Center for Institutional Analysis and Development (CADI) workshop 2012Possible Futures of Capitalism             Paul Drag...
Outline• A puzzle: regulatory capitalism VS. deregulation• Taxonomy of capitalist systems• Illustrations of recent histori...
The regulatory capitalism puzzle: “more rules, freer markets”CHANGES IN THE REGULATORYENVIRONMENT
The “Regulatory Capitalism” Thesis• “…the neoliberal policy package of smaller  government, privatization and deregulation...
Number of regulatory agencies (RA) (left) and the increase in the proportion of regulatory agency nichesfilled (right) for ...
Staffing of Federal Regulatory Agencies                          (source: de Rugy & Warren 2009)
Budgetary Costs of Federal Regulation,        Adjusted for Inflation                          (source: de Rugy & Warren 20...
Number of pages published annually by      the Federal Register per million people450400350300250200150100 50 0      1962 ...
Percentage of occupations requiring                       licensing          35          30          25Percent          20...
Number of US states licensing               occupation, 1890 and 1950                                      in 1950        ...
Regulation of credit, labor and               business, United States 98.5 87.5 76.5 65.5 5      1970 1975 1980 1985 1990 ...
Time required to start a business (days)60     51.150            41.640                   29.130                          ...
Cost of business start-up procedures (%          of GNI per capita)14     11.8   11.412                   9.910           ...
The puzzle• “Freer markets, more rules” (Vogel 1996);  “more capitalism, more regulation” (Levi-Faur  2005).• An intriguin...
Key idea for solving the puzzle                 (perhaps)• Why do governments create independent regulatory  agencies (IRA...
TheoryTAXONOMY OF ECONOMICSYSTEMS
Taxonomy of economic systems• Criteria of classification• Combinations of criteria lead to mapping the  possible (theoreti...
Stages of development theory
Classification criteria• Number of services provided by the state  – Few  – Medium  – Many• How regulated the market is:  ...
Classification of economic systems    Number of services             provided                       Small number of state ...
Application to concrete casesTAXONOMY OF ECONOMICSYSTEMS
Operationalization based on the             Heritage index• Number of state services:  – Size of government: fiscal freedo...
Operationalization                        Size of gov. < 20      20 < Size of gov. < 50   50 < Size of gov.               ...
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
TheoryWHAT DETERMINES THEFUTURE OF CAPITALISM IN AGIVEN COUNTRY?
Stakeholders mapping: Three actors                 model• Actors:  – General public  – Dominant corporations (corporations...
Rent-seeking analysis: Who benefits          from the economic system? Opportunities forregulatory capture                ...
Rent-seeking analysis: Who benefits           from the economic system?                        (Which one you pick depends...
In what direction is the economic              system moving?Type of political     Direction of                           ...
How do systems interact?STATE CAPITALISM ANDGLOBALIZATION
What is “state capitalism”?• “A system in which the state functions as the  leading economic actor and uses markets  prima...
The Economist, January 2012“The crisis of liberal capitalism has been renderedmore serious by the rise of a potent alterna...
Allan Meltzer, Why Capitalism? 2012“The high tide of multilateral trade agreements to reduce barriersto trade is probably ...
Our thesis• The rent-seeking theory of state capitalism =>  state capitalism is nothing but a modern form of  mercantilism...
Classical perspective on mercantilism“[M]ercantilists, whatever the period, country, or status of theparticular individual...
The rent-seeking thesis: An incentives          driven perspective• The best way to understand mercantilism is the  “rent-...
SOME IMPLICATIONS
At the level of individual countries• The future of capitalism depends on the balance  of power between the general public...
At the globalized level: the impact of state          capitalism is uncertain• State capitalism looks a lot less impressiv...
Implications for globalization• The current mix of market  capitalism, regulatory capitalism, crony  capitalism, and state...
Bremmer’s and Meltzer’s warnings       against protectionism hold• “In order to ensure that the free market remains the  m...
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Aligica &amp; Tarko - Possible futures of capitalism

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based on Paul Dragos Aligica & Vlad Tarko papers on Regulatory capitalism and State capitalism

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Aligica &amp; Tarko - Possible futures of capitalism

  1. 1. Center for Institutional Analysis and Development (CADI) workshop 2012Possible Futures of Capitalism Paul Dragos ALIGICA Vlad TARKO George Mason University, Mercatus Center
  2. 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. 3. The regulatory capitalism puzzle: “more rules, freer markets”CHANGES IN THE REGULATORYENVIRONMENT
  4. 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. 5. Number of regulatory agencies (RA) (left) and the increase in the proportion of regulatory agency nichesfilled (right) for 16 sectors across 49 nations, 1960–2002 (source: Levi-Faur in Braithwaite 2008)
  6. 6. Staffing of Federal Regulatory Agencies (source: de Rugy & Warren 2009)
  7. 7. Budgetary Costs of Federal Regulation, Adjusted for Inflation (source: de Rugy & Warren 2009)
  8. 8. Number of pages published annually by the Federal Register per million people450400350300250200150100 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. 9. Percentage of occupations requiring licensing 35 30 25Percent 20 15 10 5 0 1950s 1970s 1990s 2000s (source of data: Krueger & Kleiner 2010)
  10. 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 4Professional engineers 48 4 Embalmers 48 4 Dentists 48 4 Attorneys 48 4 Architects 48 4 Accountants 48 4 (source of data: Zhou, 1993)
  11. 11. Regulation of credit, labor and business, United States 98.5 87.5 76.5 65.5 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. 12. Time required to start a business (days)60 51.150 41.640 29.130 25.0 21.120 15.8 14.8 14.1 12.310 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. 13. Cost of business start-up procedures (% of GNI per capita)14 11.8 11.412 9.910 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. 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. 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.
  16. 16. TheoryTAXONOMY OF ECONOMICSYSTEMS
  17. 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
  18. 18. Stages of development theory
  19. 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. 20. Classification of economic systems Number of services provided Small number of state Medium number of by the Many state services services state servicesType of stateInterventionMinimal regulation of Free-marketmarket participants capitalism Neoliberalism Provider state(deregulation) (Classical-liberalism)Regulation of activities Interventionism Regulatory capitalism Welfare stateof market participantsFavored status(monopoly grants) to Corporate or State Mercantilism Socialismcertain of market capitalismparticipants
  21. 21. Application to concrete casesTAXONOMY OF ECONOMICSYSTEMS
  22. 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. 23. Operationalization Size of gov. < 20 20 < Size of gov. < 50 50 < Size of gov. Free-marketOpen of markets >80 capitalism Neoliberalism Provider state (Classical-liberalism)Open markets < 80 Interventionism Regulatory capitalism Welfare stateRegulatory eff > 70Open markets < 80 Corporate or State Mercantilism SocialismRegulatory eff < 70 capitalism
  24. 24. Regulatory efficient countries
  25. 25. Countries with regulated markets
  26. 26. Recent history, some regulatory efficient countries
  27. 27. Recent history, some regulatory efficient countries
  28. 28. Recent history, some countries with regulated markets
  29. 29. Long-term history, illustrative
  30. 30. History is non-deterministic
  31. 31. TheoryWHAT DETERMINES THEFUTURE OF CAPITALISM IN AGIVEN COUNTRY?
  32. 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. 33. Rent-seeking analysis: Who benefits from the economic system? Opportunities forregulatory 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. 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 stateThe public benefits (Classical-liberalism) (Large, small risk) Regulatory The dominant Interventionism Welfare state capitalismcorporations benefit (Large, high risk) Corporate or State The government Mercantilism Socialism capitalism benefits
  35. 35. In what direction is the economic system moving?Type of political Direction of Examplessystem economic system Australia, Ireland, Free-market capitalismDemocracies with Canada, Switzerland Neoliberalismhigh transparency Britain, Netherlands, Provider state SwedenDemocracies in which United States, France,special interests are Regulatory capitalism Germany, JapanpowerfulAutocratic regimeswhere governments State capitalism Brazil, China, Russiacan affordprotectionism
  36. 36. How do systems interact?STATE CAPITALISM ANDGLOBALIZATION
  37. 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. 38. The Economist, January 2012“The crisis of liberal capitalism has been renderedmore serious by the rise of a potent alternative:state capitalism, which tries to meld the powers ofthe state with the power of capitalism. It dependson government to pick winners and promoteeconomic growth. But it also uses capitalist toolssuch as listing state-owned companies on thestockmarket and embracing globalisation.”
  39. 39. Allan Meltzer, Why Capitalism? 2012“The high tide of multilateral trade agreements to reduce barriersto trade is probably past. Currently, the best future hope is thatthe US and the EU won’t step up trade restrictions tocompensate for foreign labor and environmentalpractices, …, and that China will stop subsidizing or giving otheradvantages to Chinese firms. Both seem a vain hope. Tradeprotectionists and nationalists everywhere seem eager to end theregime that brought 60 years of global expansion and risingliving standards.”
  40. 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. 41. Classical perspective on mercantilism“[M]ercantilists, whatever the period, country, or status of theparticular individual, would have subscribed to all of the followingpropositions:(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. 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.
  43. 43. SOME IMPLICATIONS
  44. 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. 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. 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. 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)

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