aligica & tarko - possible futures of capitalism

47
Possible Futures of Capitalism Paul Dragos ALIGICA Vlad TARKO George Mason University, Mercatus Center Center for Institutional Analysis and Development (CADI) workshop 2012

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based on Paul Dragos Aligica & Vlad Tarko papers on Regulatory capitalism and State capitalism

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Page 1: Aligica & Tarko - Possible futures of capitalism

Possible Futures of Capitalism

Paul Dragos ALIGICAVlad TARKO

George Mason University, Mercatus Center

Center for Institutional Analysis and Development (CADI) workshop 2012

Page 2: Aligica & Tarko - Possible futures of capitalism

Outline

• A puzzle: regulatory capitalism VS. deregulation• Taxonomy of capitalist systems• Illustrations of recent historical developments

(past 2 decades)• Non-deterministic long-term history (past 3

centuries)• What determines the direction in which

capitalism changes at the level of individual countries?

• Globalization and the interaction between state capitalism and market-capitalism

Page 3: Aligica & Tarko - Possible futures of capitalism

CHANGES IN THE REGULATORY ENVIRONMENT

The regulatory capitalism puzzle: “more rules, freer markets”

Page 4: Aligica & Tarko - Possible futures of capitalism

The “Regulatory Capitalism” Thesis

• “…the neoliberal policy package of smaller government, privatization and deregulation was never an accurate way of describing what was happening in the US or UK” (Braithwaite, 2005)

• We are in fact entering an era of “regulatory capitalism”, “regulatory state” or a regulation-centered political economy.

Page 5: Aligica & Tarko - Possible futures of capitalism

Number of regulatory agencies (RA) (left) and the increase in the proportion of

regulatory agency niches filled (right) for 16 sectors across 49 nations, 1960–2002

(source: Levi-Faur in Braithwaite 2008)

Page 6: Aligica & Tarko - Possible futures of capitalism

Staffing of Federal Regulatory Agencies

(source: de Rugy & Warren 2009)

Page 7: Aligica & Tarko - Possible futures of capitalism

Budgetary Costs of Federal Regulation, Adjusted for Inflation

(source: de Rugy & Warren 2009)

Page 8: Aligica & Tarko - Possible futures of capitalism

Number of pages published annually by the Federal Register per million people

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

0

50

100

150

200

250

300

350

400

450

(source of data: Office of the Federal Register)

Page 9: Aligica & Tarko - Possible futures of capitalism

Percentage of occupations requiring licensing

1950s 1970s 1990s 2000s0

5

10

15

20

25

30

35

Perc

en

t

(source of data: Krueger & Kleiner 2010)

Page 10: Aligica & Tarko - Possible futures of capitalism

Number of US states licensing occupation, 1890 and 1950

AccountantsArchitectsAttorneys

DentistsEmbalmers

Professional engineersPhysicians

TeachersVeterinarians

BarbersFuneral directors

Real estate brokersSurveyors

Dental hygienistsInsurance brokers

ContractorsPlumbersMidwives

MinersLibrarians

4

4

4

4

4

4

4

4

4

6

12

12

19

23

26

33

35

38

39

43

48

48

48

48

48

48

48

48

48

46

40

40

33

29

26

19

17

14

13

9

in 1950 in 1890

(source of data: Zhou, 1993)

Page 11: Aligica & Tarko - Possible futures of capitalism

Regulation of credit, labor and business, United States

1970

1975

1980

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

5

5.5

6

6.5

7

7.5

8

8.5

9

10 is maximum economic freedom, 1 minimum (source of data: Frazer Institute 2011)

Page 12: Aligica & Tarko - Possible futures of capitalism

Time required to start a business (days)

2003 2004 2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

51.1

41.6

29.125.0

21.1

15.8 14.8 14.1 12.3

6 6 6 6 6 6 6 6 6

Euro area United States

(source of data: World Bank)

Page 13: Aligica & Tarko - Possible futures of capitalism

Cost of business start-up procedures (% of GNI per capita)

2003 2004 2005 2006 2007 2008 2009 2010 20110

2

4

6

8

10

12

14

11.8 11.4

9.9

8.27.5

7.06.2 6.4

5.4

0.700000000000001

0.700000000000001 0.8 0.8

0.700000000000001

0.700000000000001

0.700000000000001

1.4 1.4

Euro area United States

(source of data: World Bank)

Page 14: Aligica & Tarko - Possible futures of capitalism

The puzzle

• “Freer markets, more rules” (Vogel 1996); “more capitalism, more regulation” (Levi-Faur 2005).

• An intriguing correlation between increased regulation and smaller government (more on this later)

Page 15: Aligica & Tarko - Possible futures of capitalism

Key idea for solving the puzzle (perhaps)

• Why do governments create independent regulatory agencies (IRAs)?– Commitment problem with respect to the long-

term preservation of the regulatory environment– Politicians need to solve this commitment

problem in order to attract campaign contributions and lobbists

• Regulatory capture problem:– Instead of capturing politicians special interests

can capture the (quasi-)independent regulators

• Complex dynamic between general public, politicians, IRAs, and special interests.

Page 16: Aligica & Tarko - Possible futures of capitalism

TAXONOMY OF ECONOMIC SYSTEMS

Theory

Page 17: Aligica & Tarko - Possible futures of capitalism

Taxonomy of economic systems

• Criteria of classification• Combinations of criteria lead to

mapping the possible (theoretical) systems

• Fitting actual cases on the conceptual map

• Classification => stage theory of historic transitions

Page 18: Aligica & Tarko - Possible futures of capitalism

Stages of development theory

Linear transitions:

Non-deterministic history: Tree of possibilities

Page 19: Aligica & Tarko - Possible futures of capitalism

Classification criteria

• Number of services provided by the state– Few– Medium– Many

• How regulated the market is:– Deregulated– Some regulation (regulation that preserves

competition, albeit in diminished form)– Strong regulation (favored statuses to firms,

monopoly grants)

Page 20: Aligica & Tarko - Possible futures of capitalism

Classification of economic systems

Number of services

provided by the

Type of stateIntervention

Small number of state services

Medium number of state services

Many state services

Minimal regulation of market participants (deregulation)

Free-market capitalism (Classical-liberalism)

Neoliberalism Provider state

Regulation of activities of market participants

InterventionismRegulatory capitalism

Welfare state

Favored status (monopoly grants) to certain of market participants

MercantilismCorporate or

State capitalismSocialism

Page 21: Aligica & Tarko - Possible futures of capitalism

TAXONOMY OF ECONOMIC SYSTEMS

Application to concrete cases

Page 22: Aligica & Tarko - Possible futures of capitalism

Operationalization based on the Heritage index

• Number of state services:– Size of government: fiscal freedom,

government spending

• How regulated the market is:– Openness of markets: trade freedom,

investment freedom, financial freedom– Regulatory efficiency: business

freedom, labor freedom, monetary freedom

Page 23: Aligica & Tarko - Possible futures of capitalism

Operationalization

Size of gov. < 2020 < Size of gov.

< 5050 < Size of gov.

Open of markets >80

Free-market capitalism (Classical-liberalism)

Neoliberalism Provider state

Open markets < 80Regulatory eff > 70

InterventionismRegulatory capitalism

Welfare state

Open markets < 80Regulatory eff < 70

MercantilismCorporate or

State capitalismSocialism

Page 24: Aligica & Tarko - Possible futures of capitalism

Regulatory efficient countries

Page 25: Aligica & Tarko - Possible futures of capitalism

Countries with regulated markets

Page 26: Aligica & Tarko - Possible futures of capitalism

Recent history, some regulatory efficient countries

Page 27: Aligica & Tarko - Possible futures of capitalism

Recent history, some regulatory efficient countries

Page 28: Aligica & Tarko - Possible futures of capitalism

Recent history, some countries with regulated markets

Page 29: Aligica & Tarko - Possible futures of capitalism

Long-term history, illustrative

Page 30: Aligica & Tarko - Possible futures of capitalism

History is non-deterministic

Page 31: Aligica & Tarko - Possible futures of capitalism

WHAT DETERMINES THE FUTURE OF CAPITALISM IN A GIVEN COUNTRY?

Theory

Page 32: Aligica & Tarko - Possible futures of capitalism

Stakeholders mapping: Three actors model

• Actors:– General public– Dominant corporations (corporations

with large market share)– Government

• Each have a distinct preference about the structure of the economic system.

• The outcome depends on their relative power.

Page 33: Aligica & Tarko - Possible futures of capitalism

Rent-seeking analysis: Who benefits from the economic system?

Opportunities for regulatory

capture

Small

Free-market capitalism (Classical-liberalism)

Neoliberalism Provider state

Large, small risk InterventionismRegulatory capitalism

Welfare state

Large, high risk MercantilismCorporate or

State capitalismSocialism

Page 34: Aligica & Tarko - Possible futures of capitalism

Rent-seeking analysis: Who benefits from the economic system?

Opportunities for regulatory

capture

(Which one you pick depends on your assumptions about the efficiency of government provided services)

(Small)The public benefits

Free-market capitalism (Classical-liberalism)

Neoliberalism Provider state

(Large, small risk)The dominant

corporations benefitInterventionism

Regulatory capitalism

Welfare state

(Large, high risk)The government

benefitsMercantilism

Corporate or State

capitalismSocialism

Page 35: Aligica & Tarko - Possible futures of capitalism

In what direction is the economic system moving?

Type of political system

Direction of economic system

Examples

Democracies with high transparency

Free-market capitalismNeoliberalismProvider state

Australia, Ireland, Canada, SwitzerlandBritain, Netherlands, Sweden

Democracies in which special interests are powerful

Regulatory capitalism

United States, France, Germany, Japan

Autocratic regimes where governments can afford protectionism

State capitalismBrazil, China, Russia

Page 36: Aligica & Tarko - Possible futures of capitalism

STATE CAPITALISM AND GLOBALIZATION

How do systems interact?

Page 37: Aligica & Tarko - Possible futures of capitalism

What is “state capitalism”?

• “A system in which the state functions as the leading economic actor and uses markets primarily for political gain” (Ian Bremmer, 2009)

• More specifically:– There is a free-market in consumer goods,

but a heavily regulated market in production goods (“commanding heights” thinking).

– Government-owned enterprises operate on the international or domestic markets with the purpose of increasing govt. revenues.

Page 38: Aligica & Tarko - Possible futures of capitalism

The Economist, January 2012

“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the power of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation.”

Page 39: Aligica & Tarko - Possible futures of capitalism

Allan Meltzer, Why Capitalism? 2012

“The high tide of multilateral trade agreements to reduce

barriers to trade is probably past. Currently, the best

future hope is that the US and the EU won’t step up trade

restrictions to compensate for foreign labor and

environmental practices, …, and that China will stop

subsidizing or giving other advantages to Chinese firms.

Both seem a vain hope. Trade protectionists and

nationalists everywhere seem eager to end the regime

that brought 60 years of global expansion and rising living

standards.”

Page 40: Aligica & Tarko - Possible futures of capitalism

• The rent-seeking theory of state capitalism =>state capitalism is nothing but a modern form of mercantilism

• One can understand state capitalism and project its potential evolution based on what we know from previous rent-seeking societies.

Our thesis

Page 41: Aligica & Tarko - Possible futures of capitalism

Classical perspective on mercantilism

“[M]ercantilists, whatever the period, country, or status of the particular individual, would have subscribed to all of the following propositions: (1) wealth is an absolutely essential means to power,

whether for security or for aggression; (2) power is essential or valuable as a means to the

acquisition or retention of wealth; (3) wealth and power are each proper ultimate ends of

national policy; (4) there is long-run harmony between these ends,

although in particular circumstances it may be necessary for a time to make economic sacrifices in the interest of military security and therefore also of long-run prosperity.” (Vinge 1949)

Page 42: Aligica & Tarko - Possible futures of capitalism

The rent-seeking thesis: An incentives driven perspective

• The best way to understand mercantilism is the “rent-seeking society” theory (Ekelund & Tollison).

• Real socialism was also a form of mercantilism (Boettke & Anderson).

• Our thesis: State capitalism merely continues real socialism in a slightly more liberalized form.

• Family of systems (mercantilism, real socialism, state capitalism): rent-seeking societies.

Page 43: Aligica & Tarko - Possible futures of capitalism

SOME IMPLICATIONS

Page 44: Aligica & Tarko - Possible futures of capitalism

At the level of individual countries

• The future of capitalism depends on the balance of power between the general public, the dominant corporations, and the state.

• Deregulated economies (be they free-market capitalist, neoliberal or provider states) are the outcome of transparent and competitive democracies.

Page 45: Aligica & Tarko - Possible futures of capitalism

At the globalized level: the impact of state capitalism is uncertain

• State capitalism looks a lot less impressive once we see it as a form of mercantilism

• Mercantilism has already lost twice against market capitalism– The 19th century emergence of liberal

capitalism– The collapse of real socialism in 1980s-1990s

• However, the future of state capitalism ultimately depends on whether a viable free market alternative system is actually provided – i.e. do liberal capitalist countries preserve their system?

Page 46: Aligica & Tarko - Possible futures of capitalism

Implications for globalization

• The current mix of market capitalism, regulatory capitalism, crony capitalism, and state capitalism is clearly an improvement in the global economy mix from the Cold War past divide.

• However, the bigger interdependence introduces new and larger inefficiencies within the market capitalist systems.

• This creates the temptation for protectionism.

Page 47: Aligica & Tarko - Possible futures of capitalism

Bremmer’s and Meltzer’s warnings against protectionism hold

• “In order to ensure that the free market remains the most powerful and durable alternative to state capitalism” liberal democracies should be “leading by example in promoting free trade, foreign investment, transparency, and open markets” (Bremmer).

• “Trade protectionists and nationalists everywhere seem eager to end the regime that brought 60 years of global expansion and rising living standards. This is a major change in the international landscape. It threatens the main source of higher living standards everywhere.” (Meltzer)