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Center for Institutional Analysis and Development (CADI) workshop 2012




Possible Futures of Capitalism


             Paul Dragos ALIGICA
                 Vlad TARKO
     George Mason University, Mercatus Center
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
The regulatory capitalism puzzle: “more rules, freer markets”

CHANGES IN THE REGULATORY
ENVIRONMENT
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.
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)
Staffing of Federal Regulatory Agencies




                          (source: de Rugy & Warren 2009)
Budgetary Costs of Federal Regulation,
        Adjusted for Inflation




                          (source: de Rugy & Warren 2009)
Number of pages published annually by
      the Federal Register per million people
450

400

350

300

250

200

150

100

 50

 0
      1962




      1988
      1950
      1952
      1954
      1956
      1958
      1960

      1964
      1966
      1968
      1970
      1972
      1974
      1976
      1978
      1980
      1982
      1984
      1986

      1990
      1992
      1994
      1996
      1998
      2000
      2002
      2004
      2006
      2008
      2010
                          (source of data: Office of the Federal Register)
Percentage of occupations requiring
                       licensing
          35

          30

          25
Percent




          20

          15

          10

           5

           0
               1950s    1970s       1990s                2000s

                                (source of data: Krueger & Kleiner 2010)
Number of US states licensing
               occupation, 1890 and 1950
                                      in 1950        in 1890

            Librarians           9
                                                                                             43
               Miners                 13
                                                                                    39
             Midwives                     14
                                                                                   38
             Plumbers                          17
                                                                              35
          Contractors                               19
                                                                         33
    Insurance brokers                                          26
                                                               26
     Dental hygienists                                              29
                                                         23
            Surveyors                                                    33
                                                    19
   Real estate brokers                                                                  40
                                     12
     Funeral directors                                                                  40
                                     12
               Barbers                                                                            46
                             6
         Veterinarians                                                                                 48
                         4
              Teachers                                                                                 48
                         4
            Physicians                                                                                 48
                         4
Professional engineers                                                                                 48
                         4
          Embalmers                                                                                    48
                         4
              Dentists                                                                                 48
                         4
            Attorneys                                                                                  48
                         4
            Architects                                                                                 48
                         4
         Accountants                                                                                   48
                         4
                                                                         (source of data: Zhou, 1993)
Regulation of credit, labor and
               business, United States
 9

8.5

 8

7.5

 7

6.5

 6

5.5

 5
      1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

      10 is maximum economic freedom, 1 minimum (source of data: Frazer Institute 2011)
Time required to start a business (days)
60
     51.1
50
            41.6
40

                   29.1
30
                            25.0
                                      21.1
20                                              15.8       14.8     14.1
                                                                             12.3
10    6      6      6         6        6          6         6        6         6

 0
     2003   2004   2005     2006      2007      2008       2009     2010     2011

                          Euro area        United States

                                                            (source of data: World Bank)
Cost of business start-up procedures (%
          of GNI per capita)
14
     11.8   11.4
12
                   9.9
10
                            8.2
 8                                    7.5
                                                  7.0
                                                            6.2      6.4
 6                                                                            5.4

 4

 2                                                                   1.4      1.4
     0.7    0.7    0.8      0.8       0.7         0.7       0.7
 0
     2003   2004   2005    2006       2007       2008       2009    2010      2011
                          Euro area         United States


                                                             (source of data: World Bank)
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)
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.
Theory

TAXONOMY OF ECONOMIC
SYSTEMS
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
Stages of development theory
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)
Classification of economic systems
    Number of services
             provided
                       Small number of state         Medium number of
                by the                                                      Many state services
                              services                 state services
Type of          state
Intervention

Minimal regulation of          Free-market
market participants             capitalism             Neoliberalism          Provider state
(deregulation)             (Classical-liberalism)


Regulation of activities
                             Interventionism        Regulatory capitalism      Welfare state
of market participants


Favored status
(monopoly grants) to                                 Corporate or State
                               Mercantilism                                     Socialism
certain of market                                       capitalism
participants
Application to concrete cases

TAXONOMY OF ECONOMIC
SYSTEMS
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
Operationalization

                        Size of gov. < 20      20 < Size of gov. < 50   50 < Size of gov.



                          Free-market
Open of markets >80        capitalism             Neoliberalism          Provider state
                      (Classical-liberalism)


Open markets < 80
                        Interventionism        Regulatory capitalism     Welfare state
Regulatory eff > 70



Open markets < 80                               Corporate or State
                          Mercantilism                                     Socialism
Regulatory eff < 70                                capitalism
Regulatory efficient countries
Countries with regulated markets
Recent history, some regulatory efficient
                countries
Recent history, some regulatory efficient
                countries
Recent history, some countries with
        regulated markets
Long-term history, illustrative
History is non-deterministic
Theory

WHAT DETERMINES THE
FUTURE OF CAPITALISM IN A
GIVEN COUNTRY?
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.
Rent-seeking analysis: Who benefits
          from the economic system?
 Opportunities for
regulatory capture

                         Free-market
      Small               capitalism             Neoliberalism        Provider state
                     (Classical-liberalism)


Large, small risk      Interventionism        Regulatory capitalism   Welfare state



                                               Corporate or State
 Large, high risk        Mercantilism                                   Socialism
                                                  capitalism
Rent-seeking analysis: Who benefits
           from the economic system?
                        (Which one you pick depends on your assumptions about the efficiency of
 Opportunities for                          government provided services)
regulatory capture

                           Free-market
     (Small)
                            capitalism              Neoliberalism            Provider state
The public benefits
                       (Classical-liberalism)

 (Large, small risk)
                                                     Regulatory
   The dominant           Interventionism                                     Welfare state
                                                     capitalism
corporations benefit

 (Large, high risk)
                                                 Corporate or State
 The government            Mercantilism                                         Socialism
                                                    capitalism
     benefits
In what direction is the economic
              system moving?
Type of political     Direction of
                                              Examples
system                economic system
                                             Australia, Ireland,
                      Free-market capitalism
Democracies with                             Canada, Switzerland
                      Neoliberalism
high transparency                            Britain, Netherlands,
                      Provider state
                                             Sweden
Democracies in which
                                              United States, France,
special interests are Regulatory capitalism
                                              Germany, Japan
powerful
Autocratic regimes
where governments
                      State capitalism        Brazil, China, Russia
can afford
protectionism
How do systems interact?

STATE CAPITALISM AND
GLOBALIZATION
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.
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.”
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.”
Our thesis
• 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.
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)
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.
SOME IMPLICATIONS
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.
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?
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.
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)

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Aligica &amp; Tarko - Possible futures of capitalism

  • 1. Center for Institutional Analysis and Development (CADI) workshop 2012 Possible Futures of Capitalism Paul Dragos ALIGICA Vlad TARKO George Mason University, Mercatus Center
  • 2. 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
  • 3. The regulatory capitalism puzzle: “more rules, freer markets” CHANGES IN THE REGULATORY ENVIRONMENT
  • 4. 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.
  • 5. 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)
  • 6. Staffing of Federal Regulatory Agencies (source: de Rugy & Warren 2009)
  • 7. Budgetary Costs of Federal Regulation, Adjusted for Inflation (source: de Rugy & Warren 2009)
  • 8. Number of pages published annually by the Federal Register per million people 450 400 350 300 250 200 150 100 50 0 1962 1988 1950 1952 1954 1956 1958 1960 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 (source of data: Office of the Federal Register)
  • 9. Percentage of occupations requiring licensing 35 30 25 Percent 20 15 10 5 0 1950s 1970s 1990s 2000s (source of data: Krueger & Kleiner 2010)
  • 10. Number of US states licensing occupation, 1890 and 1950 in 1950 in 1890 Librarians 9 43 Miners 13 39 Midwives 14 38 Plumbers 17 35 Contractors 19 33 Insurance brokers 26 26 Dental hygienists 29 23 Surveyors 33 19 Real estate brokers 40 12 Funeral directors 40 12 Barbers 46 6 Veterinarians 48 4 Teachers 48 4 Physicians 48 4 Professional engineers 48 4 Embalmers 48 4 Dentists 48 4 Attorneys 48 4 Architects 48 4 Accountants 48 4 (source of data: Zhou, 1993)
  • 11. Regulation of credit, labor and business, United States 9 8.5 8 7.5 7 6.5 6 5.5 5 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10 is maximum economic freedom, 1 minimum (source of data: Frazer Institute 2011)
  • 12. Time required to start a business (days) 60 51.1 50 41.6 40 29.1 30 25.0 21.1 20 15.8 14.8 14.1 12.3 10 6 6 6 6 6 6 6 6 6 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Euro area United States (source of data: World Bank)
  • 13. Cost of business start-up procedures (% of GNI per capita) 14 11.8 11.4 12 9.9 10 8.2 8 7.5 7.0 6.2 6.4 6 5.4 4 2 1.4 1.4 0.7 0.7 0.8 0.8 0.7 0.7 0.7 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Euro area United States (source of data: World Bank)
  • 14. 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)
  • 15. 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.
  • 17. 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
  • 19. 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)
  • 20. Classification of economic systems Number of services provided Small number of state Medium number of by the Many state services services state services Type of state Intervention Minimal regulation of Free-market market participants capitalism Neoliberalism Provider state (deregulation) (Classical-liberalism) Regulation of activities Interventionism Regulatory capitalism Welfare state of market participants Favored status (monopoly grants) to Corporate or State Mercantilism Socialism certain of market capitalism participants
  • 21. Application to concrete cases TAXONOMY OF ECONOMIC SYSTEMS
  • 22. 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
  • 23. Operationalization Size of gov. < 20 20 < Size of gov. < 50 50 < Size of gov. Free-market Open of markets >80 capitalism Neoliberalism Provider state (Classical-liberalism) Open markets < 80 Interventionism Regulatory capitalism Welfare state Regulatory eff > 70 Open markets < 80 Corporate or State Mercantilism Socialism Regulatory eff < 70 capitalism
  • 26. Recent history, some regulatory efficient countries
  • 27. Recent history, some regulatory efficient countries
  • 28. Recent history, some countries with regulated markets
  • 31. Theory WHAT DETERMINES THE FUTURE OF CAPITALISM IN A GIVEN COUNTRY?
  • 32. 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.
  • 33. Rent-seeking analysis: Who benefits from the economic system? Opportunities for regulatory capture Free-market Small capitalism Neoliberalism Provider state (Classical-liberalism) Large, small risk Interventionism Regulatory capitalism Welfare state Corporate or State Large, high risk Mercantilism Socialism capitalism
  • 34. Rent-seeking analysis: Who benefits from the economic system? (Which one you pick depends on your assumptions about the efficiency of Opportunities for government provided services) regulatory capture Free-market (Small) capitalism Neoliberalism Provider state The public benefits (Classical-liberalism) (Large, small risk) Regulatory The dominant Interventionism Welfare state capitalism corporations benefit (Large, high risk) Corporate or State The government Mercantilism Socialism capitalism benefits
  • 35. In what direction is the economic system moving? Type of political Direction of Examples system economic system Australia, Ireland, Free-market capitalism Democracies with Canada, Switzerland Neoliberalism high transparency Britain, Netherlands, Provider state Sweden Democracies in which United States, France, special interests are Regulatory capitalism Germany, Japan powerful Autocratic regimes where governments State capitalism Brazil, China, Russia can afford protectionism
  • 36. How do systems interact? STATE CAPITALISM AND GLOBALIZATION
  • 37. 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.
  • 38. 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.”
  • 39. 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.”
  • 40. Our thesis • 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.
  • 41. 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)
  • 42. 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.
  • 44. 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.
  • 45. 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?
  • 46. 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.
  • 47. 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)