States, Markets, and the Good Society State (central planning by government) Market (free market) What balance between states and markets most enhances people’s capability, the good society?

Market systems Market system = production for profit intended for, coordinated through private exchanges (buyers and sellers) More extensive (more international transactions) and more intensive (more social transactions) States determine how extensive and intensive markets are

States and Markets Lindblom: “...market system…method of controlling and coordinating people’s behavior.” Market systems require states (cannot exist without them) Political economy = balance between political and market forces

Advantages of Market Systems Dynamic Productive Enhance prospects for democracy and political rights Separate economic from political power Planned economies combine economic and political power in state

Dark Side of Markets Volatile Socially destructive Inequality Harmful spillover effects (externalized costs)

Shifting Balance Market systems require rules enforced by state to work States steer economies toward certain goals, intervene Degree of intervention source of conflict ◦ 1970s, rise of market advocates (Reagan, Thatcher) -- spending, taxes, regulation  work ethic, entrepreneurialism, taxes divert income, public enterprises unproductive, inefficient

Globalization Globalization = increasing flow of money (investment), people, skills, ideas, and goods (trade) across borders (market extension) “Washington consensus” (neoliberalism, “market fundamentalism”) ◦ Balance budgets, cut spending, open markets to foreign trade/investments, privatize industries ◦ Supported by large MNCs, US, and World Bank/IMF  Economic assistance dependent on adoption of neoliberal policies (Structural Adjustment Policies)

Neoliberalism Markets = efficiency, productivity, growth, rising incomes Critics Inequality between and within countries Promotes corporations and powerful individuals at expense of poor people and disadvantaged states Crises, environmental destruction Empirical record uneven Widespread adoption of SAPs; little growth, development Strong-state successes (e.g., India, China, S. Korea, Taiwan)

Effects of Globalization Developing countries ◦ Greater integration = more job opportunities for workers at all levels of development; workers in less developed countries at highest levels of economic development benefit most ◦ Workers in less developed countries = effect conditioned by level of economic development and economic/political institutions Developed countries Function of different institutions and governing coalitions States differ in government spending, union density, welfare Some take advantage of globalization, others fail to Some ameliorate its effects, others fail to

State Intervention Fiscal policy – budgets; overall revenues and expenditures ◦ Deficits/surplus; tax and spending  States that tax more have more influence over how national income is used and distributed Monetary policy – interest rates, cost of borrowing money ◦ Inflation/recession ◦ Central banks/foreign exchange  States vary in influence/control over central bank (some insulated from political influence, e.g., U.S.; some state controlled (e.g., China, S. Korea 1970s) Regulatory policy – rules that firms must follow ◦ Manage competition, industry standards, certain business practices Nationalization – state-owned and controlled public enterprises ◦ States control strategic assets, social criteria; vary in degree

States and Markets Japan = state promoted mergers, cooperation to create firms large, efficient enough to compete internationally Germany = state brokered agreements among union and employer organizations State-market balance product of political struggle ◦ Market systems  States do not redirect as much income, exert influence on central banks; state regulations are not intrusive, public enterprises small ◦ State systems  States redirect more income through taxes and spending, exert greater influence over central banks; state regulations pervasive and directive, public enterprises control strategic industries

Markets and Democracy Liberal democracies have higher degrees of economic freedom Market systems do not guarantee liberal democracy No liberal democracies without market systems More markets do not necessarily mean more political freedom Lack of strong market system seems to preclude it

Markets and Literacy Literacy rates not strongly associated with market economies ◦ High literacy rates among East European countries ◦ Low rates among poor and wealthy countries (e.g., African states and Arab states) Appear to reflect cultural and religious values

Markets and Safety Political economy totally unrelated to likelihood of war Little correlation between political economy and homicide rates Type of economy has little influence on safety ◦ Citizens no safer in market-based countries than state-led economies

Markets and Physical Well- Being Strong association between life expectancy and market economies ◦ Countries with market systems are more likely to live longer, with glaring exceptions  Cuba and U.S. have same life-expectancy  Zambians (with a market-based system) can expect to live half as long as Israelis with strong state-led economy

Markets and Capability Market systems may improve capabilities a bit, but not consistently ◦ Democracy not necessarily strong among market systems ◦ Not necessarily most literate ◦ No safer ◦ Longer life expectancy (with significant exceptions) Markets not a panacea; must be supplemented to increase capabilities ◦ Challenge: to develop a balance between states and markets that promotes best qualities of markets (innovation, productivity), while avoiding worst effects (instability, inequality)