This document discusses how the distribution of risks in the economy can threaten democracy by narrowing the democratic policy space. It argues that the increasing role of finance has externalized many risks from their originators onto governments and individuals. This has restricted policy options and encouraged antidemocratic tendencies as governments feel compelled to avoid risks materializing. The document calls for analyzing risk distribution through theories of justice and making these political choices around risk more explicit. Remedies proposed include re-regulating finance and shifting power from civil servants back to politicians.

1. Risk distribution and threats to
democracy
Teppo Eskelinen
University of Eastern Finland
teppo.eskelinen@uef.fi

2. Democratic policy space in economic
policy
• Is the policy space narrowing?
• If yes, what is the cause?
• If yes, is it undesirable?
->My starting point: the policy space in
narrower than before, and that is undesirable

3. Some clarificatory points
• Often transnational processes, corporate
power etc are blamed using democratic
language, but the criticism really regards the
content of decision, not the limits of the
existing option set prior to the decision.
• The implementation of economic policy is not
devoid of power struggle, which often takes
the rhetorical form of tehnical vs political.

4. Definition
• Political issue is a decision or institution, to
which there are viable alternatives which
wuold affects different people or groups of
people in a different manner

5. Explicit restrictions to economic
democracy
• ”Bail-out” programmes
• Growth and stability pact
• Yet these are not sufficient in showing real
limitations to economic democracy
• Also, the capacity to contest them is one
negotiation forum regarding economic
democracy (by whom and on what conditions
can these be overturned?)

6. Economic decision-making
• Increasing technocratic rule:
• Civil servants, ministries of finance
• International institutions
• Why is the scope of ”necessary” and
”technical” in economic policy increasing?

7. Explanations (1)
• Hegemony of neoclassical theory
• Globalisation
• Financialisation

8. Explanations (2)
• Neoclassical economics: recommends one
policy set over others, based on conservative
monetary theory and suspicion regarding
”interventions”
• Globalisation: deepening economic and
political relations, yet this is a process with
long history and presently very selective

9. What financialisation is?
• Change in the structure of economy
• Change in priorities of productive firms
• Change in income distribution
• Rise of the tax-avoidance accounting industry
• Change in the form of social security
• My suggestion: A change in the logic of risk
distribution

10. Risks: neoclassical theory and practice
• Neoclassical theory: Financial risks are
reflections of uncertainties in the external
world
• Effective allocation in the financial market
• Financial market as a contained and neutral
trading venue (not interest group, not
originator of risks, not manipulator of any
political logic).

11. Problems
• The financial market does affect political
processes
• The financial market does generate new risks
• The financial market does encourage risk-
taking
• The largest agents in the financial market are
able to externalise risks without a burden of
compensation

12. Externalising risks
• ”Shadow markets”, concealing risks in
”synthetic” securities
• Too big to fail
• Increase of systemic risks
• Individuals’ compulsion to become partial
bearers of risks

13. Governments and financialisation
• Government funding becomes dependent on
observations by financial agents
• Social protection becomes dependent on
investment success
• Employment heavily dependent on stock
markets rather than commodity markets
• ->Restricted policy space

14. Problems to democracy (1)
• Note: simultaneously problem for distributive
justice and democracy
• More systemic risks for a) government b)
individuals
• Very minor changes in expectations can cause
collapses
• Governments will have to govern procedures
by the logic of avoiding the materialisation of
major risks

15. Problems to democracy (2)
• Expectations are mostly psychological
• Cross-securisation, leverage
• No ”sudden moves”
• Civil servants interpret this as the need for
”firm and consistent” economic policy
• Felt need to ”send the right signal”, ”ensure
confidence”
• Leads to antidemocratic tendencies

16. The distribution of risks
• Distribution of a burden, not good
• Implicit distribution
• A specific kind of burden

17. Theories of justice
• Possible theoretical directions:
• Overlap: risk originator bears the risk
• Just rules of exhange: transparency of
”products” etc, limitations regarding
”products” and the bounds of the market
• Distribution of moral labour: which body in
the society bears responsibility for protecting
citizens from certain risks

18. Conclusion
• The democratic policy space depends on the
relations btw finance & productive economy,
finance & the government
• Risk distribution is a political choice which has
to be analysed in terms of theory of justice,
needs to be made explicit
• Remedies: reregulation of finance, power
from civil servants to politicians