Redefining the Market-State Relationship

Responses to the Financial Crisis and the Future of Regulation

Ioannis Glinavos

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136014802
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Derecho mercantil

This book offers an interdisciplinary overview of the role of law in modern capitalism in the context of financial crisis. In this work, the reader will find a discussion of key issues relevant to the crisis that have occupied the pages of the financial press since 2007 including an assessment of the meltdown of the sub-prime mortgage market, the credit crunch, the European debt crisis and the turmoil in Greece, plus a series of theoretical contributions that are aimed to challenge perceptions of the market-state relationship and the place of law within it.

The book includes a methodological defence of the state-market dichotomy, a critique of the tenets of neoclassical economics, and an evaluation of what the financial crisis heralds for the future of the political economy of western democracies. Ioannis Glinavos argues that it is a mistake to associate markets with freedom and states with oppression, and suggests that more choice for consumers can -and does- mean less choice for citizens. The book suggests that a new social contract is needed to ensure the survival of both capitalism and democracy.

In contributing a unique, legal perspective to the underlying dynamics of the financial crisis, this book will be valuable to scholars and students of regulation, financial markets and economic development.

Part 1

Theory

Contrary to much popular perception, scepticism about the place of markets in society is not the exclusive domain of anti-globalisation, anti-capitalist agitators. This book is premised upon the central idea that in order to ensure the survival of capitalism and the perseverance of free markets, we need to reconsider the balance between the state and the market. This is not a call for revolution or a suggestion that non-capitalist ideas are necessarily viable. It is rather a pragmatic observation that a progressively less democratic capitalism is unsustainable. The suggestion that de-politicised economic decision-making does not ensure long-term stability is critically reinforced by the financial crisis. Market advocates, even more than market sceptics, therefore, stand to gain from the realisation that a growing disconnect between public support and free markets, embedded in legal structures, does more to undermine markets than state sponsored attempts at re-regulation. The nexus of this discussion is the role of politics (via law) in economic governance. The reason why the debate about better economic management and more legitimate economic decision-making is essentially a political question is because, as this book claims, it is only political processes that can determine the overall aims of policy with a degree of legitimacy and permanence that ensures the long-term survival of the capitalist project. Economic policy design currently, however, is largely being considered as an issue of technical competence, a scientific endeavour. The market (allegedly) has rules that are akin to scientific rules. These rules demand certain things of the state–market relationship and set frameworks that mandate what is beneficial and what is damaging to the market and, by extension, to the society as a whole. This perception, however, equates market needs with social needs. When social needs diverge from what is best for the market, the currently dominant analytical framework described above requires that social requirements take a back seat to the needs of the market. Determining a hierarchy of needs and goals for government policy, however, cannot be made the prerogative of so-called scientific economic analyses. The explanation for this is that lacking legitimacy and public support, any system of government is unstable and potentially incapable of keeping the peace. It is politics, which this book regards as representative democratic politics, which should determine the aims of a system of governance, not markets or economic theories. As a democratic society, we aspire to live in a state governed by law determined in reflection of the popular will. A society governed by laws created on the basis of their compatibility with ‘technical competence’ are inching away from democracy, towards what we could, in the context of contemporary capitalism, call a ‘dictatorship of finance’.

In discussing where should the balance between markets and states be found, and what is the role of law within such a balance, we need to address the question of what is capitalism aimed to achieve? Indeed, what is the market aimed to achieve? We need to find what the goals of policy should be, before we start debating the means employed to reach those goals. These questions are, of course, inherently political questions. Once we answer the question of what capitalism is for and what is the role of markets then we can use economic efficiency arguments to determine the means to achieve these objectives. To reiterate a point made earlier, this book does not recommend that a command economy along Stalinist lines of control (a historical alternative to capitalism) could ever replace a free market or lead to better social outcomes. The book, however, does argue that economic considerations, in the guise of science or not, should not determine every aim of policy. It is our prerogative as citizens to determine what the market is for, what the state should do and the shape of the structure of our economies. The acceptance of free markets as an effective way to achieve optimal outcomes should not mean that the public is robbed of choices. Even conceding that one would rather live in a capitalist, as opposed to a command, economy does not make capitalism the end of history. Viewed in this way, the discussion offered in this book becomes a discourse on choice. Not the choice that right-leaning governments (like the Conservative-Liberal coalition in the UK) want us to have (consumer choice), but a choice about more fundamental questions as to how we live our lives. A choice as to the aims of the system around us and as to the outer legal boundaries of that system.

Are these questions naive? Is not what is being described here (a democratic state) what we already have? Unfortunately the answer to both these questions is no. These questions are not naive if we go beyond the theory as to how our state should operate and actually confront how it does operate. I live in Britain which is a democratic state, but perhaps democratic in name is not the same as democratic in nature. What is the use of the label ‘democracy’ if choices about the things that matter are not subject to the democratic process? What this book seeks to achieve is to spark a discussion as to what sort of capitalism we want. The financial crisis is a unique opportunity in this regard in opening up a discussion shorn of the conceptual shackles of a neoliberally defined recent past. When I was writing Neoliberalism and the Law (2010a) I dealt with the way economic theory shaped the role of law, resulting in a distortion of democratic dynamics in states emerging from Communism (primarily in Russia). I did not anticipate at the time that the same questions as to the balance between state and market, and the role of law in elevating choices in economic governance beyond the reach of the political process, would become so prominent in discussions about regulatory reform worldwide, only a few years later. The financial crisis allows us to revisit the capitalist settlement that crept upon us after the collapse of ‘applied’ socialism. If capitalist societies have a good look at themselves, as democratic polities, perhaps they will be able to determine whether this settlement is appropriate for the twenty-first century.

1 Methodological framing

Resistance to regulation negates democratic choice because it entails a rejection of democratic politics.

1.1 Introduction

The first chapter of this book sets the methodological bases of the discussion. The chapter offers an explanation for the choice of the market–state relationship as a valid methodological tool and reflects on the nature of market and state. In doing so, the following discussion draws from political, legal and philosophical debates in investigating which sources of coercion in society can be considered as legitimate. Chapter 1 also offers a discussion as to the nature of law and its relationship with regulation, exploring theories of market intervention in economic processes. This presentation sets the background for a consideration of ethics in a capitalist economy. Why is it, the chapter asks, that the wealthy in society reject claims to their wealth as violations of rights? The answer is not to be found in avarice, but in understandings of the nature and function of property rights that are intrinsic to capitalism. If this is the case, then, does capitalism require the existence and persistence of inequality, and how do western concepts of legality deal with the problem of inequality? In addressing these issues, Chapter 1 acts as an introduction to western political economy and as an entry point to a thesis about the place of law in modern capitalism. We begin our discussion by considering the nature of the divide between state and market.

1.2 The state–market relationship

1.2.1 The state–market dichotomy

This book is based on a dichotomy between the market and the state. The choice of this dichotomy as a methodological tool requires some justification. While commonplace, the terms state and market are not automatically accepted as a valid categorisation for advanced capitalist economies. It has been argued, for instance, that this distinction is far too abstract to lead to the kinds of policy work that the financial crisis necessitates we engage in before finding a lasting resolution to problems of systemic stability. Could there be a sensible way to talk about banking regulation, for example, in terms of a bifurcation between state and market?

Randall Germain (2010) argues that while market- or state-based control structures were useful definitional tools in the past, they are not adequate descriptions of later twentieth-century forms of economic governance. Talking about dis-embedded economic orders (structures of economic governance distinct from their social backgrounds) in the era of advanced financialised capitalism (Lapavitsas, 2009) suggests, according to authors like Germain, a need to consider hybrid forms of governance. These hybrid forms are neither entirely private and national in sphere, nor solely public and international. They combine elements of public-private and national-international in a potentially unstable mix. The asymmetrical expansion of power, in some places country-specific while in others global, in some market-based while in others state-based, is consistent, according to Germain, with Karl Polanyi’s (1957) observation of a double movement. This double movement, Polanyi argued, is one where the effects of self-regulating markets force political movements to counter the socially destructive consequences of profit-seeking activities. This effort to find balance (or, as economists say, to reach equilibrium) and to counter market freedoms with regulation generated for Polanyi the conditions for a Great Transformation to a new social, political and economic stability. This stability crystallised from the 1950s to the 1970s in a highly regulated cooperative model of oligopolistic capitalism. Robert Reich (2009) describes this compromise as a ‘not quite golden age’ of capitalism. The reason for the ‘not quite’ is the persistence of differences in the life chances of population groups according to gender and race that, according to Reich, makes it misleading to call this a society-wide golden age. Nonetheless, the ‘compromise’ that characterised the result of Polanyi’s movement is hailed by most commentators as the pinnacle of capitalist success in the twentieth century.

Even focusing on the state as the source of ‘regulation’ is considered outdated. Morgan and Yeung (2007: 4) challenge what they view as the three key assumptions behind focusing on the state as the source of regulation. First they argue that non-state institutions, including commercial enterprises and non-governmental organisations (NGOs), operate as sources of social influence and as fora of public deliberations. As a result, the state is challenged in its role as the primary forum for articulating the collective goals of the community. Second, the idea that the state has final authority expressed in a vertical sense, from ruler to subject, is increasingly challenged by the emergence of multiple centres of governance, national and international, public and private. Third, legal rules may not be as effective in controlling behaviour (it can be challenged that commands and command structures are the main drivers of human motivations), plus there is in advanced economies potential for alternative techniques of policy implementation, such as self-regulation and voluntary codes of conduct that are becoming a lot more common, as we will see in Chapter 6.

It is acknowledged that modern forms of regulation have acquired hybrid forms, combining public and private elements, aspects of hard law and self-regulation; however, this does not negate the methodological value of a categorisation of the sources of controls of economic activity as market-based or state-based. While one cannot deny the emergence of ‘decentred regulation’, it can be argued that the phenomena described above change the relationship between the state and other actors, without dislodging the state from its central role. Also, such developments do not eliminate the relevance of law, nor the importance of a legal perspective on regulation. This book will show in the coming chapters how the state remains the prime conduit of political choices to economic governance by using the responses to the financial crisis and the political turmoil that underlies them as evidence. As balances in the market–state relationship are struck (where expanded market freedoms meet with stronger political resistance that pushes the state to act to protect non-profit interests, in accordance with Polanyi’s double movement) it is the force of democratic choice that lends credence to the resulting political economy. In other words, it is the core force of politics as opposed to the profit-making motive of markets that explains the shape of economic governance arrangements. There are political as opposed to economic imperatives therefore that maintain the need to talk about states as distinct from markets even in the current political economy, which is admittedly characterised by hybrids. This argument will be resisted by those who view politics and market interests as one and the same; after all, do politicians not reflect the wishes of markets as opposed to the vaguely expressed interests of constituents? We can ask, therefore, why shouldn’t politics be subsumed into the will of the market?

One of the key problems we have in understanding the relationship between the state and the market is the obscuring effects of ‘economism’. We can define economism as the orthodox interpretation of economics that employs an almost Marxist inspired pyramid of social relations, placing economic relations at the basis of all social interaction. The problem with this economic determinism is that it leads us to mistake the approximation of human relations in the form of market exchanges with the totality of human interactions. In a sort of odd Platonic ‘allegory of the cave’ therefore, we mistake shadows with reality and then proceed to structure our entire system of rules upon a false basis of economic exchange. Because markets ‘leave their mark’ (Sandel, 2012) we come increasingly (to borrow Oscar Wilde’s quote) to know the price of everything and the value of nothing. This makes societies less likely to ‘counter-move’ à la Polanyi. The law, however, can help us out of this trap and offer hope to those who wish to counter-move (Perry-Kessaris, 2011), because the law can re-establish the link between the popular will and economic governance.

A further reason why not all political motivation is ‘captured’ or tends to market needs is that not all political initiative has market imperatives. There remain centres of power outside the market, which makes the state the crossroads of political activity. We see this in those states worst hit by the crisis, states like Greece, where politics has assumed the role of a buffer between the impositions of economic orthodoxy on the one hand and popular frustration on the other. Perhaps another way to explain a sustained focus on the state–market division as a valid methodology is to argue that losing sight of the dichotomy between state and market is dangerous because, as noted by Stigler (1971), it concedes to private interests coercive powers that should be the sole privilege of the state. If the reader is wondering why coercion should remain the prerogative of the state (and isn’t in any case economic coercion as important as the power to exercise physical force?), this book argues that coercion should remain a state prerogative because only the state, to the extent that it is the product of a democratic political process, can use its privilege of coercion legitimately. The link to legitimacy or the perception of a link to legitimacy via democratic expressions of the popular will dampens the destabilising effects of the exercise of coercion, especially in times of crisis. If the aim of the political debate is to sustain capitalism, to sustain free markets, something more than the realpolitik of force (economic or physical) is necessary. The nihilism of abandoning the ideal of democratic control over economic decision-making can lead to the loss of both democracy and markets, something that again we see emerging in crisis states like Greece in the last few years.

While the state at least aspires to legitimation therefore, the market on the contrary uses its privilege of wealth to coerce without needing to appeal to higher ideals (even though a link has been suggested between wealth and moral entitlement as we will see later on in this chapter, followed by an evaluation of the argument that markets are inherently democratic and that product choices are a method of people voting with their wallets later on in the book). The move from state-based regulation to hybrid forms and self or voluntary regulatory structures is explored fully in Chapter 6; however, it is important to state now that if economic governance comes, at least on a philosophical and theoretical level, under the control of hybrid structures, then political legitimacy is defused and the subjugation of social needs to the profit imperative is in danger of becoming total. Vesting ability to exercise coercion to private forces de-legitimises the state, and de-legitimising the state leads to a corruption of social cohesion. We should not therefore be quick to agree to conceptualise regulation outside the notion of the state because that can lead us to relinquish permanently our status as citizens in favour of our status as consumers.

It is our status as consumers in fact that comes to define much of our social and political interaction. Perhaps as a consequence, in twenty-first-century Europe many citizens would consider their lives to be at the mercy of market forces, a reality that Olli Rehn (2011), European Commissioner for Economic and Monetary Affairs, all too well recognised in a speech in January 2011. Indeed, a Eurobarometer survey (European Commission, 2011) in November 2011 found the most negative perceptions of European citizens to the internal market to be related to too unequal competition, loss of identity to the detriment of smaller countries, inequality between countries and labour issues. The problem is that Mr Rehn used this danger as an argument for further fiscal consolidation, despite most Europeans’ distaste for European integration by necessity rather than by choice. We will return to the issue of economic policy by ‘technical expertise’ instead of democratic choice later on in the book, but before we can do that, the following section seeks to explore further how control is exercised over economic governance by delving deeper into the issue of elevating the state to the position of sole legitimate holder of coercive powers.

1.2.2 Sources of legitimate coercion

The preceding discussion has portrayed the state as being in the position of primary carrier of legitimate powers over decision-making in society. Why is it that the state should be entrusted with such a function, and are sources of legitimate governance residing in other spheres of social interaction, like the market? The concept of legitimacy is used here to denote the extent to which a broad community (in the sense of the principal organisations affected by policy and the general public) acceptance of a regulatory regime comes into being. Legitimacy in turn is linked to the notion of accountability, which is conceptualised as a set of mechanisms and processes that impose an obligation to reveal, explain and justify regulatory actions and is therefore instrumental in securing regulatory legitimacy (Morgan and Yeung, 2007: 11).

In placing the state centre-stage in the debate as to governance and legitimacy the book adopts John Locke’s view of the state as a social contract (expressed in the Second Treatise on Civil Government, 1690), the product, in other words, of a conscious decision to defer coercive powers to an entity distinct from other citizens – a politically constituted institution. This view of the state leads to a perception of democracy as government by laws which are arrived at after deliberation by properly chosen representatives of the people and which are promulgated so that all citizens may become acquainted with them. We find a parallel here with discussions as to the nature and meaning of the rule of law, discussed in some detail in Neoliberalism and the Law (Glinavos, 2010a). A lot of this discussion on the nature of command structures and the place of law has to do with rights over property, as laws are often evaluated via their impact on the possession of wealth. Indeed Locke’s emphasis on private property rights shows that economic rights are the ones most strongly determining the flavour and quality of any governance regime, including a democratic one. According to Locke, therefore, the whole purpose of government is to make laws for the regulation and preservation of property, and for the defence of the community (Popkin and Stroll, 1986: 80).

A key argument of this book is that as the preservation and use of private property rights rests at the core of our conception of the role of the state (which is why private property rights form the cornerstone of the legal framework that enables capitalism), a discussion needs to be had as to the way society uses these rights to effect social outcomes. The discussion in this chapter started by critiquing the current political economy for distancing economic decision-making from political processes. In order to reverse this phenomenon of de-politicisation, the social outcomes of property relations should become once more the overt subject of political discussion. It is argued that this is not the case in contemporary debates, as evidenced, for example, by the inability to discuss openly the uses taxation can serve, especially in Anglo-American jurisdictions. We will address issues of wealth distribution, including the role of taxation, in various parts of this book, in particular in our examination of compensation structures in the financial industry. In arguing for a debate about property rights and wealth, it is important to highlight, however, where my argument deviates from Locke’s political philosophy. This book does not treat property rights as natural rights that precede the creation of the institutional st...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• Acknowledgments
• List of abbreviations
• PART 1 Theory
• PART 2 Crises
• PART 3 Futures 115
• Epilogue
• Bibliography
• Index