Sources for an Alternative Political Economy
by Neil Fligstein and Steven Vogel:
We will propose three core principles of an alternative political economy:
governments and markets are co-constituted
"First, then, governments and markets are co-constituted. Government regulation is not an intrusion into the market but rather a prerequisite for a functioning market economy. Critics of neoliberalism often make the case for government “intervention” in the market. But why refer to government action as intervention? The language of intervention implies that government action contaminates a market otherwise free of public action. To the contrary, the alternative to government action is not a perfect market, but rather real-world markets thoroughly sullied with collusion, fraud, imbalances of power, production of substandard or dangerous products, and prone to crises due to excessive risk-taking.
Likewise, critics of neoliberalism often adopt the fictional “free market” as a reference point even as they make the case for deviation from it. For example, they follow the standard practice of economists by identifying market failures and proposing solutions to those failures. To be fair, this can be a useful way to see how government action can remedy specific problems, and to assess when action may be helpful or not. But this approach also risks obscuring the fact that market failure is the rule and not the exception. More fundamentally, the government is not a repair technician for a market economy that functions reasonably well, but rather the master craftsperson of market infrastructure.
Thus, governments pacify a territory and centralize the means of violence, making investment safer and trade less precarious. They create ways to write and enforce contracts via the rule of law. They provide public goods like education and transport infrastructure. No neoliberal denies the value of these things. Beyond these basic functions, governments establish the conditions for the emergence of new markets, provide the architecture to stabilize existing ones, and manage crises to limit damage and facilitate recovery. Historically, governments fostered many of the largest markets, such housing and banking, by designing new market structures that enabled the mass expansion of goods and services. In the case of the housing market, the U.S. federal government created the 30-year fixed interest rate mortgage as the standard mortgage product. It also stabilized the savings and loan industry by creating rules about paying interest on bank accounts and deposit insurance.
In the postwar era, this system helped propel home ownership from around 40 percent to 64 percent. More recently, many policy failures, such as the financial crisis of 2007–2009, occurred because governments shirked their role of making markets work through “deregulation.” Essentially, the U.S. government allowed financial institutions to enter whichever businesses they liked and with little oversight. In the wake of the Great Recession, predictably, the government re-established control and oversight over the banking sector with the Dodd-Frank Act. One of the provisions of that act was to give the Federal Reserve the ability to ask the largest banks to undergo stress tests every year to determine whether or not they could manage a serious downturn.
Governments also support knowledge creation and dissemination and underwrite the cost of innovation in the private sector. They facilitate the organization of market activity by establishing the legal basis for corporations and by setting the rules for fair and efficient trading practices on stock exchanges. A political economy that does not value the role of government along these different dimensions distorts how markets do contribute to society.
real-world political economy hinges on power
Second, real-world political economy hinges on power, both political and market power. Specific forms of market governance—of the kinds we just sketched—do not arise naturally or innocently. They are the product of power struggles between firms, industries, workers, and governments within particular markets and in the political arena. Those with more power and wealth, especially incumbent firms, seek to shape governance in their favor. There is no natural equilibrium point of perfect competition devoid of power, but only a spectrum of power balances between employers and workers, incumbents and challengers, lenders and borrowers, and so on.
For example, we tend to think of labor market regulation as the protection of workers from exploitative employers. But labor market regulation can also protect employers from workers by imposing restrictions on union formation or strike activity. So the balance of power between employers and workers is not inherent to the market, but reflects the historic battles that forged the particular forms of governance in the economy. The fact that there is no “state-of-nature” has important implications for how we analyze labor markets and design policy solutions. For analysis, it means that we should not take any given state as a reference point or a default, but rather try to understand how real-world labor markets are governed, how that governance came to be, and what consequences it has.
In the United States, for example, the Reagan administration confronted public sector unions by firing air traffic controllers who were on strike, appointing more business-friendly representatives to the National Labor Relations Board, and enacting rule changes that made it harder for unions to win elections and easier for companies to decertify unions. And this in turn emboldened managers to engage in more aggressive anti-union strategies.
For policy, since there is no “power-free” solution but only an infinite variety of power balances, we should not be too shy about turning the dial to recalibrate the balance in the public interest. So political economy should investigate how political and market power interact. For example, we should not take a firm’s market dominance as a given, perhaps needing some corrective action, but investigate how that dominance might itself reflect political influence and social privilege. Likewise, we should understand the political power of a firm or an industry as more than financial contributions or lobbying because a dominant market position—for example, in transportation or information—can generate influence even in the absence of political activity.
This means that political economy needs to integrate multiple levels of analysis, including government, industry, firm, and individuals. Political scientists cannot understand politics without understanding what is happening at the firm level, and how that shapes what businesses lobby for. Business scholars cannot understand corporate strategy without examining how businesses press for regulatory changes that support their business strategies and how they take advantage of those changes once enacted.
there is more than one way to organize society
Third, there is more than one way to organize society to achieve economic growth, equity, and access to valued goods and services. The balance of power between government, workers, and firms differs greatly across countries and time. And the different power balances in different countries shape distinctive national trajectories of policies. We can expect that the governing institutions will reinforce the status-quo balance of power, particularly in a crisis. It is rare for any one set of actors to have total control in a society, a condition that would lead to extreme rent-seeking behavior. Instead we see constant contestation between different sets of organized actors but a general balance of power that reflects the dominance of one side or another. One of the most reproduced empirical results from comparative political economy is that the same crisis will beget very different policy responses from societies that have different balances of power between the state, labor, and capital. If one takes a long-run view of economic development in the developed world, one can see that a great variety of these arrangements are compatible with innovation and growth.
Abandoning the neoliberal lens of government versus market and the “one best way” perspective opens up the possibility of a profound rethinking of economic policy that seeks to learn from the great variety of capitalisms that actually exist. One intriguing implication of this understanding is that a new political economy implies a turn toward what is sometimes called the “predistribution agenda.” Redistributive policies take the market allocation of income and wealth as a given and devise ways to moderate the inequalities that markets generate. Predistributive policies focus on how market governance—such as corporate governance, labor regulation, financial regulation, or antitrust policy—affects who benefits from economic activity in the first place. We can learn from the experiences of other societies where different policies and institutions have been tried and found to work more equitably. The government could enact reforms in these areas to give workers a more powerful voice in corporations; push financial institutions to deliver more value for the economy and fewer rents to themselves; shift the balance of power between employers and workers; or constrain market power to benefit both workers and consumers. That would not undermine American capitalism but revitalize it." (https://economicsociology.org/2020/10/08/political-economy-after-neoliberalism-a-manifesto-for-new-thinking/amp/?)
i.e. potential sources for a synthesis or integration
by Neil Fligstein and Steven Vogel:
"* We know about these possibilities from the work of economic sociologists, who stress the political, cultural, and social embedding of real-world markets.
Example: The Handbook of Economic Sociology: Second Edition 2nd Edition by Neil J. Smelser (Editor), Richard Swedberg (Editor). Princeton University Press, 2005
- From work in comparative political economy, demonstrating how the relationships between government and industry and among firms, banks, and unions vary from one country to another.
Ex: Comparative Political Economy: States, Markets and Global Capitalism 2014th Edition by Ben Clift. Red Globe Press, 2014.
- From political and economic geographers, who place regional economies in their spatial contexts and natural environments.
Ex: The Wiley-Blackwell Companion to Economic Geography (Wiley Blackwell Companions to Geography) 1st Edition. by Trevor J. Barnes (Editor), Jamie Peck et al. Wiley-Blackwell, 2016
- From economic historians, who explore the transformation of the institutions of capitalism over time.
EX: Favorites of Fortune: Technology, Growth, and Economic Development since the Industrial Revolution. by Patrice Higonnet (Editor), David S. Landes et al. Harvard University Press, 1991
- From an emergent Law and Political Economy (LPE) movement that aspires to shift priorities from efficiency to power, from neutrality to equality, and from apolitical governance to democracy.
Ex: LAW AND POLITICAL ECONOMY: TOWARD A MANIFESTO JEDEDIAH BRITTON-PURDY, AMY KAPCZYNSKI, DAVID SINGH GREWAL. URL = https://lpeproject.org/blog/law-and-political-economy-toward-a-manifesto/
- And from economists — often villainized as the agents of neoliberalism — who are exploring novel approaches to the problem of inequality and the slowdown in productivity, and show renewed concern with the economic dominance of a few large firms."
Ex: Unbound: How Inequality Constricts Our Economy and What We Can Do about It Hardcover – October 25, 2019 by Heather Boushey. Harvard University Press, 2019.