial sectors. That responsibility should be exercised by other authorities, with due regard to the general social utility of allowing prices to find their natural level, and with attention to the fact that speculative bubbles can and do arise from time to time. These other authorities should use regulatory tools designed to have an effect in the sectors where the bubble economy is underway, and not elsewhere. 8. However, it would be a mistake to rule out any role for the central bank in controlling bubble economies. Because central banks typically keep in close touch with economic developments throughout their economies, it is appropriate that these institutions track not only changes in variables such as interest rates, prices, employment, and productivity, but also changes in asset prices in different industrial sectors. If the central bank observes problems arising in particular sectors, it can alert the appropriate authorities. 9. Beyond this, there may be rare events where price bubbles, become so large that they pose a threat to the entire economic system; in such cases, the central bank may appropriately decide to use the tools of monetary policy to counteract the bubble economy, notwithstanding the effects that monetary tightening might have elsewhere in the economy.

William Lazonick, Mary O'Sullivan, "Maximizing shareholder value: a new ideology for corporate governance"

1. The decade-long boom in the US stock market and the more recent boom in the US economy have fostered widespread belief in the economic benefits of the maximization of shareholder value as a principle of corporate governance. 2. The arguments in support of governing corporations to create shareholder value came into their own in the United States in the 1980s. As has been the case throughout the twentieth century, in the 1980s a relatively small number of giant corporations, employing tens or even hundreds of thousands of people dominated the economy of the United States. On the basis of capabilities that had been accumulated over decades, these corporations generated huge revenues. They allocated these revenues according to a corporate governance principle that we call 'retain and reinvest'. These corporations tended to retain both the money that they earned and the people whom they employed, and they reinvested in physical capital and complementary human resources. 3. In the 1960s and 1970s, however, the principle of retain and reinvest began running into problems for two reasons, one having to do with the growth of the corporation and the other having to do with the rise of new competitors. Through internal growth and through merger and acquisition, corporations grew too big with too many divisions in too many different types of businesses. The massive expansion of corporations that had occurred during the 1960s resulted in poor performance in the 1970s, an outcome that was exacerbated by an unstable macroeconomic environment and by the rise of new international competition, especially from Japan 4. Japanese competition was, of course, particularly formidable in the mass production industries of automobiles, consumer electronics and in the machinery and electronic sectors that supplied capital goods to these consumer durable industries. Yet these had been industries and sectors in which US companies had previously been the world leaders and that had been central to the prosperity of the US economy since the 1920s. Japan was able to challenge the United States in these industries because its manufacturing corporations innovated through the development and utilization of integrated skill bases that were broader and deeper than those in which their American competitors had invested 5. As, during the 1970s, major US manufacturing corporations struggled with these very real problems of excessive centralization and innovative competition, a group of American financial economists developed an approach to corporate governance known as agency theory. Agency theorists posited that, in the governance of corporations, shareholders were the principals and managers were their agents. Agency theorists argued that, because corporate managers were undisciplined by the market mechanism, they would opportunistically use their control over the allocation of corporate resources and returns to line their own pockets, or at least to pursue objectives that were contrary to the interests of shareholders. Given the entrenchment of incumbent corporate managers and the relatively poor performance of their companies in the 1970s, agency theorists argued that there was a need for a takeover market that, functioning as a market for corporate control, could discipline managers whose companies performed poorly. The rate of return on corporate stock was their measure of superior performance, and the maximization of shareholder value became their creed 6. In addition, during the 1970s, the quest for shareholder value in the US economy found support from a new source - the institutional investor. During the 1950s and 1960s, there were legal restrictions on the extent to which life insurance companies and pension funds could include corporate equities in their investment portfolios, while mutual funds played only a limited, although growing, role in the mobilization of household savings. In the 1970s, however, a number of changes occurred in the financial sector that promoted the growth of equity-based institutional investing. Partly as a consequence of Wall Street's role in the buying and selling of companies during the conglomeration mania of the 1960s, from the early 1970s there was a shift in the focus of Wall Street financial firms from supporting long-term investment activities of corporations (mainly through bond issues) to generating fees and capital gains through trading in corporate and government securities. To expand the market for securities trading, Wall Street firms convinced the Securities and Exchange Commission (SEC) to put an end to fixed commissions on stock exchange transactions. At the same time, developments in computer technology made it possible for these firms to handle much higher volumes of trade than had previously been the case. 7. Meanwhile, the oil-induced in ation of the 1970s created a problem for US financial institutions in managing their nancial assets to generate adequate returns, thus leading to the nancial deregulation of the American economy. As investors in stocks and bonds, mutual funds had advantages over other institutional investors such as life insurance companies and pension funds in generating higher returns on household savings because they were not subject to the same stringent regulations concerning the types of investments that they could make. Moreover, even without the mutual funds as competitors, the inflationary conditions of the 1970s meant that, under current regulations, pension funds and insurance companies could no longer offer households positive real rates of return. The regulatory response was ERISA - the Employee Retirement Income Security Act (1974) - which, when amended in 1978, permitted pension funds and insurance companies to invest substantial proportions of their portfolios in corporate equities and other risky securities such as 'junk bonds' and venture funds rather than just in high-grade corporate and government securities 8. During the 1970s the US banking sector also experienced significant deregulation. With the inflationary conditions boosting the nominal rates of interest on money-market instruments, through a process that became known as 'disintermediation', money-market funds emerged to offer savers much higher rates of returns than the regulated banks could offer them. Beginning in 1978, the government sought to help the banks compete for depositors by deregulating the interest rates that commercial banks and savings banks could pay to depositors and charge on loans. In this deregulated environment, however, savings and loans institutions (S&Ls), a type of savings bank whose assets were long-lived, low-yield mortgages, found that, unless they could invest in higher-yield assets, they could not compete for household deposits. The regulatory response was the Garn-St. Germain Act of 1982 that permitted the S&Ls to hold junk bonds and to lend to inherently risky new ventures, even while the government continued to guarantee the accounts of S&L depositors. 9. The stage was now set for institutional investors and S&Ls to become central participants in the hostile takeover movement of the 1980s. An important instrument of the takeover movement was the junk bond - a corporate or government bond that the bond-rating agencies considered to be below 'investment grade'. The innovation of Michael Milken, an employee at the Wall Street investment bank of Drexel, Burnham, and Lambert, was to create a liquid market in junk bonds by convincing financial institutions to buy and sell them Milken orchestrated most of these hostile takeovers by gaining commitments from institutional investors and S&Ls to sell their shareholdings in the target company to the corporate raider, when the target company was taken over, to buy newly issued junk bonds that enabled the company to buy the raider's shares. 10. The result was the emergence of a powerful market for corporate control

Embedded liberalism

1. The formulation in a 1982 article by one of the authors of the present essay, John G. Ruggie, has become the dominant interpretation of the postwar international economy: a reconciliation of market and society termed the compromise of embedded liberalism. "Unlike the economic nationalism of the thirties, it would be multilateral in character; unlike the liberalism of the gold standard and free trade, its multilateralism would be predicated upon domestic interventionism." The practices of domestic interventionism would tame the socially disruptive effects of markets without, however, eliminating the welfare and efficiency gains derived from cross-country trade. National societies shared the risks through varieties of safeguards and insurance schemes that composed, in part, the European welfare states or, in the ever-exceptional United States, the New Deal state. Sophisticated modeling has demonstrated that embedded liberalism generated both better long-term economic performance and social protection than its laissez-faire predecessor. 2. In that same article, Ruggie conjectures that "the resurgent ethos of liberal capitalism"—what later became known as neoliberalism—threatened to undo the compromise of embedded liberalism as the world had known it. In the event, it wasn't merely embedded liberalism's specific policy tools that became discredited; its paradigm of political economy was itself attacked and undermined.

Ezra Klein, "Financial crisis and stimulus: Could this time be different?"

1. The issue is the graph on Page 1. It shows two blue lines sloping gently upward and then drifting back down. The darker line — "With recovery plan" — forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010. 2. Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administration's economic policies. That line lets Republicans talk about "the failed stimulus." That line has discredited the White House's economic policy. 3. But the other line — "Without recovery plan" — is more instructive. It shows unemployment peaking at 9 percent in 2010 and falling below 7 percent by the end of this year. That's the line the administration used to scare Congress into passing the single largest economic recovery package in American history. That line is the nightmare scenario. 4. And yet this is the cold, hard fact of the past three years: The reality has been worse than the administration's nightmare scenario. Even with the stimulus, unemployment shot past 10 percent in 2009. 5. To understand how the administration got it so wrong, we need to look at the data it was looking at. 6. he Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn't until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; t hey didn't know that it had been run over by a truck. 7. But the Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish "This Time Is Different," their fantastically well-timed study of nine centuries of financial crises. 8. That was the dark joke of the book's title. Everyone always thinks this time will be different: The bubble won't burst because this time, tulips won't lose their value, or housing is a unique asset, or sophisticated derivatives really do eliminate risk. Once it bursts, they think their economy will quickly clamber out of the ditch because their workers are smarter and tougher, and their policymakers are wiser and more experienced. But it almost never does. The basic thesis of "This Time Is Different" is that financial crises are not like normal recessions. Typically, a recession results from high interest rates or fluctuations in the business cycle, and it corrects itself relatively quickly: Either the Federal Reserve lowers rates, or consumers get back to spending, or both. 9. But financial crises tend to include a substantial amount of private debt. When the market turns, this "overhang" of debt acts as a boot on the throat of the recovery. People don't take advantage of low interest rates to buy a new house because their first order of business is paying down credit cards and keeping up on the mortgage. 10. In subsequent research with her husband, Vincent Reinhart, Carmen Reinhart looked at the recoveries following 15 post-World War II financial crises. The results were ugly. Forget the catch-up growth of 4 or 5 percent that so many anticipated. Average growth rates were a full percentage point lower in the decade after the crisis than in the one before. 11. Perhaps as a result, in 10 of the 15 crises studied, unemployment simply never — and the Reinharts don't mean "never in the years we studied," they mean never ever — returned to its pre-crisis lows. In 90 percent of the cases in which housing-price data were available, prices were lower 10 years after the crash than they were the year before it. 12. The theory was that success would beget success. Passing the stimulus would stabilize the economy, prove the White House's political mettle and deliver immediate relief to millions of Americans. That would help the administration build the political capital to pass more stimulus, if necessary. But when the economy failed to respond as predicted, the political theory fell apart, too. 15. To the Fed, the nightmare scenario is that it tries to create inflation now and fails. It would have given up its hard-won credibility as an inflation fighter and invited political backlash, all without helping the economy. 17. So could this time have been different? There's little doubt that it could have been better. From the outset, the policies were too small for the recession the administration and economists thought we faced. They were much too small for the recession we actually faced. More and better stimulus, more aggressive interventions in the housing market, more aggressive policy from the Fed, and more attention to preventing layoffs and hiring the unemployed could have led to millions more jobs. At least in theory. 18. Of course, ideas always sound better than policies. Policies must be implemented, and they have unintended consequences and unforeseen flaws. In the best of circumstances, the policymaking process is imperfect. But January 2009 had the worst of circumstances — a once-in-a-lifetime economic emergency during a presidential transition. 19. Give policymakers some credit: They really have learned from the Depression. So did the Japanese. In the 1990s, they pumped monetary and fiscal stimulus into their economy, too, and they didn't suffer a depression. But they never found themselves in a recovery. They stagnated for a decade, and then for another. 20. By saving the banking system, you end up with banks that are quietly holding on to toxic assets in the hope that one day they'll be worth something. By limiting the output gap, you keep the economy from getting so bad that truly radical solutions, such as wiping out hundreds of billions of dollars of housing debt, become thinkable. You limp along. 21. Yet the Obama administration did too little. Its team of interventionist Keynesians immersed in the lessons of the Depression and Japan did too little. Everyone does too little, even when they think they're erring on the side of doing too much. That's one reason "this time" is almost never different. 22. The tendency thus far has been to look at these crises in terms of the identifiable economic factors that make them different from typical recessions. But perhaps the better approach is to look at the political factors that make them turn out the same, that stop governments from doing enough even when they have sworn to err on the side of doing too much. 23. These crises have a sort of immune system. It is never possible for the political system to do enough to stop them at the outset, as it is never quite clear how bad they are. Even if it were, the system is ill-equipped to take action at that scale. The actors comfort themselves with the thought that if they need to do more, they can do it later. And, for now, the fact that this is the largest rescue package anyone has ever seen has to be worth something. 24. Perversely, the very size of the package is part of its problem. With something extraordinary that is nevertheless not enough, the economy deteriorates, and the government sees its solutions discredited and its political standing weakened by the worsening economic storm. That keeps it from doing more. 25. Meanwhile, the opposition's capacity to do more is arguably even more limited, as it has turned against whatever policies were tried in the first place. Add in the almost inevitable run-up in government debt, which imposes constraints in the eyes of the voters and, in some cases, in the eyes of the markets, and an economy that started by not doing enough is never able to get in front of the crisis. 26. These sorts of economic crises are, in other words, inherently politically destabilizing, and that makes a sufficient response, at least in a democracy, nearly impossible. 27. There's some evidence for this internationally. Larry Bartels, a political scientist at Vanderbilt University, examined 31 elections that took place after the 2008 financial crisis and found that "voters consistently punished incumbent governments for bad economic conditions, with little apparent regard for the ideology of the government or global economic conditions at the time of the election." Just look to Europe, where the path to ending the debt crisis and saving the euro zone — the group of nations that use the currency — is clear to most economists but impossible for any European politician. 28. That isn't to say that this time couldn't have been different or that next time won't be. But it is no accident that these crises so often turn out the same, in so many countries, with so many types of governments, who have tried so many kinds of responses. 29. In general, the policies that are vastly better than whatever you are doing are not politically achievable, and the policies that are politically achievable are not vastly better. There were many paths that could have been taken in January 2009, and any one would have made this time a bit different. But not different enough. Not as different as we wish.

"lemons"

1. The lemons problem refers to issues that arise due to asymmetric information possessed by the buyer and the seller of an investment or product, regarding its value. 2. The lemons problem was put forward in a 1970 research paper, "The Market for Lemons," written by George Akerlof, an economist and professor at the University of California, Berkeley. 3. The tag phrase identifying the problem came from the original example of used cars that Akerlof used to illustrate the concept of asymmetric information, as defective used cars are commonly referred to as "lemons."!--break-- 4. The lemons problem is recognized as existing in the marketplace for both consumer and business products, and also in the arena of investing, related to the disparity in the perceived value of an investment between buyers and sellers. 5. The lemons problem is also prevalent in financial sector areas, including insurance and credit markets. For example, in the realm of corporate finance, a lender has asymmetrical and less-than-ideal information regarding the actual creditworthiness of a borrower.

The liquidity trap

1. The liquidity trap is the situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings, because of the prevailing belief that interest rates will soon rise. 2. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline.

Mundell-Fleming Trilemma (deeper explanation)

1. The policy trilemma, also known as the impossible or inconsistent trinity, says a country must choose between free capital mobility, exchange-rate management and monetary autonomy (the three corners of the triangle in the diagram). Only two of the three are possible. A country that wants to fix the value of its currency and have an interest-rate policy that is free from outside influence (side C of the triangle) cannot allow capital to flow freely across its borders. If the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy (side A). And if a country chooses free capital mobility and wants monetary autonomy, it has to allow its currency to float (side B). 2. To understand the trilemma, imagine a country that fixes its exchange rate against the US dollar and is also open to foreign capital. If its central bank sets interest rates above those set by the Federal Reserve, foreign capital in search of higher returns would flood in. These inflows would raise demand for the local currency; eventually the peg with the dollar would break. If interest rates are kept below those in America, capital would leave the country and the currency would fall. 3. Where barriers to capital flow are undesirable or futile, the trilemma boils down to a choice: between a floating exchange rate and control of monetary policy; or a fixed exchange rate and monetary bondage. Rich countries have typically chosen the former, but the countries that have adopted the euro have embraced the latter. The sacrifice of monetary-policy autonomy that the single currency entailed was plain even before its launch in 1999. As with many big economic ideas, the trilemma has a complicated heritage. For a generation of economics students, it was an important outgrowth of the so-called Mundell-Fleming model, which incorporated the impact of capital flows into a more general treatment of interest rates, exchange-rate policy, trade and stability. 4. The model was named in recognition of research papers published in the early 1960s by Robert Mundell, a brilliant young Canadian trade theorist, and Marcus Fleming, a British economist at the IMF. Building on his earlier research, Mr Mundell showed in a paper in 1963 that monetary policy becomes ineffective where there is full capital mobility and a fixed exchange rate. Fleming's paper had a similar result. 5. If the world of economics remained unshaken, it was because capital flows were small at the time. Rich-world currencies were pegged to the dollar under a system of fixed exchange rates agreed at Bretton Woods, New Hampshire, in 1944. It was only after this arrangement broke down in the 1970s that the trilemma gained great policy relevance.

The case for more stimulus

1. The positive case • Accounting identities: not possible for everyone to reduce their debt at once. If balance sheet effects important, then government needs to take on more debt to allow private sector balance sheet repair • In liquidity trap, monetary policy ineffective in translating low interest rates into demand. Government borrowing and spending overcomes this problem 2. Challenging the austerity case • Where's the signs of fears over size of deficits, at least in countries that print their own currencies? • Austerity very likely 'self-defeating': allows potential of economy to decay, slows growth, making debt harder to pay back

Price index (HICP, 1999=1) to 2013

1. The price index of the PIIGS outpaced that of Germany 2. LOOK BACK TO HALL AND FRANZESE TO SEE WHAT THEY THOUGHT EUROZONE WOULD BE LIKE 3. Main attraction of unified currency was an independent central bank that could lower inflation rates 4. What wasn't expected, by and large, was that inflation rates would vary across countries 5. Inflation in Germany has been lower than the rest of the Eurozone, and inflation rates continue to differ. This was similar to the gold standard (go back to all the gold standard stuff) 6. Difference in inflation rates contributed to a Eurozone wide boom-bust cycle.

Time inconsistency

1. The same problem arises less dramatically in the conduct of monetary policy. Consider the dilemma of a Federal Reserve that cares about both inflation and unemployment. According to the Phillips curve, the tradeoff between inflation and unemployment depends on expected inflation. The Fed would prefer everyone to expect low inflation so that it will face a favorable tradeoff. To reduce expected inflation, the Fed might announce that low inflation is the paramount goal of monetary policy. 2. But an announcement of a policy of low inflation is by itself not credible. Once households and firms have formed their expectations of inflation and set wages and prices accordingly, the Fed has an incentive to renege on its announcement and implement expansionary monetary policy to reduce unemployment. People understand the Fed's incentive to renege and therefore do not believe the announcement in the first place. Just as a president facing a hostage crisis is sorely tempted to negotiate their release, a Federal Reserve with discretion is sorely tempted to inflate in order to reduce unemployment. And just as terrorists discount announced policies of never negotiating, households and firms discount announced policies of low inflation. 3. The surprising outcome of this analysis is that policymakers can sometimes better achieve their goals by having their discretion taken away from them.

Karl Polanyi, "The Great Transformation," Chapter 5

1. The step which makes isolated markets into a market economy, regulated markets into a self-regulating market, is indeed crucial. The nineteenth century—whether hailing the fact as the apex of civilization or deploring it as a cancerous growth—naively imagined that such a development was the natural outcome of the spreading of markets. It was not realized that the gearing of markets into a selfregulating system of tremendous power was not the result of any inherent tendency of markets toward excrescence, but rather the effect of highly artificial stimulants administered to the body social in order to meet a situation which was created by the no less artificial phenomenon of the machine. The limited and unexpanding nature of the market pattern, as such, was not recognized; and yet it is this fact which emerges with convincing clarity from modern research. 2. Internal trade in Western Europe was actually created by the intervention of the state. 3. The next stage in mankind's history brought, as we know, an attempt to set up one big self-regulating market. There was nothing in mercantilism, this distinctive policy of the Western nation-state, to presage such a unique development. The "freeing'' of trade performed by mercantilism merely liberated trade from particularism, but at the same time extended the scope of regulation. The economic system was submerged in general social relations; markets were merely an accessory feature of an institutional setting controlled and regulated more than ever by social authority.

Explanation of Strawberry Growers' Situation

1. The strawberry growers existed more or less in isolation from each other prior to the creation of the market. 2. The existence of the market allowed the farmers to act politically in a way they did not before. 3. Market is process in time 4. Granovetter says pay attention to concrete forms of interaction, as they evolve over time. 5. Strawberry growers have a choice in how they use strawberries: table or jam (less preferable).

Oliver E. Williamson, "The Economics of Organization: The Transaction Cost Approach"

1. The transaction cost approach to the study of economic organization regards the transaction as the basic unit of analysis and holds that an understanding of transaction cost economizing is central to the study of organizations. 2. Economizing is accomplished by assigning transactions to governance structures in a discriminating way. The approach applies both to the determination of efficient boundaries, as between firms and markets, and to the organization of internal transactions, including the design of employment relations. 3. According to transaction-cost approach, "skills acquired in a learning-by-doing fashion and imperfectly transferable across employees need to be embedded in a protective governence structure...... 4. Human assets can also be measured by 1) degree of firm-specificy and 2) difficulty of individual productivity measurability. Low of 1 and 2 is a internal spot labor market. Low 1/High 2 is a primitive team. High 1/Low 2 is an obligational market with defined rules for performance. High1/High 2 is the relational team where assets are specific and individual output hard to measure. 5. Williamson asked under what circumstances economic functions are performed within the boundaries of hierarchical firms rather than by market processes that cross these boundaries. His answer, consistent with the general emphasis of the new institutional economics, is that the organizational form observed in any situation is that which deals most efficiently with the cost of economic transactions. Those that are uncertain in outcome, recur frequently, and require substantial "transaction-specific investments"-for example, money, time, or energy that cannot be easily transferred to interaction with others on different matters-are more likely to take place within hierarchically organized firms. Those that are straightforward, nonrepetitive, and require no transaction-specific investment-such as the one-time purchase of standard equipment-will more likely take place between firms, that is, across a market interface. 6. In this account, the former set of transactions is internalized within hierarchies for two reasons. The first is "bounded rationality," the inability of economic actors to anticipate properly the complex chain of contingencies that might be relevant to long-term contracts. When transactions are internalized, it is unnecessary to anticipate all such contingencies; they can be handled within the firm's "governance structure" instead of leading to complex negotiations. The second reason is "opportunism," the rational pursuit by economic actors of their own advantage, with all means at their command, including guile and deceit. Opportunism is mitigated and constrained by authority relations and by the greater identification with transaction partners that one allegedly has when both are contained within one corporate entity than when they face one an- other across the chasm of a market boundary.

Karl Polanyi, "The Great Transformation," Chapter 12

1. The true implications of economic liberalism can now be taken in at a glance.Nothing less than a self-regulating market on a world scale could ensure the functioning of this stupendous mechanism. Unless the price of labor was dependent upon the cheapest grain available, there was no guarantee that the unprotected industries would not succumb in the grip of the voluntarily accepted taskmaster, gold. The expansion of the market system in the nineteenth century was synonymous with the simultaneous spreading of international free trade, competitive labor market, and gold standard; they belonged together. No wonder that economic liberalism turned almost into a religion once the great perils of this venture were evident. 2. The great variety of forms in which the ''collectivist'' countermovement appeared was not due to any preference for socialism or nationalism on the part of concerted interests, but exclusively to the broad range of the vital social interests affected by the expanding market mechanism. This accounts for the all but universal reaction of predominantly practical character called forth by the expansion of that mechanism.

Karl Marx, "Capital: a critique of political economy," Chapter 26

1. The unequal division of capital that underlay capitalism resulted from in his words "the historical process of divorcing the producer from the means of production" 2. To Marx, England stood out as the prime example of this phenomenon by which people lost their livelihoods to capitalists in the process of primitive accumulation

Hall and Franzese

1. Their prediction was wrong 2. No one discrete moment of coordination or lack thereof among employees

"free markets" vs. "state intervention"

1. These terms are massively confusing 2. Market economies are constituted by the state e.g. notes and coins made by the state. Monetary systems set up by the state define money. No market economy has a monetary system outside of state control. Property also defined by the state. Market economies are constituted by state action. This is a course about state-market interaction.

The Institutional Solution

1. Third-party enforcement: 2. North (258): "an impersonal body of law, courts, and the coercive power to enforce judgments are fundamental factors in permitting the complex contracting essential to a world of specialization and impersonal exchange."

2008 crisis: money not multiplying

1. This credit crunch was transmitted to the real economy. 2. The money multiplier declined sharply in 2008.

Fred Block, "Crisis and renewal: the outlines of a twenty-first century new deal"

1. This paper attempts to combine the insights in these bodies of scholarship to situate the 2007-2009 crisis in relation to long-term development patterns. It also seeks to outline what kind of new 'regime of accumulation' could be constructed in the aftermath of the crisis. While the usage here diverges somewhat from the Regulation theorists, it encompasses the institutional reforms necessary to undergird a new period of sustained economic growth. 2. The Fordist regime of accumulation in the USA, in short, rested on mass production of automobiles and other consumer durables by unionized, semi-skilled workers whose income kept pace with productivity advances. The purchasing power of these production workers helped to sustain a pattern of demand based on suburban growth, automobiles and single family homes. These arrangements were supported by significant federal investments in building the highway system and in maintaining supplies of cheap petroleum. These sources of demand were supplemented by continuing high levels of military production, even during periods between hot wars. The large corporations who produced most of the consumer durables were able to finance expansion by reinvesting profits, so pools of available financial capital were directed elsewhere in the economy. A system of consumer-oriented finance, centring on home mortgages, supported the mass consumption economy 3. The strong global dimension is important because the infrastructure of the global economy has historically depended on a hegemonic power—England in the nineteenth century and the USA from World War II onward (Polanyi, 2001 [1944]). Large US corporations exported capital in the form of foreign direct investment as a way to participate in overseas growth opportunities and the Bretton Woods system of 'embedded liberalism' provided an infrastructure in which strong US economic growth was reinforced by high growth rates overseas (Ruggie, 1982). 4. Entrenched business interests such as the auto companies, the petroleum industry, defence firms and big financial institutions worked hand-in-hand with conservative political leaders to construct a 'free market' regime of accumulation designed to bolster business profits at the expense of all other social groups. The strategy that they pursued was to reverse almost all of the key reforms of Roosevelt's New Deal. The accord between business and labor was jettisoned, the social safety net was weakened, and the share of income going to the top 1% of households increased dramatically as a result of changes in tax law, changes in financial regulation, and new corporate compensation practices 5. However, this project lacked a way to generate significant new productive investments in the economy. This is what made it an ersatz regime; it relied for economic growth on almost all of the same sources of demand that had been dominant under Fordism—single family housing, automobiles and defenc production. The only exception to this—new investments by business and households in computer-based technologies—was an accidental rather than an intrinsic part of a new regime of accumulation. 6. These efforts were ultimately an exercise in policy nostalgia that worked only by squeezing some additional life out of the Fordist regime of accumulation. This exercise relied on a combination of domestic Keynesian measures and increased borrowing, including massive borrowing from abroad. The expansions in the 1980s and 1990s were surprisingly vigorous because of the contingent and unexpected growth in the computer industry that provided unusually strong support for employment, investment and demand. The computer boom in the 1980s centered on the rapid growth in the market for personal computers, while that in the 1990s was driven by the take off of web-based computer applications that kept personal computer sales strong and led to a new round of investment in software and web applications. 7. Another continuity was the resort to domestic Keynesian stimulus as a means to bolster employment growth. Both Reagan and George W. Bush presided over quite substantial increases in defence spending, whereas the Clinton Administration used minimum wage increases and expansion in the Earned Income Tax Credit to expand purchasing power at the bottom of the income distribution. However, the most important factor was the more rapid growth of consumer borrowing in all three of these economic expansions shift of income towards the top 10% started in motion, the only way that most consumers could maintain their standard of living was by taking on increased debt. Since there was a strong upward trend in housing prices across these expansions, consumers were able to borrow against their increasing equity in housing—using their homes as automated teller machines. This dramatic expansion in consumer credit worked to breathe new life into the exhausted model of suburban-based mass consumption, but by the 2000s, the fragility of the strategy was increasingly apparent. To keep things going, there was an unprecedented expansion of credit—often on predatory terms—to urban minorities who had previously been excluded from access to mortgage finance. When this subprime lending boom suddenly halted, so, also did the whole economic expansion because of its dependence on ever-increasing debt levels 8. All three of these economic expansions also depended on foreign borrowing. The pattern was set in the early 1980s when the Reagan Administration was trying to revive the economy after the 1981-1982 downturn. The combination of massive tax cuts and increased military spending assured that the federal budget deficit would increase and the US international payments were in chronic deficit because imports greatly exceeded exports and the US government was spending vast sums overseas on military and political initiatives. The Reagan officials were surprised to find that other nations, particularly in Asia, were willing to loan the USA the funds to cover both of these chronic deficits. 9. This began a pattern that continued for the next quarter century. By all accepted theories of international economics, nations that run balance of payments deficits are supposed to carry out adjustments that move their accounts back towards balance. However, the US simply ignored this fundamental principle and foreigners continued to finance the US deficits. They did so because the obvious alternative—a sharp contraction in the US economy designed to adjust its payments balance—would have led to a global economic slowdown, resulting in heightened unemployment, particularly in the Asian nations that ran chronic trade surpluses with the USA. In short, the world colluded in pretending that the US deficit was not a serious problem

Contrast: Marx on "Primitive Accumulation"

1. This primitive accumulation plays in Political Economy about the same part as original sin in theology. Adam bit the apple, and thereupon sin fell on the human race. Its origin is supposed to be explained when it is told as an anecdote of the past. In times long gone-by there were two sorts of people; one, the diligent, intelligent, and, above all, frugal elite; the other, lazy rascals, spending their substance, and more, in riotous living. The legend of theological original sin tells us certainly how man came to be condemned to eat his bread in the sweat of his brow; but the history of economic original sin reveals to us that there are people to whom this is by no means essential. Never mind! Thus it came to pass that the former sort accumulated wealth, and the latter sort had at last nothing to sell except their own skins. 2. Karl Marx, Capital Note: Where did split between capitalists (with capital) and proletariat (without capital) come from? Marx criticized the fable of diligent capitalists saving up capital.

Natural metaphors for self-regulation

1. Townsend uses the example of goats and dogs on Galapgos Island. 2. Mariners left goats to feed themselves. The goats caused problems until dogs were put on the island. 3. This led to a natural balance between predator and prey. 4. Nobody does anything to ensure balance. 5. Smith didn't think it needed to be this awful. 6. Nevertheless, as a result of this horrible thinking, policymaking was needed to remove the barriers to the commodification of labor

Ruggie's "Embedded Liberalism"

1. Trying to understand international economic regimes 2. Power ('hegemonic stability theory'): e.g. UK at heights of its power set up monetary system. Where there is one, same for the US. The hegemon is interested in stability. Ruggie says the focus is on power to the exclusion of purpose. 3. Purpose: Ruggie says you need to pay attention to the purposes powerful countries pursue. 3. "Embedded liberalism" (post-WWII until ~1980): liberalism stands in for relatively free trade. Liberalism is structured to ensure minimal disruption. Embeddedness comes from Polanyi. Some kinds of goods and services compete in a complementary fashion e.g. Starbucks competes with Pink: money spent on shirts is money not spent on coffee. Economists refer to this as monopolistic competition. In this example, companies are monopolies, even though in reality they are not. Monopolistic competition exists when products aren't exactly identical. Other kinds of goods are commodities and compete only on price. For commodities, there is price competition, whereas in monopolistic competition, there's competition on quality. A. Recognisably liberal international market order B. Structured to ensure minimal domestic disruption a. Trade arrangements: Ruggie argues postward trade was set up to enable monopolistic comeptition e.g. Ford and BMW. Trade is complementary, because they compete under monopolistic competition. Ruggie argues that the postwar trade order was not liberal when it came to commodities. He takes this as the purpose of the post-WWII order. Ruggie suggests that the international regime of any period results from a combination of purpose and power. b. Monetary arrangements

GDP in US, UK and Euro Area

1. US and UK saw slightly negative growth in 2008: Euro countries, slightly positive 2. All went negative in 2009

Key elements of interwar economic history

1. US boom turns to bust in late 1929, leads to Great Depression: collapse of world trade and output, massive bank problems 2. Restoration (1924-1926) and subsequent breakdown (1931-1936) of international gold standard (guaranteeing convertibility of major international currencies into fixed quantities of gold) 3. Government efforts to fight depression Note: second part of story is the decline of the gold standard. First it was restored then discarded, followed by government efforts to fight depression (THIS IS AWFULLY SIMILAR TO STORY OF EURO, WOODRUFF WOULD SAY)

Basic story of Broz

1. US economy growing and becoming more integrated, yet it's not the dominant currency 2. Banks want to make money off of being the international currency and push for the creation of the Federal Reserve

III. A Consequential Minsky Process: The US Subprime Crisis

1. US house prices peaked in 2006 after a long run-up 2. The subprime crisis was an outgrowth of a house price bubble, and the Fed lowered interest rates, and lenders made mortgages available to subprime borrowers who were less likely to pay

End of Bretton Woods: August 1971

1. US situation looking unsustainable A. Trade deficit expanding--Triffin dilemma worsening B. US President Nixon pushing reflation of economy for re-election, prices rising, US becoming less competitive C. Leads to run on dollar 2. August 1971: there's a run on the dollar A. Nixon stops convertibility of dollars into gold B. Pressures trading partners to "revalue" (make currencies stronger against dollar) [Smithsonian Agreement, December 1971] C. By March 1973, system of floating rates And so is borne a system of macroeconomic autonomy and free-flowing capital, and consequently, floating exchange rates. Nevertheless, there are capital controls in the form of limits to convertibility.

Volume of World Trade and World GDP

1. US stock market bubble bursts, Oct-Nov 1929 2. World GDP declines 18% in two years 3. Trade declined more than GDP

'Process tracing' Hall's argument (South)

1. Uncoordinated wage bargaining leads to 2. Wage gains outstrip productivity leads to 3. Weak exports, strong domestic demand

Decline of Bretton Woods: Triffin dilemma

1. Under Bretton Woods, other currencies linked to dollar, dollar linked to gold 2. As economies grow, need more money (remember MV=PQ) 3. Implies US has to pump out dollars to back creation of other currencies 4. But this can leave US without enough gold backing for dollars: this is the key to the end of the Bretton Woods system

Critiques of V.o.C. anti-convergence arguments

1. Underestimate power of international economic trends - "race to the bottom" not the only mechanism 2. Underestimate influence of political institutions 3. Both of the above lapses

Possible pathologies of "shareholder value"

1. Undermines CMEs, because it pushes firms into short-term capital markets 2. Short-termism, because firms focus on delivering money to shareholders e.g. in this environment, better for Apple to return a handsome dividend than reinvest. Apple holds so much cash to avoid tax and, perhaps, to expand production capacity. 3. Bubbles e.g. 2000s. Equity compensation is dangerous. 4. Corporate governance scandals: misleading earning figures are released to boost valuation of the comapny.

Week 7

1. Varieties of Capitalism 2. For reading, focus through section 1.4 3. Hall and Soskice made the most famous contribution to comparative politics in the last 20 years 4. Market economy doesn't exist without the state 5. Market economies can be constituted in a wide variety of ways 6. The duo summed up lots of literature about many different varieties of capitalism

Example: Germany 1990s-2005

1. Wage problem (keep wages in line with productivity) -Erosion of wage coordination (but to permit more wage restraint): that is to say, wage coordination breaks down, and even the coordinated wage is kept low. 2. Work problem (employment, unemployment benefits) - Dualisation of labour market: the labor market is segmented with one part with strong protections and the other without strong protections. 3. Total factor productivity (profitable use of labour and capital) = original V.o.C - (Palier and Thelen 2010): Outsourcing and offshoring around a core of skilled labour THUS Net effect: depressed domestic demand, reliance on foreign demand (a subterranean factor in the V.o.C.) Note: ask what breaks apart VoC

Peter A. Hall, Robert J. Franzese, Jr., "Mixed Signals: Central Bank Independence, Coordinated Wage Bargaining, and European Monetary Union"

1. We focus on three issues. How should the effects of central bank actions on the economy be conceptualized? Do higher levels of central bank independence invariably result in better economic performance? Will establishing an EMU equipped with such a bank improve economic well-being in its member states? 2. Our core contention is that many of the effects of central bank independence operate through a signaling process that takes place between the bank and economic actors. 3. Most analyses assume an effective signaling process, but we suggest that this is unrealistic and that the effectiveness of the process more likely depends on a broader set of institutional conditions, including, most notably, the organization of wage bargaining. 4. We argue that, where wage bargaining is more coordinated, this signaling process is likely to be more effective, so that increasing the independence of the central bank can lower the long-run rate of inflation at relatively low unemployment costs. Where bargaining is less coordinated, however, increases in central bank independence may lower the rate of inflation only at the cost of substantially higher levels of unemployment. 5. This analysis has especially interesting implications for the monetary union currently being contemplated in Europe. The EMU is to be built around a European central bank whose general structure and level of independence are modeled on the German Bundesbank. Many hope that, as a consequence, the new union will emulate the historic performance of the German system. 6. Our analysis suggests that such aspirations are unlikely to be realized, because the German system has depended on levels of wage coordination that the EU is unlikely ever to acquire. On the one hand, the leadership of the EU has yet to show any real interest in acquiring such institutions, as indicated by the halting nature of the steps toward developing a Social Charter. On the other hand, even if they did show interest, such institutions would be difficult to secure. Wide disparities in the organization of workers and employers across the EU mean that wage bargaining could not be coordinated across the continent without large-scale reorganization; and the few efforts made by trade unions or employers to reorganize wage bargaining on a European level have been singularly unsuccessful. As a result, to secure low rates of inflation, a European central bank may have to resort to relatively high levels of unemployment because it will lack the effective signaling process provided by a continent-wide system of wage coordination. 7. Furthermore, the common view that all nations will gain from the EMU may be wrong.Our analysis suggests that the move to monetary union may improve the economic performance of some nations but is likely to erode the economic performance of others. The precise effects experienced by each nation will be determined by the effectiveness of its existing institutions relative to those it acquires by joining the EMU. 8. To return finally to the German case, the better guide to what we can expect from EMU may not be the familiar image of Modell Deutschland but Germany's experience with unification in the years just after 1989. 9. In this context, the lessons that follow from the example of German unification are not altogether encouraging.The German system itself experienced severe strain as a result of unification. Two sources of that strain deserve emphasis here. First, efforts to incorporate East Germany into the existing industrial-relations system proved highly taxing and only partly successful. One result was high levels of industrial conflict, notably in the spring of 1993 when employers challenged the extension of the wage bargaining system to the former East Germany. Second, unification also provoked conflict between the federal government and the Bundesbank, which customarily responds not only to wage bargains, as we have emphasized here, but also to the fiscal policies of the government. When the efforts of the latter to nance uni cation resulted in fiscal and monetary expansion, the Bundesbank responded with high interest rates to encourage fiscal restraint and dampen in inflationary pressures. The consequences were far from ideal for the German or European economies. 10. The EMU will pose similar, if less severe, challenges.It will disrupt the processes of signaling and coordination long established between central banks and wage bargainers in some nations—an effect that may inspire broader changes in their industrial relations systems. It will require the development of new relationships between the European central bank and the fiscal authorities of each nation, relationships that have already been the subject of considerable controversy. Moreover, in the context of continuing high unemployment, many member governments may seek more expansionary policies precisely when the new European central bank is seeking to establish its credibility with relatively rigorous monetary policies. One effect is likely to be higher levels of unemployment than many proponents of the EMU currently envisage. Another may be intensified pressure for further institution building to cope with the dilemmas of coordinating fiscal and monetary policy.

Akerlof, George A. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism."

1. We have been discussing economic models in which "trust" is important. Informal unwritten guarantees are preconditions for trade and production. 2. Where these guarantees are indefinite, business will suffer -as indicated by our generalized Gresham's law. 3. This aspect of uncertainty has been explored by game theorists, as in the Prisoner's Dilemma, but usually it has not been incorporated in the more traditional Arrow-Debreu approach to uncertainty.' 4. But the difficulty of distinguishing good quality from bad is inherent in the business world; this may indeed explain many economic institutions and may in fact be one of the more important aspects of uncertainty.

Karl Polanyi, "The Great Transformation," Chapter 6

1. We recall our parallel between the ravages of the enclosures in English history and the social catastrophe which followed the Industrial Revolution. Improvements, we said, are, as a rule, bought at the price of social dislocation. If the rate of dislocation is too great, the community must succumb in the process. The Tudors and early Stuarts saved England from the fate of Spain by regulating the course of change so that it became bearable and its effects could be canalized into less destructive avenues. But nothing saved the common people of England from the impact of the Industrial Revolution. A blind faith in spontaneous progress had taken hold of people's minds, and with the fanaticism of sectarians the most enlightened pressed forward for boundless and unregulated change in society. The effects on the lives of the people were awful beyond description. Indeed, human society would have been annihilated but for protective counter-moves which blunted the action of this self-destructive mechanism. 2. Social history in the nineteenth century was thus the result of a double movement: the extension of the market organization in respect to genuine commodities was accompanied by its restriction in respect to fictitious ones.While on the one hand markets spread all over the face of the globe and the amount of goods involved grew to unbelievable dimensions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labor, land, and money. While the organization of world commodity markets, world capital markets, and world currency markets under the aegis of the gold standard gave an unparalleled momentum to the mechanism of markets, a deep-seated movement sprang into being to resist the pernicious effects of a market-controlled economy. Society protected itself against the perils inherent in a self-regulating market system—this was the one comprehensive feature in the history of the age.

Weaponized market panic

1. Weaponised market panic: lender of last resort makes political demands in return for calming markets 2. It is what the LOLR demands, NOT what markets demand, that drives policy outcomes

Williamson's conclusion

1. When transaction costs are high (for instance, when specific assets involved) hierarchy preferred to market 2. Your employees can't "hold you up" the way an outside firm would Note: inside firm, you have recourse to hierarchy e.g. build a fence. If employee does a bad job, is fired. Williamson thinks policing and regulatory costs, asset specificity and credible commitments important to defining the boundary of the firm. He thinks of market economies defined by bargaining.

Political mystery of austerity's victory

1. Why isn't stimulus policy more popular? • Some of have held that politicians love to spend money in search of votes -- why not do it now, when there's a credible economic justification? • The victims of austerity are concentrated and aware, not diffuse 2. How does the ECB credibly weaponise market panic? • Possible explanations • Power of ideas • Financial interests • My view: In Eurozone, positive feedback between veto points and the power of ideas in key jurisdictions: Woodruff thinks this to do with ordoliberalism

Granovetter's alternative

1. Williamson offers "undersocialized" account 2. Overestimates success of hierarchy, ignores possibilities of nonhierarchy 3. "Embeddedness" -- behaviour is often thoroughly constrained by ongoing social relations Note: Williamson sees people as atoms, when in fact people are embedded in social networks. Reputation can be used for deception. Granovetter thinks Williamson's portrait is overdrawn. Social relations such as friendships constrain exchange. Granovetter thinks that the boundaries of firms are the boundaries of communities policed by formal and informal mechanisms.

Growth in Domestic Demand, 1999-2009 (%)

1. Yes, Germany had lower domestic demand growth than the rest of the Eurozone 2. But Portugal and Italy did too

Double Movement, cont'd

1. [The double movement] can be personified as the action of two organizing principles in society... The one was the principle of economic liberalism, aiming at the establishment of a self-regulating market, relying on the support of the trading classes, and using largely laissez-faire and free trade as its methods; the other was the principle of social protection aiming at the conservation of man and nature as well as productive organization, relying on the varying support of those most immediately affected by the deleterious action of the market—primarily, but not exclusively, the working and the landed classes—and using protective legislation, restrictive associations, and other instruments of intervention as its methods. 2. Chapter 11

The "double movement"

1. [The double movement] can be personified as the action of two organizing principles in society... The one was the principle of economic liberalism, aiming at the establishment of a self-regulating market, relying on the support of the trading classes, and using largely laissez-faire and free trade as its methods; the other was the principle of social protection aiming at the conservation of man and nature as well as productive organization, relying on the varying support of those most immediately affected by the deleterious action of the market—primarily, but not exclusively, the working and the landed classes—and using protective legislation, restrictive associations, and other instruments of intervention as its methods. 2. Chapter 11 3. I.e. double movement has two parts: 1) economic liberalism: creation of the self-regulating market, backed by the trading class; 2) social protection, backed by the working and landed classes. Woodruff doesn't think that Polanyi's definition of a commodity is particularly good.

Real appreciation

1. an increase in the purchasing power of a currency 2. prices higher in terms of international currency 3. In this context, what happens when domestic inflation goes faster than currency depreciation - the process that makes a currency overvalued

Over any period, amount money spent = value of stuff bought

1. £1 spent 1 time = 1 item bought at £1 OR 2 items bought at 50p 2. 50p spent 2 times = 1 item bought at £1 OR 2 items bought at 50p

Bond prices and policy change 1

1: Enforcing austerity (March-May 2010) 2. Bond prices rise in response to austerity for PIGS (excluding Italy)

Two transformations 3

2. Industrial revolution: application of expensive machinery for production of goods. Needed to be sure as an industrialist that you can buy what you need to produce output. A. Expensive machines -> need everything on sale (unregulated national market) B. Including FICTITIOUS COMMODITIES: Idea of fictitious commodities is important for Polanyi. Polanyi defines a commodity as something produced for sale. Polanyi says this doesn't apply to land (not produced), labor (we labor by nature) and money (comes from banking). These commodities are very vulnerable to the price mechanism. a. Commodity = produced for sale b. Not true of land, labour, money c. Shared feature: supply contraction destroys capacity for subsequent supply expansion e.g. contraction of labor means that people die or if land lies fallow, it must be redeveloped. Polanyi argued that the Industrial Revolution created a situation in which fictitious commodities needed to be on sale constantly. And fictitious commodities went on sale as part of the project to build the self-regulating market.

Problems with adjustment under gold standard and the post-WWII order (Polanyi)

2. Polanyi A. Can imply severe deflation B. Competitiveness strains may prompt trade protectionism Thus, external and internal balance hard to reconcile--Ruggie sees post-WWII order as answer to this problem

Where the money came from: the boom in subprime lending

2001: less than 10% of new housing loans are subprime 2006: 40% of new housing loans are subprime

Bond prices and policy change 2

2: Disciplining Italy & Spain, constitutionalizing austerity, May-September 2011 2. Bond prices continue to shoot up in response to austerity

Bond prices and policy change 3

3: "Whatever it takes" - A conditional end to panic 2. Bond prices finally start to come after pledge by Mario Draghi to do whatever it takes to fix the crisis

Where does rise of shareholder value come from? 3

4. Rising opportunity costs of using stock to cement strategic partnership, use instead for 1. Acquisition currency 2. Compensation schemes 3. Finance investments Note: In CMEs, there's a pattern of cross-shareholding. But as stock becomes more valuable, can be used for other things.

Zero lower bound

A situation that occurs when the Federal Reserve has lowered short-term interest rates to zero or nearly zero. When interest rates are this low, new methods of economic stimulus must be examined and implemented.

Polanyi's project

A. "To trace the institutional mechanisms of the downfall of a civilization may well appear as a hopeless endeavor. 1. Yet it is this we are undertaking." TGT, p. 4 B. Project unfolds in three phases 1. Rise of 'self-regulating' market governed by prices 2. Protective reaction 3. Catastrophic consequences of contradiction between markets and protection

collateralized debt obligations (CDO)

A. A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation (CDO) is so-called because the pooled assets - such as mortgages, bonds and loans - are essentially debt obligations that serve as collateral for the CDO. The tranches in a CDO vary substantially in their risk profile. The senior tranches are relatively safer because they have first priority on the collateral in the event of default. As a result, the senior tranches of a CDO generally have a higher credit rating and offer lower coupon rates than the junior tranches, which offer higher coupon rates to compensate for their higher default risk. B. As many as five parties are involved in constructing CDOs: 1. Securities firms, who approve the selection of collateral, structure the notes into tranches and sell them to investors; 2. CDO managers, who select the collateral and often manage the CDO portfolios; 3. Rating agencies, who assess the CDOs and assign them credit ratings; 4. Financial guarantors, who promise to reimburse investors for any losses on the CDO tranches in exchange for premium payments; and 5. Investors such as pension funds and hedge funds. C. The earliest CDOs were constructed by Drexel Burnham Lambert - the home of former "junk bond king" Michael Milken - in 1987 by assembling portfolios of junk bonds issued by different companies. Securities firms subsequently launched CDOs for a number of other assets with predictable income streams, such as automobile loans, student loans, credit card receivables and even aircraft leases. However, CDOs remained a niche product until 2003-04, when the U.S. housing boom led the parties involved in CDO issuance to turn their attention to non-prime mortgage-backed securities as a new source of collateral for CDOs. D. CDOs subsequently exploded in popularity, with CDO sales rising almost 10-fold from $30 billion in 2003 to $225 billion in 2006. But their subsequent implosion, triggered by the U.S. housing correction, saw CDOs become one of the worst-performing instruments in the broad market meltdown of 2007-09. The bursting of the CDO bubble inflicted losses running into hundreds of billions on some of the biggest financial institutions, resulting in them either going bankrupt or being bailed out through government intervention, and contributing to escalation of the global financial crisis during this period.

Hyman Minsky's theory of financial crises 2

A. A theory on how changes in balance sheets (assets and liabilities) drive phases of boom-bust cycle B. Phases in the process 1. Displacement: External event touches off investment wave i.e. external event increases value of a security e.g. a new invention. Krugman (1995) talks about effects on emerging market economies of IMF reforms announced. This can set off a boom, per Wade on the Asian financial crisis. 2. Boom: expectations of a sustained rise in asset prices become entrenched: with more liabilites and fewer assets, there is less equity. • Liquidity (availability of credit) increases • Leverage increases (debt-equity ratio increases)

Exchange-Rate Protectionism 1

A. Imagine Japan wants to lower its exchange rate B. Dollars are flowing in, because of a big trade surplus C. The central bank has two options: 1. The central bank could not purchase dollars and let its currency appreciate. As a result, companies such as Nissan use dollars to buy yen to pay employees. 2. The central bank creates more yen and uses that to buy dollars. The result is a lower price of yen, a higher price of dollars. Of course, this mechanism only works by injecting yen into the economy, so there's inflation and real appreciation of the yen.

Exchange-Rate Protectionism 2

A. Imagine Japan wants to lower its exchange rate B. Dollars are flowing in, because of a big trade surplus C. The central bank has two options: 1. The central bank could not purchase dollars and let its currency appreciate. As a result, companies such as Nissan use dollars to buy yen to pay employees. 2. The central bank creates more yen and uses that to buy dollars. The result is a lower price of yen, a higher price of dollars. Of course, this mechanism only works by injecting yen into the economy, so there's inflation and real appreciation of the yen. 3. Sterilization remains as an option, if the government still wishes to lower the value of its currency

Understanding "real appreciation" 2

After inflation 1. Without peg: 1$=2P, Devaluation can keep pace with inflation 2. With peg: 1$=1P, Inflation outstrips devaluation = Real appreciation

Two Solutions To Agency Problem

Agency problem: how to align interests of owners/investors and management i.e. how do principals get agents to act in their best interest? Note agency problem solution directly affects finance structure 1. Liquidity (market for corporate control, public info) -> Short-term capital e.g. shareholders sell stock to punish management, and investors insert new management, which acts responsibly. 2. Monitoring (networks, inside info) -> Long-term capital Which solution gets adopted has important implications for firm financing. Market for corporate governance implies short-termism. Long-term finance arises out of monitoring/networks.

Sources of demand

All stuff bought = 1. Stuff bought by consumers + 2. Stuff bought by government + 3. Net stuff bought by foreigners 4. Stuff bought for investment More formally, GROSS DOMESTIC PRODUCT (GDP) = 1. HOUSEHOLD FINAL CONSUMPTION 2. GOVERNMENT FINAL CONSUMPTION 3. TRADE BALANCE 4. GROSS FIXED CAPITAL FORMATION

asymmetric information

Asymmetric information, sometimes referred to as information failure, is present whenever one party to an economic transaction possesses greater material knowledge than the other party.

barriers to entry

Barriers to entry are the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business.

Why does Keynes say markets are unstable?

Because opinion as well as opinion of opinion change

Understanding "real appreciation" 1

Before inflation 1. Without peg: 1$=1P 2. With peg: 1$=1P

Pre-Stock Market Business Operations

Before stock markets, businesses were owned by individuals who would turn to friends to invest

UK and Ireland Financial Crisis Experience

Big difference: Ireland doesn't have its own central bank

The magic of leverage

Borrowing money can be magical. Both losses and gains are magnified, a fact that can lead to liquidation. 1. Case 1: Spend $1 on asset, goes up 10% => My return is $.10, or 10% 2. Case 2: Spend .10 of my own money and .90 of borrowed money on asset, goes up 10% => my return is $.10, or 100% 3. Case 3: Spend $1 on asset, goes down 10% => my loss is 10% 4. Case 4: Spend .10 own and .90 borrowed, asset goes down 10% => my loss is 100%, AND I still owe .90: may have to sell this or other assets to get my leverage down ➔Leverage goes up when credit is easy and risks of being left out (in boom) exceed risks of being caught out (in bust) 5. That is to say, leverage is the tooth fairy on the way up, and a scary monster on the way down. When it's easier to borrow, firms become more levered. Leverage on the way up turns a worthless tooth into gold, while leverage on the way down turns gold into a worthless tooth.

How strategic interaction in skills acquisition plays out

Both workers and employees would prefer specific skills and higher wages. 1. Nevertheless, when faced with decision, employer will dismiss or badger worker into lower wages. 2. Likewise, worker's best bet is to invest in general skills Consequently: 1. Best outcome: Worker gets well paid, employer gets skilled labour 2. Outcome without coordination: Workers switch jobs easily, but less skilled for employers Of course, labor-capital relationship isn't only coordination problem. Also arises in corporate governance

Minsky process, continued

Bust: the big unwinding • Shock to availability of credit means speculative and Ponzi financiers have to liquidate • Fisher: debt deflation That is to say, the virtuous circle turns vicious. Minsky's big insight is that a transformation in balance sheets creates a house of cards.

Mundell-Fleming Trilemma 1

Can pick two of three 1. Macroeconomic autonomy e.g. set interest rates and money supply as country wishes 2. Fixed exchange rate e.g. gold standard 3. Free flow of capital i.e. investors can move money freely

Central Banks replace private sector lending

Central banks replaced private sector lending and bought up financial assets: true of Fed, Bank of England, ECB

The Eurozone's pre-crisis demand model

Change in Eurozone 18 GDP and components, 2007 vs 1999 (mln 2005 €). Note this is the share in total output growth 1. Trade surplus: 8.4% 2. Investment: 27.8% 3. Govt final consumption: 17.5% 4. Household final consumption: 45.4% GDP: +19.0% (2.2% CAGR)

Takeaway

Changes in European demand because of austerity brought on by EDB influenced by Germans

Complementarities: Agency Problem & Skills Problem

Complementarity: Feasible solution to skills coordination problem depends on agency problem solution Note agency problem solution directly affects finance structure, which in turn affects the skills solution problem 1. Liquidity (market for corporate control, public info) -> Short-term capital -> General skills (and no employer commitment) 2. Monitoring (networks, inside info) -> Long-term capital -> Specific skills (and employer commitment)

Hall and Soskice, 2001

Contrast two varieties of capitalism: liberal market economies (LMEs) and coordinated market economies (CMEs) based on their solutions to the coordination problems of "strategic interaction" and "credible commitment" in the economy

Areas Where Coordination Problems Arise For VoC 1

Corporate governance system (relationship between owners and managers of firm) Aside: agency theory

The Politics of Bubbles

Could/should central banks prick bubbles?

The displacement: changing home lending practices 2

Default rates going down in early 2000s • Lenders design mortgages that A. Make loans available to "subprime" borrowers B. Because they only make sense if refinanced 1. In effect, make it easier for people to buy houses they "can't afford" by relying on future appreciation 2. Supercharged collateral cycle 3. Thus, homeowners engaged in Minsky's "speculative finance"

The displacement: changing home lending practices 1

Default rates going down in early 2000s • Lenders design mortgages that A. Make loans available to "subprime" borrowers: lenders based this decision on the fact that subprime borrowers historically repaid. Lenders only had to check to see if borrower could repay loans for one year. Rates would rise dramatically in the second year. The home price would rise, and the borrower would pay off the old loan and borrow a new loan. This process rested on the ability of subprime borrowers to refinance. B. Because they only make sense if refinanced • In effect, make it easier for people to buy houses they "can't afford" by relying on future appreciation • Supercharged collateral cycle

Final Conclusion

ECB 'mission creep' in the course of the crisis

Birth of "political economy"

Early 19th-century embrace of natural metaphors for society (Malthus, Townsend) A. vs. Smith (Wealth of Nations 1776) "A broad optimism pervades Smith's thinking, since the laws governing the economic part of the universe are consonant with man's destiny as are those that govern the rest. No hidden hand tries to impose upon us the rites of cannibalism in the name of self-interest."(TGT 112 [Chapter 10]). B. Townsend and others view ferocious balancing mechanisms of nature as appropriate for society as well. THIS CONNECTS WELL WITH CALLS FOR AUSTERITY

IV. Towards recovery

Elements of recovery, 1932-

All readings week 3

Emphasize strong role of state in creating the market

Where does rise of shareholder value come from? 1

Entrepreneurs discover, exploit mismatch of de jure and de facto firm obligations - But where do they get the money? - Creates real "market for corporate control," exerts pressure on incumbents Note: entrepreneurs particularly exploit this mismatch through hostile takeovers. There was a wave of takeovers in the 1980s. Money for hostile takeovers comes from borrowing innovations e.g. junk bonds. Firms are mortgaged, and bonds are issued to cover the purchase of the firm, and the firm ends up with a lot of debt and the eventual sellers with a lot of profit.

Interest rates on 10-yr gov't bonds

Euro leads to convergence in rates, persists until financial crisis at which they spread out sharply

Spreads on 10-year gov't debt

Euro leads to convergence in rates, persists until financial crisis at which they spread out sharply

The Eurozone's post-crisis demand model

Eurozone 12 GDP and components, 2015 vs. 2009 1. Trade surplus: +440% (64% of growth) 2. Investment: +3 3. Govt final consumption: +2.6% 4. Household final consumption: +1.5% Note: Europe had much lower growth since the crisis. 64% of the growth came from the trade surplus. Europe didn't restart domestic consumption after the crisis. In the aftermath of the crisis, government spending didn't replace domestic demand.

Minsky phases, continued

Financial fragility is dangerous. 1. 'Financial fragility' grows A. Three types of situations, classified by vulnerability to changes in availability or cost of credit (loans) • Meet liabilities from reliable earnings ('hedge finance', because hedged against changes in credit market) i.e. usual sales • Meet liabilities by rolling over debt ('speculative finance'): FOCUS ON THIS. This is borrowing to pay debt. • Meet liabilities by increasing debt (Ponzi finance) i.e. Ponzi scheme = earlier investors pay later investors. It becomes Ponzi finance when you're not jsut rolling over debts but also expanding them. Ponzi fiannce is even more vulnerable than rolling over debt. 2. "Financial fragility" systemic problem when patterned vulnerabilities to changes in the cost and availability of credit (loans). But why patterned vulnerability? Patterns of debt change in the cycle. 3. Change in value of collateral changes cost and availability of credit (loans)

Manage change (Polanyi)

For Polanyi, ideas matter

Fordist Regime

Ford's innovation was the assembly line: expensive factory, unskilled labor. Workers had to be paid almost enough to afford cars. There were few other elements to close the demand gap. 1. Demand: high wages, welfare state 2. Investment: retain & reinvest, per Lazonick and O'Sullivan 3. Finance: enterprise, per Keynes 4. International arrangements: symmetric adjustment/making it unecessary Block said this turned into an ersatz regime. Crouch calls this privatized Keynesianism.

Literature precursors for Hall & Soskice: classifications and explanations for varieties of capitalism

Gerschenkron

II. The gold standard

Gold standard(s), 1870s-1930s 1. Most hand-to-hand currency is banknotes, convertible to gold at bearer's demand

Implications of the equation of exchange 1

Government which does not control the money supply may have to tolerate deflation

SOLVING coordination problems for central banks and wage bargainers

Hall and Franzese on German model 1. Independent central bank gives credible low inflation promise 2. Coordinated wage bargainers pay attention, avoid wage-price spiral 3. Central bank doesn't have to run harsh monetary policy to keep inflation low

Different varieties of capitalism?

Hall: • 'variations in the organisation of the European political economies generate[d] structural strains within EMU' 1. Northern model: (like CMEs) • Wage coordination enables wage moderation • Competitiveness does not depend on devaluation • Exports as key source of demand 2. 'Southern' model: (like LMEs and includes Ireland) • Weak capacity for wage moderation • Competitiveness depends on devaluation • Domestic demand crucial

II. Hyman Minsky's Theory Of Financial Crises

Hyman Minsky's theory of financial crises

The Economics and Politics of Market Bubbles

I. Keynes And The Speculative Character Of Liquid Security Markets Note: Keynes argues that liquid securities are speculative. They're liquid, because there's lots of buying and selling. And they're securities, because they're paper that promises you a return.

1920s and 1930s

Idea of mases was popular in social science

Karl Marx, "Capital: a critique of political economy," Chapter 31

If this were not enough, the state also helped the malefactors of great wealth acquire even more through its tax system, its colonial conquests, its tariffs and its ballooning national debt

Keynes Writes FDR, 1933

In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads. The object is to start the ball rolling. The United States is ready to roll towards prosperity, if a good hard shove can be given in the next six months. Could not the energy and enthusiasm, which launched the N.I.R.A. in its early days, be put behind a campaign for accelerating capital expenditures, as wisely chosen as the pressure of circumstances permits? You can at least feel sure that the country will be better enriched by such projects than by the involuntary idleness of millions.

Relative prices since the crisis

Inflation in Ireland way lower than Germany and the Euro area

1st critique of V.o.C. anticonvergence arguments: Underestimate power of international economic trends - "race to the bottom" not the only mechanism

International economic trend: the rise of ideology of 'shareholder value'

Asymmetric information as a barrier to entry

It becomes a barrier to entry, because buyers need to trust sellers e..g market for lemons: bad drives out the good

The underconsumption dilemma: how can consumers afford to buy everything produced?

Keynes' influential analysis focused on the underconsumption dilemma 1. Sales price of goods = costs + profit 2. Costs = wages + other stuff →Wages < Sales price of goods →Help! Who's going to buy everything? 3. Wait: I left out the profits! What happens to them? •Spent on consumption (but probably at a lower rate than wages): profits tend to go to the better off who spend less of their income, as they have a lower marginal propensity to consume •Saved (no help there) •Invested (Hooray! Spending without sales!): because wage earners can't buy everything, investment is a key source of demand

The case for demand management

Keynes' worry 1. Not every country can export more than it imports 2. Makes us dependent on fickle moods of investors THUS •Government should be in charge of investment •Demand management: Government should spend more than it takes in (deficit spending) when necessary •Internationally: Symmetric adjustment Lest we forget, trade imbalances mattered in the lead-up to the Great Depression. Eichengreen and Temin said trade imbalances contributed. TIE THIS IN WITH GIANT POOL OF MONEY AND TRADE IMBALANCES CONTRIBUTING TO GREAT RECESSION

I. Keynes And The Speculative Character Of Liquid Security Markets

Keynes: Psychological and sociological features of liquid investment markets

Gerschenkron

Later industrializers face context shaped by earlier industrializers (relative backwardness) 1. Borrowable technology 2. Felt backwardness / military security 3. Labour scarcity All of which lead to: Capital scarcity

Karl Polanyi, "The Great Transformation," Chapter 18

Mankind was in the grip, not of new motives, but of new mechanisms. Briefly, the strain sprang from the zone of the market; from there it spread to the political sphere, thus comprising the whole of society. But within the single nations the tension remained latent as long as world economy continued to function. Only when the last of its surviving institutions, the gold standard, dissolved was the stress within the nations finally released. Different as their responses to the new situation were, essentially they represented adjustments to the disappearance of the traditional world economy; when it disintegrated, market civilization itself was engulfed. This explains the almost unbelievable fact that a civilization was being disrupted by the blind action of soulless institutions the only purpose of which was the automatic increase of material welfare.

Possible stabilisation measures

Monetary 1. "Lender of last resort" in case of a bank panic 2. Restrain inflation, avoid deflation (general fall in prices) 3. Adjust exchange rates Fiscal: Spend more in a recession (Keynes) Note: Keynes said that markets wouldn't recover on their own and can coordinate predictions. Once again, state's role is indeterminate.

Assets

Money, things that can be sold for money, rights to collect money, such as: 1. Shares of stock 2. Loans to businesses 3. Government bonds

Lastly

Moral hazard? Or hazardous morality?

Productivity and hourly wages in Germany (real % change since 2000, HICP deflator)

New wage repression mechanisms, not classical CME wage coordination, key in German wage evolution 1. Mechanisms restricting wages in Germany had little to do with wage coordination 2. There were new wage repressions 3. Hall discussed the rising dualization of the German economy: this has more to do with slow wage growth

Markets in history 1

Note: markets hardly present and when present, were local e.g. Sheffield market or very international .e.g the spice trade. They carried things unavailable on the local level. 1. Before commercial society, markets had adjunct role A. Local B. International C. Complementary, not competitive exchange i.e. no one went out of business and markets did not respond to supply and demand, and endowments were complementary. This is clear in the case of international exchange. a. "Monopolists" swap with one another: people would swap complementary goods with each other that they couldn't otherwise get b. No one driven out of production 2. Tight local regulation, coercive barriers to entry [logistical and transactional also strong]: even feasible markets limited by regulations and high barriers to entry so as to prevent scenarios such as a merchant coming to town with cheaper grain and driving local farmers out of business. Economic life was regulated with an eye toward sustainability. This was the so-called "moral economy." This was reinforced by logistical and transactional barriers to entry. Markets played a supplementary role. National market, Polanyi suggests, is distinct and unusual, as it gives rise to exchange that is competitive but not complementary. Only way this happens, says Polanyi, is by the dismantling of barriers.

Karl Polanyi, "The Great Transformation," Pages 3-5

Our thesis is that the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it.

Problems with adjustment under gold standard 1

Polanyi 1. Can imply severe deflation 2. Competitiveness strains may prompt trade protectionism e.g. countries suffering from a trade deficit ๏ International co-ordination problems (Eichengreen and Temin): 1. "scramble for gold" 2. U.S. (and to some extent France) as central banker to the world, "one size fits all" monetary policy i.e. Countries that don't deflate will hoard gold. US and France had so much gold that they unproductively dictated the global economy. Note: gold standard makes the wrong presumptions about policymakers, according to Polanyi. Furthermore, it limits countries macroeconomic autonomy.

Two transformations 1

Polanyi covers two transformations 1. Enclosures and mercantilism (16th-18th centuries) A. Enclosures--privatization of common land in which common land was privatized and enclosed. Hedgerows were planted to enclose pastures previously accessible to everyone. B. circa 200,000 miles of hedgerows planted from 1720-1840 Note: rise of sheep farming went hand in hand with the privatization of common land. Enclosure has the effect of taking people who supported themselves on the land and forcing them to earn a wage.

III. Polanyi's "double movement" and the interwar catastrophe

Polanyi's project

Relation to Hall & Soskice

Post-Gerschenkronian ("modernization" in H&S, 2) 1. Who steers and finances industrialization? 2. Zysman 1983, eg: form of finance allows classification of varieties (market-led, bank-led, state-led)

Intellectual background, cont.

Post-Marxist (neo-corporatism in H&S, 3) 1. What are the possibilities for class collaboration in constraining inflation? 2. Dependent on organizational structure of class 3. Germany vs US or UK

Before The Crisis: Common Currency And Uncommon Effects

Price index (HICP, 1999=1)

The political-economic context of recent bubbles

Privatised Keynesianism (Colin Crouch) • Keynesianism stimulated demand via government spending • If this is no longer available, or considered available, how can politicians appeal to (especially middle class) voters? ➡If people own assets (esp. housing), and those assets rise in value, they can borrow against them, and spend ➡Consumers not government, do the deficit spending ➡Goes with deregulation of finance, to make lending available 1. Financial liberalization, in other words, connects with borrowing (demand), downsize & distribute (investment), speculation (finance) and postponed and/or symmetric adjustment (international arrangements) 2. This helps explain why in the US consumption outpaces wages and salaries from 2001-2008, as people are borrowing a ton of money. It should come as no surprise that indebtedness peaks in the US in 2007.

The liquidity trap, revisited

QE SEEKS TO CHANGE Are investors willing to take some risk?

When low interest rates are not enough: secular stagnation

Secular, in this context, means a long-term trend. This has economists very worried. 1. If there are prospects of investments paying off (future demand growth), then lower interest rates will indeed stimulate investment. 2. But if there are not prospects of investments paying off (future demand growth), low interest rates will lead to weak investment and secular stagnation. That is to say, low interest rates are not sufficient to stimulate demand. What is needed is actual demand growth. Sign of secular stagnation is that real interest rates can't stimulate demand anymore/need to keep going lower. Summers argues that the regime of accumulation broke down.

Logic of demand stimulus: 'The Paradox of Thrift'

Self-fulfilling predictions: what I do depends on what I think everyone else will do 1. The Paradox of Thrift, or paradox of savings, is an economic theory which posits that personal savings are a net drag on the economy during a recession. This theory relies on the assumption that prices do not clear or that producers fail to adjust to changing conditions, contrary to the expectations of classical microeconomics. The Paradox of Thrift was popularized by British economist John Maynard Keynes. 2. According to Keynesian theory, the proper response to an economic recession is more spending, more risk-taking and less savings. Keynesians believe a recessed economy does not produce at full capacity because some of its factors of production — land, labor and capital — are unemployed. 3. Keynesians also argue that consumption, or spending, drives economic growth. Thus, even though it makes sense for individuals and households to cut back consumption during tough times, this is the wrong prescription for the larger economy. A pullback in aggregate consumer spending might force businesses to produce even less, deepening the recession. This disconnect between individual and group rationality is the basis of the savings paradox.

'The Paradox of Thrift,' revisited

Self-fulfilling predictions: what I do depends on what I think everyone else will do 1. If everyone borrows, spends and invests, economy grows and we all make money 2. If everybody scrimps and saves, my thrift was justified, but economy keeps getting worse 3. If everyone else borrows, spends and invests, No big deal: I was thriftier than I had to be 4. If I'm the only borrowing, spending and investing, Argh! I'm broke and there's no jobs/customers

Karl Polanyi, "The Great Transformation," Chapter 10

Short summary: as national markets built upon these newfangled machines emerged in the 1750s, thinkers of diverse ideological persuasions wrestled with what maintained social order in the absence of government intervention. The fact that they all arrived at the same answer, namely market forces outside of human laws, did not just make their response credible. It also pushed the British government to remove its protections for the poor and turn labor into a commodity. As one can imagine, these decisions had extremely painful consequences for the newly commodified. Only later did the state return to safeguarding workers. 1. Let us briefly survey the consequences of the fact that the foundations of economic theory were laid down during the Speenhamland period,which made appear as a competitive market economy what actually was capitalism without a labor market. 2. Firstly, the economic theory of the classical economists was essentially confused. The parallelism between wealth and value introduced the most perplexing pseudo-problems into nearly every department of Ricardian economics. The wage-fund theory, a legacy of Adam Smith, was a rich source of misunderstandings. 3. Secondly, given the conditions under which the problem presented itself, no other result was possible. 4. Thirdly, the solution hit upon by the classical economists had the most far-reaching consequences for the understanding of the nature of economic society. The laws of a competitive society were put under the sanction of the jungle. The true significance of the tormenting problem of poverty now stood revealed: economic society was subject to laws which were not human laws. The rift between Adam Smith and Townsend had broadened into a chasm; a dichotomy appeared which marked the birth of nineteenth-century consciousness. From this time onward naturalism haunted the science of man, and the reintegration of society into the human world became the persistently sought aim of the evolution of social thought.

Wade's argument regarding the role of capital inflows in increasing financial fragility

Some parts of this causal sequence require suspension of some disbelief. This is what you need to know: - Capital inflows can lead to money supply outstripping output of goods and services and this can lead to a credit boom which manifests in: 1) a surge in imports of consumer goods 2) consumer price inflation 3) asset price bubbles 4) surge in industrial investment, which requires a surge in capital goods imports - All of which contribute to financial fragility. For an elaboration of these arguments consult the work of Hyman Minsky

Regime of accumulation (Block 2010)

Some scholars have postulated a regime of accumulation that solved the Keynesian problem. BLock laid out 4 components • "A system of production relations for the dominant sectors of the economy incorporating both the technologies and the social relations of production." • "A way of organizing and stabilizing the structure of demand so that firms will be willing to sustain high levels of investment." FOCUS ON THIS i.e. certainty of demand • "Financial mechanisms that support both the system of domestic production relations and the structure of demand." • "International arrangements that create complementaries in trade and financial flows in relation to the rest of the world." FOCUS ON THIS i.e. avoid asymmetric adjustment or don't make it necessary

Cumulative change in labour costs as share of output since 1999

Spain and Germany outliers in holding wage gains far under productivity increases—different domestic inflation rates key to nominal ULC (unit labor cost) divergence

Old paradigm roles for the state: Public goods state

State should provide "public goods" and eliminate "public bads" arising from externalities

Old paradigm roles for the state: Macroeconomic stabilisation state

State should smooth out the business cycle 1. Sustain economy in a recession 2. Restrain economy in a boom

Sterilization

Sterilization takes newly created money out of the economy through 2 mechanisms. 1. Yen removed by Ministry of Finance (taxes and budget surplus) 2. Yen removed by Central Bank (reserve ratios, open market operations) i.e. central bank forces banks to hold more money. This paradoxically leads to higher interest rates, which increases the value of the domestic currency and reduce the nations' competitiveness.

Demand and international adjustment

Suppose 1. Country 1: Net importer. It purchases goods from Country 2 and receives loans in return. 2. Country 2: Net exporter. It sells goods to Country 1 and loans money to Country 1. • Symmetric adjustment: Country 1 reduces consumption (exports more of own production, buys less from Country 2), Country 2 expands consumption (buys more of own production and that of Country 2) • Asymmetric adjustment: Country 1 reduces consumption Keynes wanted symmetric adjustment, because asymmetric adjustment could shrink global demand.

II. After The Financial Crisis: The 'Liquidity Trap' And The Collapse Of Growth

The 2008 crisis: lending collapses

Week 9

The Economics and Politics of Market Bubbles

Seminar agenda

The Hay and Miller readings, and the This American Life episode, give information (at different levels of detail) about four bubbles--in Ireland, the UK, the US, and Japan. For each of these a) Identify the displacement or displacements (in Minskyʼs sense) that triggered them b) Discuss, to the extent the evidence allows, the sources of credit that fueled the bubble c) Identify any positive or negative feedback loops that sustained the bubble or accelerated the crash. In particular, look for signs of the "financial fragility" discussed in lecture

Jacquard loom

The Jacquard mechanism, invented by Frenchman Joseph Marie Jacquard and first demonstrated in 1801, simplified the way in which complex textiles such as damask were woven. The mechanism involved the use of thousands of punch cards laced together. Each row of punched holes corresponded to a row of a textile pattern. This modification not only introduced greater efficiency to the weaving process, allowing the weaver to produce, unaided, fabrics with patterns of almost unlimited size and complexity, but also influenced the future development of computing technology.

US Trade Balance

The US has run trade deficits since 1976

Karl Polanyi, "The Great Transformation," Chapter 16

The case of money showed a very real analogy to that of labor and land. The application of the commodity fiction to each of them led to its effective inclusion into the market system, while at the same time grave dangers to society developed.With money, the threat was to productive enterprise, the existence of which was imperiled by any fall in the price level caused by use of commodity money. Here also protective measures had to be taken, with the result that the self-steering mechanism of the market was put out of action.

Isn't there an alternative way to deal with inadequate demand?

The central bank channel. In period of privatized Keynesianism, there's a shift of focus to the central bank. Some think lower interest rates could lead the economy to self-correct or the central bank could lower interest rates. 1. Profit makers saving, rather than spending or investing 2. This leads to low interest rates, as there are lots of savings available: at this stage of the process, the central bank can intervene to reduce interest rates even further 3. Low interest rates can, in principle, stimulate investment

Time inconsistent preferences and the problem they pose

The central bank: 1. First, wants its low-inflation promise to be believed 2. But later, it want to stimulate with inflation 3. Far-sighted market participants understand this logic 4. Thus, in order to get credible promise of low inflation, need an independent central bank that doesn't care about stimulus

Why do Ordoliberals get their way? 2

The crazy guy will always win the chicken game 1. Player 1: No worries, I'm sane 2. Player 2: No worries, he knows I follow rules

Why do Ordoliberals get their way? 1

The crazy guy will always win the chicken game 1. Player 1: No worries, I'm sane 2. Player 2: No worries, he knows I'm crazy

The political effects of deflationism (TGT, Chapter 19)

The deflationist's ideal came to be a "free economy under a strong government"; but while the phrase on government meant what it said, namely, emergency powers and suspension of public liberties, "free economy" meant in practice just the opposite of what it said, namely, governmentally adjusted prices and wages (though the adjustment was made with the express purpose of restoring the freedom of the exchanges [i.e., unrestricted conversion of domestic currency to gold or international currency] and free internal markets) ...[I]n the course of these vain deflationary efforts free markets had not been restored though free governments had been sacrificed.

Enclosures

The process or policy of fencing in wasteland or common land so as to make it private property, as pursued in much of Britain in the 18th and early 19th centuries

I. Keynesian Demand Analysis, Regimes Of Accumulation, And Secular Stagnation

The underconsumption dilemma: how can consumers afford to buy everything produced?

Positive externalities and indeterminacy of state's role

There are so many positive externalities that could justify massive state role in shaping production and consumption 1. public education--but how long? 2. state-standardised computer operating system?

Karl Marx, "Capital: a critique of political economy," Chapter 30

This meant that these former peasants had to turn to the market for both their wages and their nourishment. This widespread deprivation strengthened the hand of capital, as industrialists could now hawk their goods and services on a national market due to the national scope of the suffering

Self-fulfilling prophecies on government

This process isn't necessarily driven by debt: it's driven by what Keynes calls the average opinion of the average opinion. 1. If one investors buys/holds bonds and other investors do the same, interest rate low, government can afford payments, no default 2. If one investor sell bonds and other investors do the same, interest rate high, government can't afford payments, default This is why the only option is for the lender of last resort (LOLR) to be able and willing to buy bonds

Hall's Modifications

Three key problems facing European capitalist states 1. Wage problem (keep wages in line with productivity) 2. Work problem (employment, unemployment benefits) 3. Total factor productivity (profitable use of labour and capital) = original V.o.C

How time inconsistency works (when central bank is credible)

Two options: either the central bank's promise of low inflation is believed or not believed 1. If the central bank's promise of low inflation is believed, then people ignore potential inflation, and contracts are unindexed and costs don't adjust for inflation 2. But if inflation happens, people will ignore it: consequently, customers will pay more, and costs don't go up right away. As a result, output expands and the inflation is stimulative.

How time inconsistency works (when central bank is NOT credible)

Two options: either the central bank's promise of low inflation is believed or not believed 1. If the central bank's promise of low inflation is not believed, people prepare to disregard inflation, and contracts are indexed, so costs adjust quickly for inflation. 2. But if inflation happens, people prepare to disregard inflation: consequently, customers will pay more, but costs will go up to match. Thus there is no change in output, and the inflation is not stimulative.

Two intertwined stories of the interwar period

US stock-market boom turns to bust in late 1929, leads to Great Depression: 1. collapse of world output and trade, 2. massive bank problems Note: between WWI and WWII, US stock boom goes bust.

Structured Investment Vehicle (SIV) and the Financial Crisis

US trigger of crash: people unable to pay loans 1. SIV assets: MBS 2. SIV liabilities: short-term loans 3. Lenders to the SIV felt confident until some of the MBS defaulted 4. Then short-term loans dried up and MBS en masse were put on the market, and the SIV was unable to pay, and the lenders were screwed 5. Then insurance CDS goes bust

Polanyi on governing by panic (Woodruff really like this)

Under the gold standard the leaders of the financial market are entrusted, in the nature of things, with the safeguarding of stable exchanges and sound internal credit on which government finance largely depends. The banking organization is thus in the position to obstruct any domestic move in the economic sphere which it happens to dislike, whether its reasons are good or bad. In terms of politics, on currency and credit, governments must take the advice of the bankers, who alone can know whether any financial measure would or would not endanger the capital market and the exchanges. ...The financial market governs by panic.

Shareholders vs stakeholders

VERY CRUDELY: 1. LME: Shareholders valued over stakeholders (workers, but also business partners, local economy, etc.) 2. CME: Stakeholders valued over shareholders

Mokyr & Nye, cont'd

Versus North & Weingast: 18th century development depended on being able to overcome traditional property rights, not protect them 1. Enclosures 2. Localistic interests 3. Parliament as a 'meta-institution' 4. Rent-seeking

Mokyr & Nye

Versus North & Weingast: 18th century development depended on being able to overcome traditional property rights, not protect them 1. Enclosures 2. Localistic interests Note: Mokyr and Nye thought inefficient property rights of the commons impeded development. Same thing with rent seeking localistic interests, and hence it was necessary to create national competition. The duo identify the power of Parliament as being key to overcome local interests. To create canals, Parliament trod on interests of many, many farmers. What Parliament accomplished was the radical reconfiguring of property rights. 3. British 'inland waterways', many improved/constructed 18th century

Vertical integration

Vertical integration is a strategy where a company expands its business operations into different steps on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiencies by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the established expertise and economies of scale of other vendors rather than trying to become vertically integrated.

The virtuous circle: risings assets, rising leverage

Virtuous circle creates increasing financial fragility. 1. "Excess" collateral: encourages people to 2. Borrow more money to buy assets (liquidity increases): as demand for assets increases, 3. Asset prices rise, and there is once again, "excess" collateral Buying assets on collateralised credit: Value of collateral required depends on size of loan.

Second coordination problems for central banks and wage bargainers 2

Wage bargainers against central bank: time inconsistency of monetary policy preferences 1. Bank promises zero inflation 2. Corresponding contracts are signed 3. Bank inflates anyway, increasing output THUS Low inflation promise not credible without independent, anti-inflation central bank

Second coordination problems for central banks and wage bargainers 1

Wage bargainers against central bank: time inconsistency of monetary policy preferences

FIRST coordination problem for central banks and wage bargainers

Wage bargaining 'dyads' against each other: build inflation assumption in? 1. If we as well as everybody else prices inflation in, there will be a wage-price spiral 2. If we assume no inflation but everybody else prices inflation in, our real wages go down 3. If we price inflation in but everybody else assumes no inflation, our real wages go up 4. If we as well as everybody else assumes no inflation, there will be stable prices Coordinated wage bargain → lower inflation Note: if employers raise wages, then prices rise and there will be a wage-price spiral. If you get coordinated wage bargaining, there's lower inflation. Stable prices are preferred to a wage-price spiral. German newspapers will talk about a wage bargaining round e.g. metal workers negotiated a 2% wage increase. Firms and other unions will follow that.

The Logic of Demand Stimulus

What demand stimulus does: coordinates predictions so that economy grows and we all make money

International trade, competitiveness, and prices under the gold standard

What options do French policy makers have to change the balance of prices in their favor in the international context? 1. Under the gold standard, they can't devalue their currency 2. So their only options are deflation, having French goods remain uncompetitive, or protectionism 3. Gold standard meant permanent promise to maintain constant prices. 4. Polanyi argued that under the gold standard, there will be pressures for deflation. In practice, you'll get protectionism

III. The Austerity Mystery

Why is it that in the wake of the crisis, governments cut spending?

Strategic interaction in skills acquisition

Worker has two choices: invest in general skills or invest in specific skills 1. If the worker invests in general skills: Workers switch jobs easily, but less skilled for employers 2. If the worker invests in specific skills: employer has two options: reward skills, and worker gets well paid, employer gets skilled labour. If the employer dismisses the worker or pressures the worker for lower wages, the worker loses skills investment Note how this ties in Williamson's argument about the specificity of assets.

markets versus hierarchies

failures in "free market" transactions that lead to the need and existence of hierarchies and organizations to mediate and economize transactional costs.

USDA Standards for Grades of Strawberries

§51.3115 U.S. No. 1. "U.S. No. 1'' consists of strawberries of one variety or similar varietal characteristics with the cap (calyx) attached, which are firm, not overripe or undeveloped, and which are free from mold or decay and free from damage caused by dirt, moisture, foreign matter, disease, insects, or mechanical or other means. Each strawberry has not less than three-fourths of its surface showing a pink or red color. (a) Size. Unless otherwise specified, the minimum diameter of each strawberry is not less than three-fourths inch. (b) Tolerances. In order to allow for variations incident to proper grading and handling the following tolerances, by count, are provided as specified: (1) For defects. Not more than 10 percent for strawberries in any lot which fail to meet the requirements of this grade, but not more than one-half of this tolerance, or 5 percent, shall be allowed for defects causing serious damage, including therein not more than two-fifths of this latter amount, or 2 percent, for strawberries affected by decay. (2) For off-size. Not more than 5 percent for strawberries in any lot which are below the specified minimum size. Note: these regulations show the history of people buying stodgy strawberries. This is a case of asymmetric information.

Deal with the relevant readings!

๏ You may discuss readings from outside the syllabus, but it's neither required nor likely to improve your mark ๏ If you fail to refer to readings relevant to points you make, that will hurt your mark ๏ Markers need to see that you understood and can express arguments from readings, so don't assume too much

Advice on exam answers

• Bolted down structure: • Answer the question in the first paragraph • Go through supporting points (if you run out of time, write something on each) • Repeat answer and support in conclusion, maybe go beyond as time permits

The 'zero lower bound'

• Both the liquidity trap and secular stagnation imply that low interest rates don't translate into investment • But what about using the central bank to make interest rates even lower, to make investment relatively more attractive? • The 'zero lower bound' means that interest rates cannot go (much) lower than zero By 2009, many central banks were awfully close to the zero lower bound. This made lowering interest rates any further not a viable strategy for stimulating demand.

Broad themes for past exam q's

• Embeddedness and exchange • Varieties of capitalism • International monetary regimes and financial crisis; historical and contemporary crises • Markets and state-building • Polanyi

Conclusion

• Minsky: stability leads to instability • When will we ever learn?

Key syllabus changes

• Path dependence theme removed 2012- 2013 • Garcia-Parpet new 2012-2013 • Substantially more on Eurozone crisis from 2011-2012 • Hall (2012) new in 2012-2013 • Crouch on privatised Keynesianism new 2011 • Mandelkern new 2015, politics of demand theme broken out into separate week

Old Polanyian dilemma

• What can uncompetitive Eurozone countries do? • Devalue (not an option) • Trade protection (not an option) • Force nominal deflation • Inflate, but more slowly than Germany?

Introductory Remarks

"England and America are two countries separated by a common language" -- not George Bernard Shaw

The Paradox of Thrift, Cont'd (1)

1. Demand stimulus coordinates predictions 2. If everyone borrows, spends and invests, the economy grows and we all make money

Colin Hay, "Good Inflation, Bad Inflation: The Housing Boom, Economic Growth and the Disaggregation of Inflationary Preferences in the UK and Ireland"

1. For rather different reasons, Ireland and the UK stumbled serendipitously upon consumer-led and private debt-financed economic growth trajectories in the early 1990s. In both cases this trajectory was secured and sustained by historically low interest rates. This served to broaden access to—and to improve affordability within—the housing market, driving a developing house price bubble. Once established this was sustained, if not perhaps actively nurtured, by interest rates that remained, by recent historical standards, unprecedentedly low throughout the boom. Yet, as is now increasingly acknowledged, it was not just low interest rates that served to inflate the bubble. Crucial, too, was the liberal and highly securitised character of the mortgage market in both Ireland and the UK. In such a context, banks and building societies act effectively as financial intermediaries, repackaging new loans as mortgage-backed securities (MBSs) for institutional investors such as pension funds. The lion's share of their income is generated, not from the interest rate spread between deposits and loans, but from transaction fees. Consequently, they are energetic and often highly innovative in offering new mortgage instruments to potential borrowers, confident in the knowledge that they can pass on any interest rate risk they might otherwise bear to buyers of MBSs. In a rapidly growing housing market, they are also likely to be a source of capital to fuel consumption for borrowers keen to release the equity they have built up in their property. 2. Whether they stumbled upon it accidentally or not, it is credible to suggest that governments in anglophone liberal democracies like the UK and Ireland now acknowledge the contribution of low interest rates and house price inflation to the economic growth from which they have undoubtedly benefited politically in recent years. As such, it is surely realistic to assume that they now perceive themselves to have a considerable political (and electoral) stake in securing the conditions for a rapid resumption in house price inflation. This is, of course, immediately interesting. For it suggests a potential conflict of interest with the formally depoliticised agents of monetary policy: the Monetary Policy Committee (MPC) of the Bank of England and its European Central Bank equivalent. It also suggests that we are likely to see—if we have not already begun to see—a political test of the degree to which monetary authorities have indeed been depoliticised. It also suggests, somewhat ironically, that governments (certainly anglophone liberal governments) may be characterised today rather less by the time-inconsistent inflationary preferences from which central bank independence was designed to protect us, than from increasingly differentiated inflationary preferences. It is the argument of this article that this is indeed the case. Moreover, and perhaps rather predictably, the European Central Bank has proved itself rather better able to resist the pressures arising from such preferences, in this regard, than the Bank of England.

Personal solutions to problem of cooperation 1

1. Repeated dealings 2. Pooled information on reputations (aka gossip) e..g eBay and Uber use pooled info to get good behavior

Colin Crouch, "Privatised Keynesianism: An Unacknowledged Policy Regime"

1. There have now been two successive policy regimes since the Second World War that have temporarily succeeded in reconciling the uncertainties and instabilities of a capitalist economy with democracy's need for stability for people's lives and capitalism's own need for confident mass consumers. 2. The first of these was the system of public demand management generally known as Keynesianism. The Keynesian model protected ordinary people from the rapid fluctuations of the market that had brought instability to their lives, smoothing the trade cycle and enabling them gradually to become confident mass consumers of the products of a therefore equally confident mass-production industry. Unemployment was reduced to very low levels. The welfare state not only provided instruments of demand management for governments, but also brought real services in areas of major importance to people outside the framework of the market: more stability. Arms length demand management plus the welfare state protected the rest of the capitalist economy from both major shocks to confidence and attacks from hostile forces, while the lives of working people were protected from the vagaries of the market. It was a true social compromise. As conservative critics pointed out from the start, there was always likely to be a ratchet effect in the mechanism: it was easy for governments to increase spending in a recession, bringing lower unemployment, more public services and more money in people's pockets. It would be far more difficult at times of boom in a democracy to reverse these trends. This was the seed of destruction at the heart of the model. 3. The second was not, as has often been thought, a neo-liberal turn to pure markets, but a system of markets alongside extensive housing and other debt among low- and medium income people linked to unregulated derivatives markets. It was a form of privatised Keynesianism. Instead of governments taking on debt to stimulate the economy, individuals did so. In addition to the housing market there was an extraordinary growth in opportunities for bank loans and credit cards. It was common for people to hold cards from more than one credit card company as well as several store-specific ones. This explains the great puzzle of the period: how did moderately paid American workers in particular, who have little legal security against instant dismissal from their jobs, and salaries that might remain static for several years, maintain consumer confidence, when continental European workers with more-or-less secure jobs and annually rising incomes were bringing their economies to a halt by their unwillingness to spend? It was seen as an act of political manipulation when the UK government removed mortgage repayments, but not rent, from its calculations of inflation, but it was technically quite correct. 4. This combination reconciled capitalism's problem, but in a way that eventually proved unsustainable. After its collapse there is debate over what will succeed it. Most likely is an attempt to re-create it on a basis of corporate social responsibility.

Barry Eichengreen, Peter Temin, "Fetters of gold and paper"

1. We describe in this essay how fixed exchange rates share this dual personality, why the gold standard and the euro are extreme forms of fixed exchange rates, and how these policies had their most potent effects in the worst peaceful economic periods in modern times. We do not ask or attempt to answer whether widespread adoption of the gold standard in the mid-1920s or the creation of the euro in 1999 were mistakes. 2. Both decisions reflected deep-seated historical forces that developed over long periods of time: a set of gold standard conventions and a mentalité that flowered in the nineteenth century, allowing the gold standard to be seen as the normal basis for international monetary affairs; and a process of European integration with roots stretching back well before the Second World War that came into full flower in the fertile seedbed that was the second half of the twentieth century. We take these deep-seated circumstances as given and ask how they could have been managed better. We ask, in particular, whether they could have been managed to prevent economic disaster. 3. The gold standard was characterized by the free flow of gold between individuals and countries, the maintenance of fixed values of national currencies in terms of gold and therefore each other, and the absence of an international coordinating organization. Together these arrangements implied that there was an asymmetry between countries experiencing balance-of-payments deficits and surpluses. There was a penalty for running out of reserves (and being unable to maintain the fixed value of the currency), but no penalty (aside from forgone interest) for accumulating gold. The adjustment mechanism for deficit countries was deflation rather than devaluation—that is, a change in domestic prices instead of a change in the exchange rate 4. The gold standard was preserved by an ideology that indicated that only under extreme conditions could the exchange rate be unfixed. The euro has gone one step further by eliminating national currencies. Modifying the policy regime unilaterally is even more difficult than under the gold standard. While it is conceivable, in theory, that an incumbent member of the euro area could opt to reintroduce its national currency and depreciate it against the euro, there is no provision for doing so in the Lisbon Treaty. 5. It is similarly conceivable that an incumbent member might choose to disregard its treaty obligations. But, even then, if the decision to reintroduce the national currency and convert all the financial assets and liabilities of residents into that unit was not done instantly, a period of extreme financial instability would follow, as investors withdrew their money from the domestic banking and financial system en masse, creating what one of us has called 'the mother of all financial crises' 6. The point of this discussion is not to let deficit countries—Germany in the context of the gold standard, Greece in the context of the euro, the United States in the case of global imbalances—off the hook. All three were reluctant, for political and other reasons, to acknowledge that they faced budget constraints. They lived beyond their means, running budget and current-account deficits and financing them by borrowing abroad, Germany mainly from the United States in 1925-8, Greece mainly from its European partners in 2002-8, and the United States mainly from China and the oil-exporting economies of the Middle East. 7. In all three cases, borrowing was facilitated by the facade of stability created by pegged exchange rates. The perception that currency risk had been eliminated encouraged finance to flow from capital-abundant economies where interest rates were low to capital-scarce economies where they were high. Deficits were financed more freely, encouraging governments to run them, until markets were disturbed by financial upheavals that raised doubts about the solvency of sovereign borrowers. This, of course, is just the problem of 'capital-flow bonanza' followed by 'sudden stop' familiar from the literature on nineteenth and twentieth century emerging markets. The only surprising thing is that parochial advanced-country observers and policy-makers, whether in the 1920s or more recently, did not understand that the problem also applied to them. 8. But there is another side of this coin: namely, the policies of the surplus countries. In the late 1920s and early 1930s the difficulties of Germany and other Central European countries were greatly aggravated by the policies of gold and foreign-exchange sterilization undertaken by the US and France.With these countries in balance-of-payments surplus, someone else had to be in deficit. With their refusal to expand once the Depression struck, someone else had to contract. With their refusal to extend emergency financial assistance, the extent of the contraction to which the deficit countries were subjected became almost unimaginable. In the end, the political consequences were disastrous.

What's Block's problem with the old paradigm?

Creates overly general, and thus irresolvable ("indeterminate") discussion of justifiable limits of state intervention

Charles Poor Kindleberger, "Manias, panics and crashes"

NOTE MINSKY MODEL MENTIONED IN WADE AS WELL 1. According to Minsky, events leading up to a crisis start with a "displacement," some exogenous, outside shock to the macroeconomic system. 2. In Minsky's model, the boom is fed by an expansion of bank credit that enlarges the total money supply. Banks typically can expand money, whether by the issue of bank's notes under earlier institutional arrangements or by lending in the form of addictions to bank deposits. Bank credit is, or at least has been, notoriously unstable, and the Minsky model rests squarely on that fact. 3. Let us assume, then, that the urge to speculate is present and transmuted into effective demand for goods or financial assets. After a time, increased demand presses against the capacity to produce goods or the supply of existing financial assets. Prices increase, giving rise to new profit opportunities and attracting still further firms and investors. Positive feedback develops, as new investment leads to increases in income that stimulate further investment and further income increases. At this stage we may well get what Minsky called "euphoria." Speculation for price increases is added to investment for production and sale. If this process builds up, the result is often, though not inevitably, what Adam Smith and his contemporaries called "overtrading." 4. Although Minsky's model is limited to single country, overtrading has historically tended to spread from one country to another. The conduits are many. Internationally traded commodities and assets that go up in price in one market will rise in others through arbitrage. The foreign-trade multiplier communicates income changes in a given country to others through increased or decreased imports. Capital flows constitute a third link. Money flows of gold, silver (under gold standard or bimetallism), or foreign exchange are a fourth. And there are purely psychological connections, as when investor euphoria or pessimism in one country infects investors in others. 5. Observe with respect the money movements that in an ideal world, a gain of specie for one country would be matched by a corresponding loss for another, and the resulting expansion in the first case would be offset by the contraction in the second. In the real world, however, while the boom in the first country may gain speed from the increase in the supply of reserves, or "high-powered money," it may also rise in the second, despite the loss in monetary reserves, as investors respond to rising prices and profits abroad by joining in the speculative chase. In other words, the potential contraction from the shrinkage on the monetary side may be overwhelmed by the increase in speculative interest and the rise in demand. For the two countries together, in any event, the credit system is stretched tighter. 6. As the speculative boom continues, interest rates, velocity of circulation, and prices all continue to mount. There may then ensue an uneasy period of "financial distress." The term comes from corporate finance, where a firm is said to be in financial distress when it must contemplate the possibility, perhaps only a remote one, that it will not be able to meet its liabilities. For an economy as a whole, the equivalent is the awareness on the part of a considerable segment of the speculating community that a rush for liquidity---to get out of other assets and into money---may develop, with disastrous consequences for the prices of goods and securities, and leaving some speculative borrowers unable to pay off their loans. As distress persists, speculators realize, gradually or suddenly, that the market cannot go higher. It is time to withdraw. The race out of real or long-term financial assets and into money may turn into a stampede. 7. The specific signal that precipitates the crisis may be the failure of a bank or firm stretched too tight, the revelation of a swindle or defalcation by someone who sought to escape distress by dishonest means, or a fall in the price of the primary object of speculation as it, at first alone, is seen to be overpriced. In any case, the rush is on. Prices decline. Bankruptcies increase. Liquidation sometimes is orderly but may degenerate into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top. 8. Revulsion and discredit may go so far as to lead to panic (or as the Germans put it, Torschlusspanik. "door-shut-panic"), with people crowding to get through the door before it slams shut. The panic feeds on itself, as did the speculation, until one or more of three things happen: (1) prices fall so low that people are again tempted to move back into less liquid assets; (2) trade is cut off by setting limits on price declines, shutting down exchanges, or otherwise closing trading; or (3) a lender of last resort succeeds in convincing the market that money will be made available in sufficient volume to meet the demand for cash. 9. Whether there should be a lender of last resort is a matter of some debate. Those who oppose the function argue that it encourages speculation in the first place. Supporters worry more about the current crisis than about forestalling some future one. There is also a question of the place for an international lender of last resort. In domestic crises, government or the central bank (when there is one) has responsibility. At the international level, there is neither a world government nor any world bank adequately equipped to serve as a lender of last resort, although some would contend that the International Monetary Fund since Bretton Woods in 1944 is capable of discharging the role.

Some Background for Block

What's Block's problem with the old paradigm?

An example of asymmetric information: Roald Dahl, Matilda

"I'm always glad to buy a car when some fool has been crashing the gears so badly they're all worn out and rattle like mad. I get it cheap. Then all I do is mix a lot of sawdust with the oil in the gear-box and it runs as sweet as a nut." "How long will it run like that before it starts rattling again?" Matilda asked him. "Long enough for the buyer to get a good distance away," the father said, grinning. "About a hundred miles." "But that's dishonest, daddy," Matilda said. "It's cheating." "No one ever got rich being honest," the father said. "Customers are there to be diddled."

According to Williamson:

"Specific assets" increase transaction costs -- in particular, costs of protecting rights, policing and enforcing agreements -- because of incentive for "hold up"

institutions

Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange.

Karl Polanyi, "The Great Transformation," Chapter 3

Short summary: While Marx decried the fecklessness of the British government in halting the private seizure of the commons, Polanyi praised the Tudors and Stuarts for moderating the pace of this change. Moreover, this early privatization of land did not stand out to the Hungarian political economist as the watershed moment of British industrialization, let alone the subsequent backlash left out of Marx's account. Profitable operation of specialized machinery, Polanyi noted, required that industrialists be able to buy the factors of production as needed on markets. With this method of manufacture in place, "the idea of a self-regulating market system," he observed, "was bound to take shape" 1. Economic liberalism misread the history of the Industrial Revolution because it insisted on judging social events from the economic viewpoint. For an illustration of this we shall turn to what may at first seem a remote subject: to enclosures of open fields and conversions of arable land to pasture during the earlier Tudor period in England, when fields and commons were hedged by the lords, and whole counties were threatened by depopulation. Our purpose in thus evoking the plight of the people brought about by enclosures and conversions will be on the one hand to demonstrate the parallel between the devastations caused by the ultimately beneficial enclosures and those resulting from the Industrial Revolution, and on the other hand—and more broadly—to clarify the alternatives facing a community which is in the throes of unregulated economic improvement. 2. England withstood without grave damage the calamity of the enclosures only because the Tudors and the early Stuarts used the power of the Crown to slowdown the process of economic improvement until it became socially bearable—employing the power of the central government to relieve the victims of the transformation, and attempting to canalize the process of change so as to make its course less devastating. 3. But in one respect the break wrought infinite harm, for it helped to obliterate from the memory of the nation the horrors of the enclosure period and the achievements of government in overcoming the peril of depopulation. Perhaps this helps to explain why the real nature of the crisis was not realized when, some 150 years later, a similar catastrophe in the shape of the Industrial Revolution threatened the life and well-being of the country. 4. This time also the event was peculiar to England; this time also seaborne trade was the source of amovement which affected the country as a whole; and this time again it was improvement on the grandest scale which wrought unprecedented havoc with the habitation of the common people. Before the process had advanced very far, the laboring people had been crowded together in new places of desolation, the so-called industrial towns of England; the country folk had been dehumanized into slum dwellers; the family was on the road to perdition; and large parts of the country were rapidly disappearing under the slack and scrap heaps vomited forth fromthe ''satanic mills.''Writers of all views and parties, conservatives and liberals, capitalists and socialists, invariably referred to social conditions under the Industrial Revolution as a veritable abyss of human degradation. 5. We submit that an avalanche of social dislocation, surpassing by far that of the enclosure period, came down upon England; that this catastrophe was the accompaniment of a vast movement of economic improvement; that an entirely new institutional mechanism was starting to act on Western society; that its dangers, which cut to the quick when they first appeared, were never really overcome; and that the history of nineteenth-century civilization consisted largely in attempts to protect society against the ravages of such a mechanism. The Industrial Revolution was merely the beginning of a revolution as extreme and radical as ever inflamed the minds of sectarians, but the new creed was utterly materialistic and believed that all human problems could be resolved given an unlimited amount of material commodities. 6. We submit that all these were merely incidental to one basic change, the establishment of market economy, and that the nature of this institution cannot be fully grasped unless the impact of the machine on a commercial society is realized.We do not intend to assert that the machine caused that which happened, but we insist that once elaborate machines and plant were used for production in a commercial society, the idea of a self-regulating market system was bound to take shape. 7. Since elaborate machines are expensive, they do not pay unless large amounts of goods are produced 8. Now, in an agricultural society such conditions would not naturally be given; they would have to be created. That they would be created gradually in no way affects the startling nature of the changes involved. The transformation implies a change in the motive of action on the part of the members of society; for the motive of subsistence that of gain must be substituted. All transactions are turned into money transactions, and these in turn require that a medium of exchange be introduced into every articulation of industrial life. All incomes must derive from the sale of something or other, and whatever the actual source of a person's income, it must be regarded as resulting from sale. No less is implied in the simple term ''market system,'' by which we designate the institutional pattern described. But the most startling peculiarity of the system lies in the fact that, once it is established, it must be allowed to function without outside interference. Profits are not any more guaranteed, and the merchant must make his profits on the market. Prices must be allowed to regulate themselves. Such a self-regulating system of markets is what we mean by a market economy.

"Hold-up with specific assets"

With fixed investment in speical factory, seller is at the mercy of the buyer 1. Either scrap metal price for factory 2. Or suffer low output price

Karl Polanyi, "The Great Transformation," Chapter 19

Yet precisely this was the case in the 1920s. Labor entrenched itself in parliament where its numbers gave it weight, capitalists built industry into a fortress from which to lord the country. Popular bodies answered by ruthlessly intervening in business, disregarding the needs of the given form of industry. The captains of industry were subverting the population from allegiance to their own freely elected rulers,while democratic bodies carried on warfare against the industrial system on which everybody's livelihood depended. Eventually, the moment would come when both the economic and the political systems were threatened by complete paralysis. Fear would grip the people, and leadership would be thrust upon those who offered an easy way out at whatever ultimate price. The time was ripe for the fascist solution.

Barrier to entry defined:

a barrier to entry is a cost that must be incurred by a new market entrant that incumbents do not have to incur

Reputational mechanism

1. Mechanism failed in the case of Stewart Richardson. 2. Buyers hold reputation hostage 3. If reputation no longer valuable, process falls apart 4. Reputation hangs on the shadow of the future

Externalities

1. indirect effect of a consumption, production, or investment decision on others than those making it AND not reflected in the costs and benefits facing the decision-maker 2. Eg: if I turn up my radio very loud, I pay for the electricity, but not for the discomfort caused to my neighbours = negative externality 3. Eg: if I buy an Apple computer, some (small) benefit to all other owners of Apple computers = positive externality

Block

1. need to replace "old paradigm" on states and markets with "new paradigm" 2. Block surveys different approaches to the question of state-market relations

Fiscal: spend more in a recession (Keynes)

1. via "automatic stabilisers" such as unemployment insurance 2. via stimulus policies (increasing spending, cutting taxes)

Peter A. Hall, "The Economics and Politics of the Euro Crisis"

1. This article addresses puzzles raised by the Euro crisis: why was EMU established with limited institutional capacities, where do the roots of the crisis lie, how can the response to the crisis be explained, and what are its implications for European integration? It explores how prevailing economic doctrines conditioned the institutional shape of the single currency and locates the roots of the crisis in an institutional asymmetry grounded in national varieties of capitalism, which saw political economies organised to operate export-led growth models joined to others accustomed to demand-led growth. The response to the crisis is reviewed and explained in terms of limitations in European institutions, divergent economic doctrines and the boundaries of European solidarity. Proposed solutions to the crisis based on deflation or reflation are assessed from a varieties of capitalism perspective and the implications for European integration reviewed. 2. However, mainstream economic doctrine changed during the 1980s in directions that made monetary union seem more feasible and left a distinctive mark on the institutional structure of the new union. Two aspects of the new economic doctrines were especially consequential. First, mainstream economics moved away from the Keynesian view that active fiscal policy was crucial for stabilising the economy - towards the monetarist view Second, in keeping with the view that demand management was largely irrelevant to growth, the new doctrines held that economic growth depended on structural reform to the supply side of the economy, and 'structural reform' meant measures to make competition in markets for goods, labour and capital more intense. 3. However, the form taken by the crisis in Europe, which arrayed the GIIPS of 'southern' Europe against their creditors in 'northern' Europe, originated in the structural strains generated when different types of political economies were joined in a currency union. One can be described as an 'export-led' growth strategy. Governments pursuing such strategies depend on world demand to fuel economic growth. This strategy dictates relatively neutral macroeconomic policies, because growth is not primarily dependent on domestic demand and expansionary policies often fuel wage increases that threaten the competitiveness of exports. For these countries, entry into EMU posed few problems. The alternative strategy often pursued by OECD countries is to pursue growth led by domestic demand, fuelled periodically by macroeconomic expansion and a tolerance for asset booms. This type of strategy is common in liberal market economies, which usually lack the capacities for sustained wage co-ordination and incremental innovation that make an export-led growth strategy feasible. 4. Therefore, although largely unacknowledged, a basic asymmetry was built into EMU from its inception. The northern European political economies entered EMU with institutional frameworks well suited to the export-led growth strategies that offer the best route to economic success in such a union. The southern European economies entered EMU with institutional frameworks badly suited to effective competition within such a union and they lost the capacity to devalue on which many had long depended. 5. Germany, Belgium, the Netherlands, Austria and Denmark pursued strategies of competitive deflation - marked by relatively tight fiscal stances, low wage increases, incremental innovation and the gradual substitution of capital for labour. Their patterns of economic performance displayed the characteristic effects of such a strategy: growth was led by exports rather than by domestic demand, based on stable or declining unit labour costs. By contrast, the countries of southern Europe, including Spain, Portugal, Greece and Italy, continued to pursue relatively expansionary fiscal policies oriented towards the growth of domestic demand. However, since these countries could no longer devalue their exchange rates against their principal trading partners, their patterns of economic performance began to display some perverse effects. Economic growth was relatively rapid in southern Europe after 1999, but it was marked by the expansion of domestic demand and rates of inflation higher than in the north, which led to deteriorating relative unit labour costs and declining shares of world exports

Block's "old paradigm"

Core aspects of worldview 1. State and economy analytically separable, thus useful to speak of state interference or intervention in functioning of economy 2. States can be classified according to how much they intervene in the economy

Fritz W. Scharpf, "Monetary Union, Fiscal Crisis and the Preemption of Democracy"

1. In the present essay I will focus on the European Monetary Union (EMU) which has removed crucial instruments of macroeconomic management from the control of democratically accountable governments. Worse yet, it has been the systemic cause of destabilizing macroeconomic imbalances that member states found difficult or impossible to counteract with their remaining policy instruments. And even though the international financial crisis had its origins outside Europe, the Monetary Union has greatly increased the vulnerability of some member states to its repercussions. Its effects have undermined the economic and fiscal viability of some EMU member states, and they have frustrated political demands and expectations to an extent that may yet transform the economic crisis into a crisis of democratic legitimacy. Moreover, present efforts of EMU governments to "rescue the Euro" will do little to correct economic imbalances and vulnerabilities, but are likely to deepen economic problems and political alienation in both, the rescued and the rescuing polities. 2. Even more important, however, were the institutional differences of national wage setting systems. The Monetarist regime worked in Germany because wage leadership was exercised by large and economically sophisticated industrial unions that had learned to operate within the monetary constraints. In countries with powerful, but fragmented and competitive unions and decentralized wage-setting institutions, by contrast, unions simply did not have the capacity to contain the inflationary pressures of wage competition 3. By 2007, therefore, conditions in the Eurozone could be described as follows: The Monetary Union had achieved its proximate political purposes by eliminating currency fluctuations and interest-rate differentials among its member economies. At the same time, however, it had deprived member governments of the monetary and exchange-rate instruments of macroeconomic management and it had tried, through the Stability Pact, to also constrain their employment of fiscal instruments. But since the Eurozone was not an "optimal currency area", the imposition of one-size-fits-all ECB interest rates produced "asymmetric" impulses in EMU economies with above average or below-average rates of growth and inflation. In low-growth Germany, high real interest rates had deepened and prolonged a recession which, since monetary as well as fiscal reflation were ruled out, was eventually overcome through wage restraint and supply-side "reforms" that constrained domestic demand and increased export competitiveness. In GIPS economies, by contrast, very low real interest rates had fueled credit-financed economic growth and employment, but also rapid increases in unit labor costs that reduced export competitiveness. The resulting rise of current-account deficits was accommodated by equally rising capital inflows from investors in surplus economies leading rising external debts accumulated primarily or exclusively in the private sector. As a consequence, GIPS economies were becoming extremely vulnerable to potential disturbances in international financial markets that might induce capital flight - followed by potential liquidity and solvency crises. 4. Governments in GIPS countries may have been as unconcerned as the American or British governments about the rise of these imbalances. But even where they tried to constrain their overheating economies through fiscal retrenchment and attempts at wage moderation, the instruments of macroeconomic policy that were still available to national governments proved insufficient to neutralize the expansionary effects of EMU monetary impulses. At the same time, moreover, the escalating economic imbalances and vulnerabilities were of no concern for EMU policy makers, neither for the Commission enforcing the Stability Pact nor for the ECB carrying out its mandate to ensure price stability. 5. For how long external imbalances in the Euro zone could have continued, whether they could have been gradually corrected by market forces or would soon have ended in a crash, has become an academic question. In the real world, the international financial crisis of 2008 did trigger chain reactions which, in the Eurozone, had the effect of transforming the vulnerability of the deficit countries into a systemic crisis that is thought to challenge the viability of the Monetary Union itself. The much-researched story is far too complex to be retold here in any detail, but for present purposes a thumb-nail sketch of three distinct, but causally connected crises will suffice. 6. Initially, the direct impact of the American "subprime mortgage crisis" and the Lehman bankruptcy was limited to European countries that had allowed their banks to invest heavily in "toxic" American securities. Apart from the UK, the main victims were Germany and Ireland, whereas in Spain banking supervision had effectively prevented Spanish banks from engaging in off-balance activities abroad. As a consequence, the budget deficits of countries that had to rescue "system-relevant" private or public banks, escalated to previously unheard-of levels 7. The secondary impact of the international financial crisis was a dramatic credit squeeze on the real economy as banks had to write off insecure assets on their balance sheets while interbank lending was stopped by mutual distrust. As a consequence, economic activity declined and unemployment increased in the countries immediately affected by the banking crisis, and these effects spread quickly to closely-linked other economies. In addition to the fiscal effects of bank bailouts, therefore, governments had to accept a steep decline of tax revenues and an equally steep rise of expenditures on unemployment and on the protection of existing jobs. Quite obviously, however, the effects of the credit squeeze would hit hardest on countries whose economic activity had come to depend most on the availability of cheap credit and massive capital inflows- which in the Euro zone had been true of the GIPS economies. In Ireland and Spain, moreover, the real-estate bubble had burst under the impact of the recession, and the defaults of mortgages created a secondary banking crisis in which governments had to rescue even more financial institutions (or their creditors in the financial institutions of surplus economies). The result was an even more dramatic rise of public-sector deficits and debt ratios even in countries like Spain and Ireland whose indebtedness had been far below the Eurozone average 9. In the process, thirdly (and belatedly), international rating agencies and investors ceased to be satisfied with the elimination of currency risks and finally began to worry about the sustainability of public-sector indebtedness - in particular for countries whose current-account deficits suggested economic weaknesses that might also affect the capacity of governments to meet financial commitments. As this happened, the price of outstanding bonds declined, refinancing as well as the placement of new issues became difficult, and the convergence of nominal interest rates on German levels came to an end. As a consequence, risk premia on sovereign debt rose to very high and practically prohibitive levels after 2008 10. The specter of "sovereign default" arose first in Greece. There, the incoming Pasok government had to admit that public sector deficits (which had significantly violated the Stability Pact even during the high-growth years following accession to the Euro zone in 2001) had in fact been grossly under-reported by its predecessors. Confronted with the potential repercussions of Greek bankruptcy on their own banks, and with speculative attacks on other EMU member states, capital-exporting countries agreed to create a common "Stability Mechanism" that would ensure Greek government obligations − which was soon followed by a much larger European Financial Stability Fund (EFSF) whose guarantees were first invoked by Ireland and now also by Portugal. In all cases, governments had to accept extremely tough commitments to fiscal retrenchment and supply-side policy reforms - which are becoming the model for a general regime of fiscal supervision and controls in the Eurozone. 11. I will now turn to issues of democratic legitimacy. From the perspective of citizens in Greece, Ireland and Portugal, the European and international agencies imposing the "rescue-cum-retrenchment" program are not, themselves, supported by democratic legitimacy. What matters, therefore, is the relationship between citizens and the national governments that are accountable to them 12. "Output-oriented legitimacy" reflects popular responses to outcomes that may be attributed to the policy output of the government whose performance is in issue. Here, the first general observation is that voters cannot be required to be fair, and that governments may be punished for outcomes they did not control. The second general point is that electoral responses will reflect relative judgments: Three million unemployed in Germany may be a political disaster or a celebrated success depending on the figures in recent years. With that in mind, the "rescue-cum-retrenchment" regime that is presently imposed on GIPS countries can only be considered a political disaster. Two-digit and still rising rates of unemployment, wage cuts, and rising social inequality will surely not generate outcome satisfaction. Under such conditions, GIPS governments cannot hope to benefit from output-oriented legitimacy. 13. But that does not, by itself, rule out the possibility of input-oriented legitimation. Democracy is about collective self-determination, rather than about wish fulfillment. It is compatible with the need to respect external constraints, and it may also support hard choices and painful sacrifices − provided that these can be justified in public discourses as being effective and normatively appropriate in dealing with common problems or achieving the collective purposes of the polity. At the same time, however, input-oriented democratic legitimacy does presuppose the possibility of politically meaningful choices, and it is not at all compatible with a situation where choices are pre-empted by external domination 14. Like Thatcher, the present Greek and Irish governments may, at least for a while, benefit from blaming present hardships on their political predecessors. But they must still struggle with the perception that the "understandings" they had to sign in order to obtain the guarantees of the Financial Stability Fund read less like self-chosen programs than like protocols of an unconditional surrender. Thus in order to be able to hang on, they may desperately need to negotiate for politically visible European "concessions" and for permission to adopt at least some "non-liberal" policies to alleviate the worst plight of their constituents. If they should fail, and if changes of governments would not seem to make a difference, the legitimacy of the democratic regime itself may be in danger - especially in polities where democratic government is itself a relatively recent achievement. 15. But political resignation, alienation and cynicism, combined with growing hostility against "Frankfurt" and "Brussels", and a growing perception of zero-sum conflict between the donors and the recipients of the "rescue-cum-retrenchment" programs, may create the conditions for anti-European political mobilization from the extremes of the political spectrum. In the worst case, therefore, the attempts to save the Euro through the policies presently enacted may either fail on their own terms, or they may not only undermine democracy in EU member states but endanger European integration itself.

Terms to retain from this lecture

1. institutions 2. transaction cost 3. barriers to entry 4. asymmetric information and "lemons" 5. "hold up" problem 6. markets versus hierarchies 7. embeddedness