To set a reading intention, click through to any list item, and look for the panel on the left hand side:. The American political economy: institutional evolution of market and state See also link to ebook. Library availability. Buy from Amazon. Have you read this? Please log in to set a read status Setting a reading intention helps you organise your reading. New material added and existing material updated in the chapter discussing the two welfare states. Extensive updates to the coverage of the global economy Expanded and updated discussion of Obama's economic policies.
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In The Spotlight. Shop Our Brands. All Rights Reserved. Cancel Submit. Ironically, although the government was spending unprecedented amounts per capita, it never had less discretionary authority. In , mandatory programs constituted approximately 27 percent of government spending. By , they had grown to In , the New Deal introduced Social Security old age pensions; three decades later, the Johnson administration expanded entitlements with Medicare and Medicaid. As of , Social Security and healthcare entitlements constituted some 42 percent of total government spending.
Given the high levels of deficit spending in recent decades, interest on the national debt has grown to claim another With an aging population and unprecedented deficits, the claims on the budget imposed by these commitments are projected to exceed 70 percent of the budget by As noted in the early pages of this chapter, the growing demands of entitlements constitute one of the great challenges that may be difficult to address given the financial collapse. Consider regulation. Between and , real federal nondefense spending increased by some percent.
The real engine of growth in regulatory spending came in the area of social regulation e. Inflation-adjusted social regulatory spending increased by percent during this period, and currently constitutes approximately 85 percent of all regulatory spending. During the period to , the Federal Register grew from 14, to 80, pages.
Regulations can mandate changes in occupational safety practices, pollution control technologies, or bank underwriting standards; they can redefine property rights, prohibit various forms of Beyond the Market-State Dichotomy 13 inter-corporate relations, or demand that businesses recognize the right of workers to engage in collective bargaining.
None of these activities will have a significant impact on the size of the budget, even if they have a substantial aggregate effect on the organization of production and the economy. Conclusion Rather than viewing the market and state as constituting two separate realms of human activity, this chapter has argued that political economy must be grounded in an understanding of the role of public policy and institutions in constituting the economy and shaping economic performance.
But state policies and institutions are not static. As shown above, there has been ongoing expansion in the size of the state. This requires that we examine, first, the path dependent process of development that exhibits relative stability for prolonged periods of time, and second, the ways in which crises have punctuated this stability. These crises create an opportunity for significant and rapid change that alters the trajectory of development. In each period of rapid change, new policies and institutions have shared common features that were grounded in a distinctive understanding of the economy, the role of the state, and the most appropriate policy instruments and patterns of state-civil society relations.
New policies and institutions are layered upon the old, contributing to institutional thickening, policy incoherence, and contradictions that may well set the stage for subsequent crises. In the following chapters, we will explore this process of change as it has unfolded over the course of the past century, giving rise to successive regimes. We will also investigate a host of contemporary problems, some of which were introduced in the early pages of this chapter, as a means of better understanding the contradictions inherent in the current regime. We may well be on the brink of another period of rapid and substantial change that will culminate in a new distinctive policy regime.
Before we can embark on this exploration, we must examine in greater detail both the key institutions of the political economy and the process of change introduced briefly above. We turn to this examination in Chapter 2. Yet, it is difficult to conceive of large, functioning markets absent state institutions.
They are central to the creation of functional property rights. Moreover, key actors in the economy corporations, labor unions, financial institutions and the permissible relationships between them, are a product of public policy. Laws shape economic development by favoring certain methods of coordination and control while rendering others illegal. The key lesson thus far is that simple lines of demarcation between the market and the state do not provide a descriptively accurate or analytically useful means of understanding the political economy.
Rather than comprising two potentially opposing forces, the market and the state are institutionally intertwined. This chapter explores the key institutions of the political economy, starting with an examination of the state, before moving to consider corporations, labor and finance. As will be argued below, these actors are constituted by the law and thus cannot be understood apart from public policy decisions.
The State Drawing on Max Weber, one can begin by defining the state as a constellation of complex organizations that claim monopoly over the legitimate use of coercive force within the boundaries of a nation. Institutions comprise the rules, roles, and decision-making procedures that both define the inner workings of the state organizations and shape the relationships between the state and civil society. Along each of these dimensions there can be great variation across the state.
Different agencies, for example, may have very different grants of authority, resource flows, and patterns of interest group relations; they may vary significantly in their analytical and administrative resources and the kinds of policy instruments they can bring to bear in formulating and executing policy. To the extent that different agencies with overlapping jurisdictions vary along these dimensions, there may be significant problems of coordination.
Although this book will employ primarily an institutional perspective, a brief discussion of two alternative frameworks—public choice and class theory—is quite useful. Each provides a unique understanding of internal dynamics and inherent tensions that can provide a richer understanding of the state, even for institutionalists. The first perspective under consideration is public choice. An understanding of any social interaction process must be based on an analysis of the choice behavior of persons who participate in that process.
In the market, individuals can pursue their self-interest by engaging in bilateral exchanges. In politics, in contrast, collective action is necessary. This approach makes the State into something that is constructed by men, an artifact. As Mancur Olson argues in The Logic of Collective Action, it is inherently difficult to mobilize in support of public goods. It is far more rational to allow others to bear the costs and engage in free riding behavior. Policies that provide selective goods, in contrast, can exclude those who fail to make the requisite investment.
Groups are most successful when they mobilize to secure narrowly focused benefits like government subsidies, tax exemptions, or regulatory barriers to entry. These benefits usually take the form of transfers: benefits for group members are funded through costs that are widely dispersed throughout society either through taxation or through higher costs borne by consumers. For such rent-seeking to be rational, it is only necessary that the net benefits enjoyed by the group that is, the group benefits minus the group costs, divided by group members are greater than the overall social 16 Making Sense of the Political Economy costs divided among members of the entire society.
In practical terms, this means that members of a group will impose social costs that are far greater than the benefits enjoyed by group members. In the end, as policy commitments accumulate, they claim an increasing proportion of national income and a greater share of private sector resources are devoted to securing and preserving transfers. As a result, governments can become sclerotic, losing their ability to respond to new challenges.
In capitalism, the state is not a neutral entity but, by necessity, represents capital in its efforts to manage the class struggle and promote the capital accumulation process.
The state must promote capital accumulation because it is structurally dependent on it for revenues. Regardless of the partisan affiliations of office holders, the need for revenues places hard limits on what can be accomplished. There is a further complication. The difficulties of managing these competing pressures can be exacerbated, moreover, by fluctuations in the business cycle, long-term industrial cycles, and changes in the relative power of nations in the international economy.
Contemporary class theorists recognize that capital is not monolithic. The state thus becomes a Making Sense of Institutions 17 mediating body, weighing priorities, filtering information, and integrating contradictory measures into state policy. Rather, the divisions within capital provide the political space for state managers to exercise some autonomy. This autonomy is arguably the greatest during periods of crisis e.
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The threat of a capital strike loses its power during a depression; businesses are already failing to invest. During times of war, demand is high but state managers can use their control of resources, transportation, and labor to starve firms that fail to accede to the requirements of war production. As Fred Block notes: It is hardly surprising … that such periods have seen the most dramatic qualitative growth in state activity and the most serious efforts to rationalise capitalism. Class theorists, in contrast, work at a far higher level of aggregation and see the state as structurally dependent on capital accumulation and forced to mediate struggles between classes and class factions.
Yet, they also tell complementary stories. Public choice, for example, can provide a compelling explanation for why transfer seeking is so ubiquitous in democratic systems, thereby providing insights that are useful in seeking to understand how competing blocs of capital become embedded in the state and why managing the resulting incoherence is so difficult for elected officials and bureaucrats.
The logic of collective action can help understand why narrowly focused business interests are so successful in achieving selective benefits whereas the kinds of policies that would provide greater support for labor e. Rather than viewing competing theoretical perspectives as mutually exclusive, it may be far more prudent to seek out those components that can provide us with a greater explanatory power.
As noted above, this analysis will be grounded primarily in an institutional perspective on the state and the economy, more generally. Richard Swedberg provides a useful definition of institutions that would satisfy institutionalists from multiple disciplines. As with public choice accounts, there is clear recognition that institutions constitute the rules and procedures that structure exchanges and collective 18 Making Sense of the Political Economy action. However, rather than assuming that state institutions are designed by rational actors seeking to maximize joint gains, it is commonly argued that institutions actually shape preferences.
James G. March and Johan P. The process involves determining what the situation is, what role is being fulfilled, and what the obligations of that role in that situation are. Institutions are critical, moreover, because they provide policymakers with a set of administrative capacities, analytical and budgetary resources, statutory authority, and patterns of interest group relations that constrain and enable their activities.
Much of the institutionalist work on the state focuses on the historical conditions that gave rise to institutions in the formative moment and the ways in which institutions successfully reproduce themselves over time. We will turn to the logic of institutional change later in this chapter. Beyond the State In The Great Transformation, Karl Polyani offered an important corrective for the belief that markets emerge spontaneously as self-regulating entities.
The examination is grounded in an understanding of the role of the law in constituting the very building blocks of the economy and governing their interaction. Following Lauren B. Edelman and Mark C. Suchman, one can observe the law creates a constitutive environment, a facilitative environment, and a regulatory environment within which economic organizations function.
In the regulatory environment, the law imposes rules that govern acceptable forms of conduct and coordination e. Drawing on Polyani, rather than assuming some autonomous logic of economic activity, it is far more accurate to view the economy as being embedded in a dense network of laws and institutions. According to Coase, although the many functions assumed by the corporation could, in theory, be executed through market exchanges, this would impose significant costs.
There are limits, however. Corporations are legal entities. In the early years of the republic, corporate charters were awarded by state legislatures. But the rapid dissemination of general incorporation laws in the early nineteenth century made the corporate charter widely available to entrepreneurs. The corporate charter carries a number of benefits.
Because the corporation is a legal entity separate from those who own and manage it, all parties have limited liability. Shareholders may lose their investments; managers may lose their jobs. But they cannot be held personally liable. Limited liability creates greater incentives for individuals to 20 Making Sense of the Political Economy invest in corporations and this access to capital was particularly important as companies grew in size. Corporations, moreover, have a separate legal personality that provides them with the right to own property, for example, or sue to enforce contracts.
In the United States, corporations qua legal entities were guaranteed certain constitutional protections afforded to real flesh-and-blood citizens. For example, they possess freedom of expression under the First Amendment; they cannot be deprived of property without due process of law nor can they be denied just compensation under the Fifth Amendment. As Alfred D. Chandler, Jr. Others adopted product divisions with different product lines assigned to different divisions. Geographical divisions were created in some cases for firms serving multiple markets, and various hybrids were employed to combine two or more forms of organization.
The movement from relatively simple corporate forms to multi-divisional organizations was, in part, a product of organizational isomorphism. That is, corporate managers adopted the kinds of innovations that were being employed by other firms. The dissemination of the multi-divisional firm cannot be separated from three other larger changes in the American economy. Second, the development of new mass production technologies e. Finally, the expansion of capital markets allowed corporations to finance growth well beyond what might have been possible if firms had been forced to rely on retained profits or the personal wealth of their founders.
The development of the corporate economy during the late nineteenth and early twentieth century occurred, in part, through consolidation. During the merger wave of —, horizontal mergers eliminated more than 3, companies, thereby creating oligopolies or monopolies in a number of industries and giving rise to some of the giant enterprises that became synonymous with American industry.
A second merger wave, from to , was once again dominated by horizontal mergers, eliminating some 12, additional firms. By prohibiting conspiracies in restraint of trade e. The complexity of the functions integrated in the large multi-divisional firms demanded professionalized management, thereby displacing the family management that had been prevalent in earlier generations.
This professionalization was combined with a diffusion of corporate ownership. As corporations sought to produce and distribute their goods in regional or national markets, the financial demands exceeded what could be accomplished through family fortunes or retained profits. It became necessary to enter capital markets and rely on the sale of stocks and bonds to fund industrial expansion.
These two trends—the professionalization of management and the diffusion of ownership—marked a significant change in the organization of corporations. As Adolf A. Berle and Gardiner C. The separation of ownership and control—and the diffusion of ownership more generally—would become far more significant over the course of the twentieth century. During the first great merger wave, investment bankers like J. Morgan used their control over finance to engineer large consolidations.
But over the course of the next century, the major players were increasingly large institutional investors like mutual funds, pension funds, and insurance companies that pooled the savings of many small investors and used them to purchase large blocks of corporate stock. In theory, these institutional investors could exercise greater control over corporate policy. However, given the development of secondary markets, it was less expensive for investors to sell their shares than to seek to exercise voice over corporate decisions. Thus, institutional investors adjusted their portfolios on a regular basis in response to poor management decisions or downturns in corporate profitability.
Their fiduciary responsibility to investors did not involve shaping the long-term strategic decisions of corporate managers. According to Robert B.
This was certainly a means of promoting short-term profitability and thus 22 Making Sense of the Political Economy meeting the demands of institutional investors and raising the value of stock, but unlike real entrepreneurship, it did nothing to create wealth. Finance The evolution of the corporate economy cannot be understood without devoting attention to the role of finance. Financial institutions or intermediaries play vital roles in any capitalist economy. They aggregate the savings of individuals and make it available for commercial transactions and investment.
Through the practice of fractional reserve banking i. Finally, finance provides a key lever for policy makers seeking to shape macroeconomic performance e. Corporations can fund expansion through three basic means, each of which has different implications for organizational autonomy. First, corporations can draw on retained profits, an option that provides a maximum level of autonomy. Second, they can rely on bank loans. Because banks are providing longterm capital, they have a direct stake in major corporate decisions and may demand some representation on corporate boards, thereby severely restricting autonomy.
Third, corporations can rely on commercial paper markets—stocks and bonds. The United States has a capital-market based system wherein firms rely primarily although not solely on stocks and bonds. Although major investment banks are responsible for the initial issuance of stocks, they quickly enter the secondary market and ownership is dispersed, thereby providing corporations with greater autonomy than would exist if funding came through bank loans. However, as noted earlier, this can carry a large cost insofar as institutional investors routinely adjust their portfolios in response to minor fluctuations in corporate profitability, and, as a result, they create disincentives to pursue long-term strategies at the cost of short-term profitability.
Arguably, there is no clearer example than finance. The divisions between investment and commercial banking, and the distinctions between commercial banks, savings and loans, and credit unions, are the product of public policy. In essence, a series of statutes created distinct financial sub-industries, each with its own set of regulatory institutions controlling entry and exit and governing what kinds of products and services could be offered and the extent of price competition.
In response to the financial panic of , Congress created the Federal Reserve in , which was given the responsibility of setting reserve requirements and serving some lender of last resort functions. Two decades later, during the cataclysm of the Great Depression, Congress forced the separation of commercial and investment Making Sense of Institutions 23 banking.
The regulation of investment banking and the exchanges was assigned to a new Securities and Exchange Commission. The regulation for commercial banking was assigned to a number of agencies with overlapping responsibilities and new agencies were created to regulate various segments of the commercial banking industry e. In short, regulatory legislation and institutions literally created the various financial industries and defined the relationships between them.
Finance has been one of the most regulated parts of the US economy. Nonetheless, there has been ongoing innovation in the financial industry often in response to new technologies and efforts to circumvent regulatory restrictions that impeded attempts to manage the pressures imposed by larger macroeconomic forces. During the s, when the United States suffered under abnormally high rates of inflation, for example, regulations limiting the interest rates that banks could pay led to a host of novel innovations and disintermediation—the flow of funds out of regulated financial intermediaries.
Subsequently, a wave of deregulations increasingly eroded the regulatory structure created during the New Deal. Ongoing innovations involving the securitization of mortgage debt and the issuance of credit-default swaps resulted in the emergence of a shadow system of finance free from regulatory oversight. The vulnerability of this system became painfully apparent in —8, when the collapse of the real estate bubble created a financial crisis second in magnitude only to the collapse during the Great Depression. Organized Labor The position of labor in the political economy is in many ways determined by decisions made by corporations.
Decades later, the decision to respond to competitive pressures by outsourcing production to nations with less expensive labor accelerated the decline of unionized manufacturing industries, while leaving fewer opportunities for unskilled workers outside of low-paid service sector occupations. In large part, the fluctuating fortunes of organized labor in the United States were a product of corporate strategies over which labor had little or no voice.
But the history of organized labor, like the history of corporations and finance, is impossible to tell without engaging the history of public policies and institutions. Key features of American political institutions e. However, the NLRB also determined what kinds of questions could be addressed in industrial relations, insulating managerial prerogatives and frustrating cooperative strategies.
After the passage of New Deal labor legislation and World War II mobilization, unionization levels peaked in at some But policy changes played a significant role. Moreover, beginning in the s, the NLRB, beset by significant budget constraints, assumed a more passive role in the regulation of industrial relations. To the extent that union growth in earlier decades was a product of government promotion of union membership, one should not be surprised that changes in governing philosophies, policies, and resource flows had important implications for unionization. Governance In the past several decades, scholars have devoted much attention to exploring the different ways in which economic organizations coordinate their behavior and the ways in which law has shaped the evolution of economic governance in Making Sense of Institutions 25 different industries and societies.
These rules define the legal and illegal forms of how firms can control competition. Such laws are never neutral. They favor certain groups of firms. State making and economic development are necessarily intertwined. In the research on governance, rather than presenting the market as being synonymous with the economy, a market is one of many potential governance mechanisms available to economic actors. In its purest form, a market is a decentralized system of exchange linking formally autonomous actors engaged in self-liquidating transactions.
It is the most appropriate means of coordinating behavior when transactions involve standardized goods or commodities. Much of the research on governance has drawn on transaction cost economics. Oliver Williamson argues that transaction costs incurred in markets drive the search for nonmarket governance mechanisms.
One might object, first, that this argument continues to grant the market a privileged status; it is, after all, both the starting point in the analysis of governance and something of a benchmark for evaluating the efficacy of alternatives. Governance decisions involve important strategic implications for the relative power of firms.
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Governance structures may bring greater stability to the economic environment, but they also often entail asymmetrical distributions of power and reinforce and reproduce the power of key economic actors. Long-term contracting, joint ventures, collective bargaining and formal integration provide means of coordinating bilateral relations, whereas 26 Making Sense of the Political Economy trade associations, standard-setting organizations, research and development alliances, and interlocking directorates can be employed in multilateral relations.
At the extreme, firms may consolidate through mergers as a means of fully coordinating their behavior. As noted above, the search for new governance mechanisms may be driven by the need to economize on transaction costs. It may reflect the efforts on the part of larger firms to exercise control over the supply chain and use this control to secure market share. However, public policies and institutions delimit the range of options open to economic organizations.
The state both creates an institutional structure within which governance regimes evolve and is an actor in its own right. Consider the vagaries of competition policy. As noted above, there is much to suggest that the great merger wave at the turn of the twentieth century was a response to Sherman Act prohibitions on conspiracies in restraint of trade that threatened associations. The state often went well beyond the promotion of associational governance. During the Progressive Era and the New Deal, a number of regulatory policies were created to coordinate the behavior of firms in various industries, controlling conditions of entry and exit, assigning markets, and setting prices.
Many economic regulatory policies were eliminated via deregulation in the late s and early s, the claim being that the market—in contrast to the state— could promote greater efficiencies. And yet, when seen through the lens of governance theory, these policies often allowed industry actors to adopt nonmarket forms of governance, often developing mechanisms that replicated some of the coordinating functions of earlier regulatory policies. But in a federal system, individual states may arrive at very different decisions regarding what forms of governance are permissible, thereby giving rise to considerable variation across the nation.
Consider finance. Although the Glass-Steagall Act of prohibited members of the Federal Reserve System from engaging in investment banking, state-chartered banks were under no such prohibitions. Moreover, there was great variation in branching practices. The Taft-Hartley Act created great regional variations in the governance mechanisms that could be used to coordinate the behavior of corporations and labor organizations. In each of these examples, federal policies shaped governance decisions but their impact was mediated by state policies over which the federal government exercised little control.
Scholars in multiple disciplines have adopted various notions of path dependence and thus, it makes sense to note explicitly what is meant by this concept as applied here. Several alternatives may be considered, but at a critical juncture, they must make a decision to adopt one alternative over the others. Once this decision is made, a path has been chosen that may shape the trajectory of future development. This has been stated conditionally for a reason: path dependence requires that once a choice has been made, there are factors that increase the costs of reversing course.
The power of these forces may vary across policy areas and overtime. First, because institutions and public policies affect the power, resources, or investment decisions of social interests, these interests have an important stake in their preservation. Industries that enjoy subsidies or protection via regulatory barriers to entry, for example, have powerful incentives to mobilize electoral and financial resources to insulate their favored policies from change. When administrators encounter challenges, they address them within the constraints and capabilities of the agencies they occupy and this, necessarily, narrows their discretion.
Third and related, there are cognitive constraints. Public policies embody a given understanding of policy problems and the underlying causal structures. They privilege certain theories and bodies of knowledge as being inherently applicable to the policy, and this, in turn, shapes organizational decisions e. Incremental change continues to occur, and overtime, the aggregate effects of these changes can be substantial. If development occurs along a given trajectory, shaped by a host of endogenous factors, one may well witness overtime a growing disjunction between state capacities and the problems that emerge in the political economy.
The state may become increasingly incapable of managing a variety of challenges.
For example, Stephen Skowronek has documented how most governmental tasks in nineteenth century America were carried out by state and local governments, the national state being essentially a state of parties and courts. These shocks force new issues on to the policy agenda, mobilize new interests, or raise profound concerns about the adequacy of the prevailing approach to and understanding of policy. However, shocks can also be of such a magnitude as to force rapid and dramatic changes in multiple policy areas, affecting broader institutional change and significant revisions in the governing philosophies regarding the role of the state in the economy.
In the twentieth century, the Great Depression provides the most striking example of a shock that carried profound ramifications for the political economy, changing the trajectory of institutional development for generations. During such episodes, Congress may pass new statutes or presidents may issue executive orders, creating new agencies or Making Sense of Institutions 29 placing demands on existing agencies that exceed their administrative capacities. Agencies, in turn, may seek to develop new and novel policy instruments in order to execute new functions.
They may expand and professionalize their bureaucracies. They may develop new mechanisms for integrating new interests into the policy process. These changes, in turn, alter the trajectory of development. However, because the creation of new policies and administrative capacities rarely results in the wholesale elimination of what came before, the changes may introduce new forms of friction and incoherence.
In some cases, there may be great contradictions between the changes initiated in response to crisis and the policies and institutions inherited from the past. Although there may be a reduction in the size and scope of government immediately following a crisis, things never return to their pre-crisis level.
Policies and practices embraced as a response to crisis are often retained because groups that have secured transfers from the policies or businesses that have altered their investment, production and employment decisions in response to the policies have substantial stakes in their perpetuation. Tight linkages between congressional committees, bureaucracies, and mobilized interests can prove remarkably resilient.
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Once a stable equilibrium forms around policies and agencies, they insulate policies from change, contributing to the directionality of path-dependent development. Even if conditions change substantially, policy commitments can be redefined to secure the support of new constituents. Thus, a system of agricultural subsidies introduced during the Great Depression, when 30 percent of the population was involved in the farm economy, served a very different purpose half-a-century later when large agribusiness dominated a sector that accounted for less than 2 percent of the workforce.
The directionality is also a product of changes in popular expectations or ideology that reinforce the expansion of the state and the relationships between the state and various social groups. On the eve of the New Deal, the federal government assumed very limited responsibility for social welfare. In contrast, by the end of the New Deal, citizens looked to the government for unemployment compensation, old-age pensions, agricultural subsidies, protection of the right to organize in the workplace, and a host of government services that had been introduced in the prior decade.
Popular expectations changed in response to this expansion of state authority. The criteria for judging performance of governmental institutions—and one might argue, the legitimacy of the state—were permanently transformed. Similarly, while the post period witnessed the growing prevalence of anti-statist rhetoric, it did not translate into retrenchment in the largest middle-class entitlement programs that have been an important driver of government growth.
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