“Markets are ‘Politically’ constructed and ‘Politically’ maintained” Critically Discuss.

NAME: Jepter Y Lorde

COURSE NAME: International Politics and Political Economy

COURSE #: GOVT 3015

INSTRUCTOR: Dr. Wendy C. Grenade

UNIVERSITY: University of the West Indies Cave Hill Campus.

DATE: 13th April 2012.

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ABSTRACT

The study of International Political Economy engages both state and non state actors, it is

however this engagement and the results of this engagement that determine equity, justice and

liberty in the system. The outcomes, however, are not always equitable or for that matter just,

this essay will seek to analyse the contribution of a main actor namely the state in this complex

relationship. An examination will be made of the circumstances that contribute to the political

construction and maintenance of the market. Areas to be discussed are rules and regulation,

coercion, control, the theoretical perspectives that govern the discipline neo-liberalism and

globalisation, power and the impact of power in the determination of influence among others.

The link drawn with respect to power and influence is cogent to the discussion as this shows a

natural progression to the real determinants in the construction and maintenance of markets.

The essay will also seek to highlight the impact of the ongoing battle between the actors by

drawing on experiences in the USA as well as the Caribbean post 2008, it is hoped that by

drawing these parallels a clear determination can be made as to how markets are constructed and

maintained.

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INTRODUCTION

The U.S and by extension the world economy since 2008 has experienced what is referred to as

variation to the business cycle. This cyclical and at times adhoc movement in which the

government plays a crucial role in deciding the strategic position of the economy by the use of

macroeconomic policy has been studied my economist in an attempt to smoothen the variability

(Krugman 2009). The ‘Great Moderation’ lulled macroeconomist and policymakers alike into the

belief that they knew how to conduct macroeconomic policy therefore giving the impression –

‘markets are politically constructed and politically maintained.’ According to (Blanchard and

Simon 2001) ‘The Great Moderation’ is the steady decline in the variability of output and of

inflation over the period in most advanced economies or what is seen as the taming of the twin

evils they being unemployment and inflation. Once achieved the state therefore was comfortable

with market performance. It would appear, however, since the period between 2008 and the

present a rethink of the theory is necessary. There is a belief, in some quarters, that a change to

the role of the state is necessary. What is not so obvious however are the ways in which that role

has to be configured in the context of in whose interest are the changes made and to what ends

are these changes to be pursued and will there be a repeat of the collapse of 2008. This essay will

seek, by way of critical discussion, to distil these issues by considering some of the different

ways in which the state intervenes in the economy, the relationship between the state and capital,

examining the impact of powerful non state actors like the IMF, World Bank, European Central

Bank as well as the impact of powerful Supra National, Multinational and Transnational interest

in the milieu of political and economic domination. The essay, although global in its assessment,

will also highlight the impact of market creation and maintenance in the Caribbean and the

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impact these decisions have had on the players. Focus to a greater extent will be placed on the

United States as this was the epicentre of the global financial crisis, the attempt therefore is an

assessment of the political economic landscape using the United States as a test bed after which

an answer will be given to the statement “Markets are politically constructed and politically

maintained.”

A BRIEF HISTORY

In a market economy, the utility of millions of firms and households is paramount. The firm

owns the factors of production and decide whom to hire and what to make. Households decide

which firms to work for and what to buy with their incomes. These firms and households interact

in the marketplace, where prices and self-interest guide their decisions (N Gregory Mankiw

2003). At first glance it would appear as if the market model would solve the convergence of

suppliers and consumers of goods and services ensuring the exchange by way of price, however

as Mankiw 2003 further explains market transactions create externalities which can be either

positive or negative and as a result affect a third party who was not part of the original

transaction. These spin offs cause what is referred to as ‘market failure’ resulting in tensions that

must be regulated thus resulting in the involvement of the state.

Intervention by the state occurred in the period after the great depression in the United States and

Post World War 2 Europe. Many states did not want a repeat of the events. The crash of the

stock market and the loss to firm and household as well as reconstruction in Europe had to be

addressed. Government went about the task of intervention and control utilising the Keynesian

construct of fiscal policies geared toward the alleviation of high unemployment and inflation.

The results were growth in the US and by extention the world economy for 40-50 years without

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major financial dislocation and this was to a greater extent dependent on an international

monetary and financial system evolving incrementally, from the gold standard to the gold

exchange standard, to the Bretton Woods gold-dollar standard highlighted the reality markets

were managed in an attempt to prevent and minimise the effects of war and abject greed that had

presented itself during the great depression (Eichengreen 2002).

MARKET CREATION - REGULATION

The process of constructing an economy requires the government developing and enforcing

regulations in an attempt to influence and control the growth of the economy. These regulations

can be divided into two categories, Economic regulations and Social regulations. An Economic

regulation covers sectors of the economy such as utilities, transportation, aviation, agriculture,

and banking. These regulations usually include barriers to entry and exit, licensing and tariff

laws, and the control of prices and wages. Social regulations on the other hand, are there to

protect the consumers. These regulations are directed toward such things as health and safety of

workers, environmental, civil rights and gender issues (R Vietor 1994). It must be understood

however regulations governing the market can significantly affect both the strategies available to

market participants and are not the sole purview of government. The rules or regimes, therefore,

can be or are important determinants of the outcome of economic activities. (Robert Gilpin 2001)

was accurate in his assessment:

“Although liberals would argue that the rules and regimes can result from

cooperative processes, more powerful actors frequently impose rules or regimes

on other players in the market. Since the rules and institutions governing

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economic activities may reflect the interests of the powerful actors, market

outcomes are profoundly affected by political, institutional, and other

noneconomic factors.”

It is clear from Gilpin’s assessment the government, although a major actor is not the

only institution competing for the right to influence. As previously mentioned the United

States post the Wall Street crash of the thirties and post World War 2 had kept a tight rein

on the financial system with highly regulated investment banks being described as small

partnerships that were distinct and separate from the commercial deposit business,

essentially speculation with the funds of depositors was frowned upon and prosecuted to

the fullest extent of the law.

From 1930 through to the 1960 the United States economy grew, low inflation rates averaged 3.8

percent over that thirty year period. Bank failures were virtually non-existent. As the sixties

came to an end the growth slowed and problems in the economy started to show. In 1974 the

banking failure rate had ballooned to unprecedented levels dwarfing past successes. The reasons

proffered for the downturn in the economy and the uptick in failure within banking was twofold

encapsulating a lapse in the control, which the government had exercised consistently within the

industry by way of developing and enforcing the regulations and almost counter intuitively as

these rules were accused of causing higher than necessary costs, distorted the patterns of supply

and demand and were creating inefficient capital allocations. These problems needed a solution

and deregulation was seen as a viable solution. It is defined as a reaction to a generalised crisis of

capital accumulation coupled with a serious challenge to capitalist class power (David Harvey

2006). Harvey, essentially, described the action as lacking the empirical data necessary to draw

the conclusion and highlighted strong social and geopolitical indicators such as the ending of the

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cold war, internet proliferation and discontent at home as strong indicators that had gone

unnoticed by the state. The period of deregulating in the early 80’s is stated by many economists

as being crucial in the affect on the global economy.

MARKET CREATION - DEREGULATION

“The greatest challenge and highest priority to the nation is to restore our economic prosperity.”

with those words Ronald Reagan former President of the United States ushered in what is now

known as the Neo liberal construct. The process of market creation via deregulation was very

different from the process of market creation via regulation. The Neo Liberal ideology is

premised on the empowered market ability to determine its destiny without the oversight of the

government as a regulator. David Harvey was comprehensive in his assessment:

“Neoliberal theory makes the assumption that individual freedoms are

guaranteed by freedom of the market and of trade (Global marketing and free

trade). The freedoms it embodies reflect the interests of private property owners,

businesses, multinational corporations, and financial capital. This would include

reversal of nationalisations, privatising public assets, opening up natural

resources (fishing, etc.) to private and unregulated exploitation (of assets even

belonging to indigenous inhabitants), and facilitating foreign direct investment

and freer trade. The doctrine is very much related to the laissez-faire theory of

Scottish economist Adam Smith (1723 - 1790), which was the belief that if

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mankind were given the freedom to act out of self-interest (selfishness?) and

pursue maximum personal gain (profit), the consequences would be "most

agreeable to the interests of the whole (elite) of society".”

Clearly the attempt by President Reagan at the time was to forge a new paradigm eclipsing the

effort to constrain and regulate an impatient participant in the name of the ‘market’. To what end,

therefore, were these new policies pursued and the results known? For this attention is turned to

the Symbol Economy and the major players that have for years influenced it meteoric rise to

world financial domination. (Bruce Coggins 1998)

The process of deregulation was deliberate on the part of the state, Donald Regan former CEO of

the investment firm Merrill Lynch was appointed by the then Reagan administration to the

position of Treasury Secretary, Mr. Regan had to say:

“We on Wall Street are behind the president one hundred percent, I have talked

to a number of people and they are in full agreement with the actions of the

president.”

The actions to which secretary Regan refers encompass over thirty years of deregulation in the

private sector with disastrous consequences. The engagement of a representative of the symbol

economy is but one of the many changes made by the administration to enable change. What can

be observed is the ideology taking root almost immediately. A CEO in the private sector driven

by a profit maximising code in a position to influence legislation within the public sector will by

rational choice seek to make decisions and enable policy to benefit himself and the firms from

where he originated. This benefit is achieved by a framework of legal and moral rules set in the

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continually contested terrain of finance. Rules and markets are structured by and give effect to

business and other interests seeking to enhance their advantages.

One major rule change made by the Reagan administration was the deregulation of what is

termed cooperatives in the Caribbean. These allowed managers to gamble with the deposits of

members the result were losses amounting to one hundred billion dollars in the industry and the

arrest of Charles Keating. To most observers this was a logical end to a sordid affair but the facts

show different. Alan Greenspan an economist testified on behalf of Mr. Keating and indicated he

found nothing wrong with his decisions that resulted in losses to individuals and taxpayers in the

United States, what resulted was nothing short of scandalous. Mr. Keating went to jail and Mr.

Greenspan was appointed by President Reagan as Head of the Federal Reserve Bank and

reappointed by Clinton and Bush Jr to continue the process of deregulation and the ultimate

collapse of the economy in 2008. With the hijacking of the regulator by special interest the

question is raised as to ‘Markets are politically constructed and politically maintained.’

The infiltration of the real economy by the symbol economy via regulatory means equates to

‘setting the cat amongst the pigeons.’ Is it therefore accurate to maintain that markets are

politically created when the influence of special interest is so great? A closer examination of the

social dynamics necessary to influence decision making is required.

POWER AND COERCION

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"Power" and its participation in the creation of the market should not therefore be discounted,

externalities as previously discussed is the impact on an agent by the decisions made by other

agents. Labour therefore is seen as the unwitting agent of the Reagan and Thatcher legacy. This

coercion was achieved by the assertion of economic power which refers to the capacity to get

what one wants by giving something else in exchange.  The more that one has that can be given

to someone else, the more economic power one has. It should be noted reference to the material

possessions one owns is not the only contributing factor but also any talents and skills that others

might want to have. (Kenneth Boulding 1956).

The exchange of the services however was for the benefit of an elite group, the analysis is

simple, campaign contributions fuel the continuation of political parties, these firms have the

ability to offer their finance in order to secure the administrative influence required to satisfy

their insatiable profit seeking imperative, the process however is not yet concluded as that result

is hinged on the removal of necessary checks and balances in the system.

Destructive power refers to the capacity to destroy something or someone.  Its use can be

constructive getting rid of something unwanted and making room for something wanted,

however it is often used to enforce a threat which has been ignored. This use of threats, either

explicit or implicit, to try to keep others from doing something is the main focus of discussion.

(Boulding 1956) Out sourcing and the transferral of jobs to locations where labour is cheap and

offers greater reward for the firm was the solution. This action ushered in a movement of capital

or finance via TNC and MNC around the globe, Nike, Adidas, J P Morgan, Goldman Sachs all

joined suit in the subjugation of labour through the dismantling of labour unions and exploitation

of labour in areas where organised labour was absent or muted. The objective was simple,

maximise profit by seeking the cheapest resource while at the same time influence and control

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the enabling state actor. David Harvey was livid in his assessment after identifying human

frailty, lapsed regulation, improper economic theory and culture as being some of the

contributing factors to the 2008 debacle. He narrows the focus to capital especially finance

capital and the internal contradictions of capital accumulation. He posits that capital never solves

its problems it moves it around; on reaching a barrier instead of abiding with its limit according

to Marx it uses financial innovation to achieve growth. This innovation in turn empowers the

financiers who get greedy, by this time finance is able to earn substantial profits via innovation

of products within its sector clearly at the disadvantage of the state and great instability to the

financial system. (Hyman Minsky 1986)

MARKET MAINTAINANCE – THE CARIBBEAN

The essential elements of the market have been identified; state as well as non state actors vie for

influence within the contentious milieu of the market. Once established however, like any other

construction, maintenance of the structure is needed for continued long run use. The techniques

used for the purpose of market maintenance are now examined.

The Caribbean can be described as the most impressionable group of islands based on

geography, size and vulnerability. It can therefore be of no surprise that the continued tension

between state and market is at its most viral for control. Financial globalisation, according to Dr.

Don Marshall, can loosely be described as the process through which money, value and credit

constitute a capital sphere sufficient enough to spawn networks and centres offering financial

services. The US-led campaign for capital mobility in the 1980s under the neo liberal construct

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of President Reagan and Prime Minister Thatcher and the subsequent coercive pressure applied

to Caribbean governments by international financial institutions (IFIs) to so deregulate their

capital markets merged well with parallel advances in communications technology marked by

the proliferation of Internet and high-tech stock. Finance-capital is often conceptualised as

largely autonomous and self-activating. (Marshall 2008-09)

A closer examination would reveal the ability of these Caribbean states to access capital is

dependent on the International Monetary Fund being satisfied that the market is so compromised

by way of lapsed rules thus enabling the finance capital to operate with impunity. Essentially the

market must be investment ready to allow the execution of projects on the terms of the TNC.

What is more confounding about the situation is the contradiction to the process. Marshall goes

on to explain that a highly regulated Caribbean is being asked to deregulate in the context of the

maintenance of a market in a highly globalised forum on the one hand and on the other being

branded as tax havens by the supranational institutions like the OECD.

The constraint does not end for a group of islands that have endured 400 years of colonial

domination. (Thomas Friedman 2007) describes the Golden Straight Jacket and the Electronic

Herd, two post colonial evils, according to this essay, of epic proportions. The ‘Jacket’ is a one

size fits all, pinching certain groups, squeezing others and generally keeping the economy of

interest under constant pressure to streamline its economic institutions and streamline

performance for the exploitation of a neo-colonial master. The rules to be adopted for a ‘good fit’

are as follows, the private sector is centre as the main engine of economic growth, low rate of

inflation and price stability, shrinking the size of the state bureaucracy, maintaining a close to

balanced budget as possible, eliminating and lowering of tariffs and import duties on imported

goods, removing restrictions on foreign investments, privatising state owned industries and

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utilities, deregulating capital markets, deregulation of economy to promote as much domestic

competition as possible and eliminating government corruption as much as possible.

A system of rules and regulation is limited without a means of enforcement; this is where the

‘electronic herd’ is most effective. It is in effect a group of international investors who can with

draw capital at the flick of a switch. Just as ‘Massa’ was able to command and get obedience at

the crack of the whip and use of his dogs to enforce the legacy of perverse domination continues

with a flick of the switch and the use of Standard and Poors as well as Moody’s as the electronic

blood hounds. (Friedman 2007) elaborates:

‘The electronic herd is made up of all the faceless stock, bond and currency

traders sitting behind computer screens all over the globe, moving their money

around. From mutual funds to pension funds to emerging market funds consisting

of MNC who spread their factories around the world and constantly shift them to

the most efficient low cost production.’

It is this contradiction that lends to a reassessment of the statement ‘markets are politically

constructed and politically maintained.’ The refinement is made by (Susan Strange 2007):

‘The impersonal forces of world markets, integrated over the post war period

more by private enterprise in finance industry and trade than by the cooperative

decisions of governments, are now more powerful than the states to whom

ultimate political authority over society and economy is supposed to belong.

Where states were once the masters of markets, now it is the markets which, on

many critical issues, are the masters over the governments of states.'

The facts concerning the relationship between capital and the state are there to be assessed; the

Caribbean by its size and strength can be forgiven for capitulating to the might of Globalisation

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but what of the mighty United States of America? The Bush administration was surrounded with

less ideological types, veterans of the corporate establishment. At the top, four of his cabinet

secretaries were former chief executives of large American companies. Vice-President Dick

Cheney ran Halliburton, an oil-services firm; Paul O'Neill, the treasury secretary headed Alcoa

an aluminium giant; Donald Rumsfeld at Defence ran General Instruments; Don Evans, the

commerce secretary, ran Tom Brown, an oil and gas company. No president since Eisenhower

has had more than one ex-chief executive in the cabinet, and Eisenhower had only two.

Less well known is the infusion of corporate types at lower levels. At the Defence Department,

Thomas White, the secretary of the army, was formerly head of the energy-trading arm at Enron;

James Roche, secretary of the air force, came from Northrop Grumman; Gordon England,

secretary of the navy, was with General Dynamics. Yet more junior ex-corporate staff has come

into the administration with them.

It was never the intent of this essay to dwell on the incestuous relations of the Bush

administrations with special interest, capital and the debilitating results spawned by the

aforementioned relations. For this assessment attention is paid to (Gore Vidal 1992) who was

empirical, frank and forthright in his analysis as to the true victims and not actors in this viral

game:

“From time to time it is shyly suggested that taxes be raised—for individuals but

never for corporations. To those who maintain that our political life is not

controlled by corporations, let me offer a statistical proof of ownership — the

smoking gun, in fact. In 1950, 44 percent of federal revenues came from

individual taxpayers and 28 percent from a tax on corporate profits. In 1991, 37

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percent came from individuals and only 8 percent from the corporations. The rest,

of course, is borrowed.”

In an equitable, just and liberal world maybe this occurrence would be impossible but the world

that we live in is far from equitable and just. The possibility of reconfiguring a society to benefit

a select few does not happen in a vacuum and almost always will impact negatively those who

were not part of the original transaction. The imperative, therefore, is for an apolitical

environment in which decisions can be made in the best interest of individual, market and the

firm without undue influence.

CONCLUSION

Economic agents with unlimited, concentrated, intensive interests tend to have greater reach and

impact on the determination of rules and regulation as opposed to agents with limited, diffuse

interests. It is a necessary imperative on the part of the economic agents to identify the ‘Gate

Keeper’ and secure easy entrance and exit. Government is therefore an object of control; the non

state actors seek to use government to enhance their utilities and chances toward market creation.

Government and business mutually influence each other within a legal-economic nexus in which

opportunities for gain or other advantage accrue to economic actors with political agendas. It is

therefore not surprising government and businesses seek to secure maximum utility with respect

to constraints imposed because of pressures placed upon the other.

It is clear the governmental determination of rights through regulation influence opportunity

through relative mutual coercion and the power dynamic. That mutual coercion is not always

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prevalent as the role of government in the formation and structure of markets is a function of

both the strength and weakness of government. The long-term successful attack on a weak

government by business enables business to secure its desired market forms. Governance is the

sum of nominally private and public governing institutions. Noninterventionist sentiments

notwithstanding, western governments have been strong enough under business influence to

produce, ratify, and reinforce certain consolidations of social power of a business society (Seider

1974).

Although the argument made by (Seider 1974) does not easily lend itself to the assessment of

this essay it is not entirely without merit. The assessment, however, fails to consider the states of

the Caribbean which are considered weak and susceptible to adverse influence. It is the assertion

therefore of this essay that Markets are Politically Constructed and Politically Maintained only

insofar as the influence of non state actors impinges on the state and compromises its ability to

act as sovereign.

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