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«Tamara Lothian* Columbia University – Center for Law and Economic Studies Roberto Mangabeira Unger* Harvard University March 1, 2011 * © Tamara ...»

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We do not need a crisis such as the one from which we are only now emerging to embrace and to advance a program marked by commitment to these twin goals. However, a crisis supplies a fast track to its advancement. It does so by weakening the obstacles, of interest and of prejudice, that it must face as well as by making more visible the links between the innovations it proposes and the concerns of ordinary 46 men and women. At the same time, it represents an experiment, offered by history, in causal connections that are normally hidden from view.

In the design and implementation of such a program, there is today a preliminary requirement to fulfill. That requirement is decisively to cast aside the division between a densely regulated and a thinly regulated sector of finance. This regulatory dualism has been for over half a century the dominant regulatory approach to finance. It has been justified in the name of the idea that the high net-worth individual and financial professionals who operate in the sector to be subject to diminished monitoring dispense close supervision.

The consequence has been to make it possible to repackage and implement in the thinly regulated sector everything that is prohibited in the densely regulated one. Regulatory dualism set the stage for massive evasion of regulatory strictures. The most important form of this evasion was the growth, alongside the banking system, of "shadow banking" – financial organizations that acted as banks but were not classified as banks and not made subject to the regulatory requirements that recognized banks had to meet. The result was to help turn part of finance into a self-regarding free-for-all, with the concerns of the real economy demoted from subject to pretext.

Regulation should be inclusive and apply to the world of high networth individuals and financial professionals as much as to the general public. It should also be designed to foreshadow, insofar as possible, the structural recovery program we now outline.

Such a program would advance along three lines of reciprocally reinforcing initiatives.

The first line consists of measures intended to make finance serve the real economy rather than serve itself. We have remarked that under 47 the present arrangements of market economies the production system is largely self-financed on the basis of the retained and reinvested earnings of private firms. Theoretically, the role of banks and stock markets is to finance production as well as consumption. In fact, the financial markets and intermediaries at the heart of the financial crisis – and responsible for much of the increase in financial activity in the past few decades – had little to do with the funding of long term investment and increasingly more to do with financing of asset trading and position taking by highly leveraged financial institutions.

Under these established arrangements, the real economy risks becoming the alibi rather than the concern of finance. Each successive layer of ingenuity in the design of new financial products and services, composed out of derivatives of the underlying, unified property right, takes the previous layer as its subject, as the transactions of the real economy recede in an ever more distant and irrelevant horizon. Wealth, influence, and talent, debased and wasted, accrue to a form of economic activity that has lost any close and real connection to the imperatives and the opportunities of production. In this direction, finance does relatively little good to the real economy in good times and threatens to do immense harm to it in bad times.

We can do better. We can innovate in the arrangements governing the relation of finance to the real economy and make the accumulated saving of society better serve the productive potential of the economy.

For example, we can establish rules and taxes that discourage credit in operations unrelated to expansion of GDP. In the United States we can tap the country's remarkable, unappreciated and underutilized network of local banks, helping them better to combine decentralization with sophistication.

Such an effort is not mere regulation as conventionally understood.

48 It is regulation as a first step to reorganization.

The second direction of this program of broad-based and socially inclusive economic growth is the reinvention of industrial policy. Its chief target should be the small and medium-sized businesses that in every major economy in the world represent the chief sources of jobs and output. Its method should be the expansion of access to credit, to technology, to advanced knowledge and practice, to facilities for the organization of networks of cooperation that combine the benefits of flexibility and of scale. Its characteristic concern should be to propagate successful organizational and technological innovations wherever they may arise. Its temper should be that of a patient and fearless experimentalism.

The major developed and developing economies have moved beyond form of industrial organization that emerged in the late nineteenth-century century and that came to prevail in the first half of the twentieth: the mass production of standardized goods and services, with rigid machines and production processes, dependence on semiskilled or narrowly skilled labor, stark contrasts between jobs of supervision and of execution as well as among specialized tasks of execution, and clear-cut separations of areas of activity considered appropriate to cooperation or to competition. However, no contemporary national economy has gone beyond such mass production in all its activity, only in particular sectors.





The rich and emerging economies alike boast advanced sectors characterized by the relatively decentralized and flexible production of non-standardized goods and services, by knowledge-intensive labor, by the softening of contrasts between supervision and execution as well as among rigid specialities at the factory or office floor, by a more thoroughgoing mixture of cooperation and competition and, above all, by a practice of permanent innovation. Under the aegis of this form of 49 production, the best firms come more closely to resemble the best schools. The thrust of this shift is toward an economy in which the relation between labor and machines is so arranged that labor time is increasingly devoted to those operations that we have not yet learned to repeat and, consequently, cannot yet express formulaically and embody in machines.

However, even in the richest and most egalitarian contemporary societies (some of the European social democracies), such vanguard practices remain confined to relatively isolated parts of the economy, from which the majority of the workforce continues to be excluded. The power of the state can and should be used to open the economic and educational gateways of access to this productive experimentalism. To this end, we need a form of association between governments and firms that is neither the American model of arm's-length regulation of business by government nor the northeastern Asian model of formulation of unitary trade and industrial policy, imposed top-down by a governmental bureaucracy: a form of strategic coordination between governments and firms that is pluralistic, participatory, and experimental. Its aim is to help make the conditions and instruments of advanced production available to larger parts of the economy and the society.

The third axis of this structural program is the educational counterpart to the second. Such an alternative requires an enhancement of the capabilities of ordinary men and women and, consequently, a significant advance in the quality of education. In the United States today there are in fact two separate educational systems. One system, restricted to the best private schools and to the top tier of public schools, takes as its priority the mastery of the analytic skills and the discursive practices needed for the performance of high-level tasks in today's society. The other system, predominating in much of the public-school system, remains focused on shallow encyclopedic coverage of information and on the effort to impose a modicum of discipline on 50 bored and restless young people. The first of these two pedagogic paradigms must be made the universal one while becoming far more rigorous and ambitious in its application. The second must be repudiated.

In a country, like the United States, that is very large, very unequal and federal in its organization, a premise of such an advance is the development of practices that reconcile the local management of the public schools with national standards of investment and quality.

Redistribution of funding and teachers from richer places to poorer places is not enough; it is also necessary to implement procedures for corrective intervention in failing schools and school systems.

Every aspect of this three-part program requires institutional innovations, not just commitment of resources. A premise of such innovations is that it is not enough to regulate the market economy or to compensate for its inequalities by means of retrospective redistribution through the familiar tools of redistributive taxation and social spending.

It is necessary to change how we organize our societies and economies the better to achieve a decisive broadening of economic and educational opportunity.

Such an approach contradicts what has been the dominant model of ideological controversy over the last few centuries throughout much of the world. According to this hydraulic model, the central question is always market or government: more market and less government, or more government and less market. A thesis of our argument is: more market and more government. Democratize the market, do not just regulate it, and use the response to the financial and economic crisis and its aftermath as an occasion to undertake this democratizing work.

Without such a project of socially inclusive economic growth, we cannot act effectively on the implicit link between redistribution and recovery.

51 An alternative like this one costs money. However, it need not cost anything like the countless billions that, throughout the world, have already been largely wasted on propping up financial institutions and financiers whose contribution to the real economy was modest or negative, or who had concentrated in their own hands a share of profit and talent that no account of the requirements and interests of production can justify.

More than money, however, such an alternative requires ideas.

Economics as it is now practiced has largely failed to generate the ideas we need. The psychological and anti-institutional bent of its dominant tradition has rendered it poorly equipped for the work at hand. The method it embraced at the time of the marginalist revolution in the late nineteenth century, and then perfected through the general-equilibrium analysis of the twentieth century, has turned it into a sham counterpart to natural science, with the crucial empirical and normative assumptions that give life and direction to economic analysis relegated to the role of factitious stipulations. Its newfound empirical interests, for example in behavioral finance, so completely disconnect behavioral tendencies from their contingent, and revisable, institutional presuppositions, that they generate little insight and almost no usable guidance for those who address real-world problems, including recovery from the slump.

In this vacuum of no ideas, the ghosts of the intellectual alternatives of nearly a hundred years ago -- a shrunken Keynesianism and a fossilized market orthodoxy -- have been called up, if not out of conviction, then out of sheer desperation. They have been invoked, by men and women who claim to speak with the authority of an economic science, but who, for the most part, have never visited a factory or even mastered the history of their own discipline.

Use the crisis to remake the market economy. Remake the market economy by undertaking the institutional innovations that can give more 52 access to more markets for more people in more ways. Take the stimulus as the holding operation that is all it can be, and keep your eyes focused on the prize: the growth project, designed to include and to empower as well as to enrich.

Insist on doing what progressives, in the United States and elsewhere, have largely failed to accomplish: to come up with a proposal that responds to the interests and aspirations of the broad working-class majority of the country. In so doing, such a program would also provide a sequel to the Roosevelt's New Deal and to the social-democratic settlement in mid-twentieth century Europe. Now, however, the emphasis would no longer fall narrowly on safeguards against economic insecurity or on high-level of redistributive social entitlements. It would fall on what matters most: the tools and occasions to make something of one's life, in biographical time and in history.

NOTE: Keynes, vulgar Keynesianism, and the road toinsight

The crisis of 2007-2009 was preceded, as we have remarked, by a partial hollowing out of many of the rules, regulations, and arrangements, especially for the discipline of finance, that in the United States were associated with Roosevelt’s New Deal and in Europe with the socialdemocratic settlement of the mid-twentieth century.

The institutional compromise of the mid-twentieth century, in both its American and its European versions, was predicated on the abandonment by the forces that had mounted a challenge to the established institutional order of the North-Atlantic societies, of any more consequential attempt to reorganize, in the interest of the common man and woman, the worlds of power and production. In exchange for this renunciation, however, national governments were allowed to increase their power to counteract economic insecurity (through 53 unemployment insurance and pension schemes) and to diminish inequality through the retrospective redistribution of wealth and income by the mechanisms of tax and transfer.

The United States soon abandoned the attempts, characteristic of the early New Deal, to innovate in the institutional arrangements of the market economy and of the relations between government and firms.



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