Fred Block: The Tenacity of the Free Market Ideology

I'm here today with Fred block research professor of sociology at the University of california-davis we're here to discuss his book the power of market fundamentalism karl polanyi's critique which was written with Margaret Summers of the University of Michigan thanks for joining us Trent thanks Erin having me so Polly Anya's critique and the power of market fundamentalism let's start with the power how the power of market fundamentalism what is that power what are you describing well Palani and his most important book the great transformation that was published 1944 argued that what the free market the people who are similar to our contemporary free market people who essentially say that the market can self-regulate and solve most problems and that the government can be kept to a minimum he argued that those people were essentially advocating a utopia he called it the free market utopia and this was a kind of very significant move because up until 1944 that denouncing something as a utopia was basically the move that the right used against the left against socialist communist Social Democrats they would say you have this vision of a better world in which people will be more equal and they'll be full democracy and so forth that's all well and good but it goes against human nature and it's impossible Palani very self-consciously said that the vision behind the free-market arguments was comparably utopian in this sense that what they were proposing was basically impossible it couldn't be it couldn't be implemented and so they were essentially selling to the public something which was a fantasy and that what's powerful about his argument is the way he systematically makes that argument that their vision of a self-regulating market system with the minimum of government is in fact impossible and the kind of key step in his argument by which he gets to that point is he says look there are three critical inputs to any economy and these inputs have long been discussed in economic theory there's land there's labor and there's money or or capital and he said that the vision of a self-regulating market requires the assumption that these three inputs land labour and money would be self-regulating that they could be organized entirely by the market and he said that would be fine if they were commodities by which he means things which were produced to be sold on the market like widgets or iPhones or whatever those kinds of things you can regulate supply and demand through the price mechanism but land labor and money are not produced for sale on the market land was given to us by the Creator or happen to be here it's nature labor is the activity of human beings and the supply of money and credit is something which isn't produced spontaneously by markets it's in our current system regulated and controlled by by central banks so what Palani was saying is that the neoclassical economists all of those who make the argument about a self-regulating market system have to pretend that these fictitious commodities behave like real commodities but they can't because they weren't produced for sale on the market and the reality the historical reality is that throughout the history of the market economy the government has played a critical role in shaping both the supply and demand of these fictitious commodities so in the case of land there are agricultural policies that shape how much farmers produce more recently we have zoning systems which determine what land can be used for what purposes with labour governments have controlled the immigration immigration school systems to create certain kinds of educated labor we have unemployment insurance we have retirement systems and so forth so that the that and then in the case of money we've had for at least for more than 100 years central banks that essentially try to avoid an excess supply of money which would involve inflation or a shortage of money which would imply deflation so Palani is saying that just from the get-go of creating a market economy the government is playing a central role in managing these fictitious commodities and so the idea that you're going to push the government out and have a self-regulating market system is an impossibility that it's the government itself activity of states that helps to constitute a market economy and without that state role there would be no market system it's interesting because inside of those debates there were things like free banking movements where they wanted to make what you might call endogenous money easier and not have it be controlled by the government right and to this day there they're people who parties what's going on or or who would prefer that to our system of central banking but the historical experience with every banking was not pretty when you talk about the historical experience Palani writes this book in 1944 this is on the back of two world wars and a Great Depression it wouldn't seem he would have a hard time convincing people that the Utopia hadn't been realized that's right that he had come to the same conclusion as john maynard keynes the the people who helped to design the post-war monetary system at Bretton Woods they all had the same understanding that the free market system and particularly the institution of the International gold standard which was kind of the centerpiece of a self-regulating market system that those institutions had played a critical role in the crisis of the 1930 had had led to the collapse of the global economy so when Palani was making this argument he was I'm kind of in accord with the general direction that and we know that in the post-world War two period that there was a kind of there was a Keynesian moment that lasted for something like 30 years in which it was widely understood that governments had to play a central role in helping to economies move towards full employment and we had a regulatory apparatus that regulated these fictitious commodities in a way that provided higher levels of social welfare and reduced reduced inequality but so so there's I the kind of ambiguity is that Palani was kind of both right and and wrong because he thought that he had seen the end of the free market system he thought that the ideas had been abandoned for good although he also in the fine chapter of his of his book essentially made an argument that what was needed to get beyond the free-market vision completely was a paradigm shift in which people redefined what freedom is and essentially he argued that particularly in in anglo-american culture there remained this idea of freedom which was highly individualistic which was basically a parallel to freedom of conscience just leave me alone and let me do my thing and he argued that in a complex society we're interdependent with other people and that particular concept of freedom is archaic I mean that it's the Robinson Caruso freedom doesn't make sense when we're in a complicated division of labor the freedom to do what you want is in conflict with the freedom from intrusion by others right and that the freedom of some people to make a lot of money has a lot of consequences for the lack of freedom for other people who then have to work in Walmart at low wages or or whatever so he argued that there was a need for this paradigm change in which we understood that living in a complex society we had to elaborate a new conception of freedom which was essentially the full development of the individual that it's not a question of being left alone it's a question of of having the space to develop one's one's capacities in connection with with other people and he believed that the way to achieve that freedom was through strengthening democracy and ultimately subordinating the economy to death kradic politics so in some sense while he was while he was too optimistic that the free market idea had been killed off his suggestion about this paradigm change gave him a claim to having been right because that paradigm change didn't happen there wasn't a new conception of freedom there wasn't an understanding that in a complex society you had to have government and the question was not minimizing government but bringing government under the control of a democratic citizenry and so I'm there someone like George Stigler with his theories of economic regulation would have said it the cure was worse than the disease unless you got in other words you forfeited the kind of individual freedom by putting government in control but if that control didn't work in the idealized romantic form of democracy the cure could be worse than that than the disease itself right and so I mean that um polanyi's book appeared the same year as as Hayek's road to serfdom and in in some sense they were debating foreign partners who and and Palani had known Hayate from from vienna had a known Hayek's teacher of enemies and had been engaged in debates with on visa back in the early 1920s so but he but polanyi's very explicit that this fear of government and planning that it will go terribly awry that it will take us down the slippery slope to serfdom he argued that that fear was was misguided that if we understood the potential of democratic politics we could in fact create a deeper kind of freedom a freedom in a complex society in which people would be able to achieve their life plans and he argued essentially for more abundant freedom and again he was voted for you mean that these constituents like health care education for you and your children a secure retirement food exactly are the big building blocks to allow one the freedom to develop themselves and it's not merely a freedom of action piece of e an adversary called government exactly and so Roosevelt's for freedom speech is the same year and so the same spirit that the freedom from hunger the freedom from economic and security this was part of what the meaning of freedom in it in a complex society so that that's exactly part of where Palani was going but the other the other piece of the story was that Palani was deeply critical of the of the Soviet Union of the new Soviet experience and he's very explicit in those final pages of the of the book that in his option of freedom there needs to be freedom for nonconformity that the people who have different different views who who reject the prevailing understandings of how society should work hit in his vision of freedom there would be greater protections for those people against kind of economic or political marginalization then you had someone like Frank Knight at University of Chicago who in many respects thought that democracy could not be achieved that the requirements of the body politic in terms of learning and attention was was a utopian vision unto itself and I think that kind of duality between the free market as a utopia and democracy as a utopia set the stage for the next we might call window of grinding conflict that culminated in Ronald Reagan how did we go from a place where people experienced two world wars in a depression and a new deal and a for freedom speech and pulled on you and we end up back with Hayek and Milton Friedman in 1980 well so the first part is that that paradigm change that Palani called for didn't happen and so the conception of freedom remain the same the freedom to be left alone I mean don't tread on me and so the the organized right in the 60s and 70s very self-consciously pushed on that concept of freedom on saying that government has gotten too big it's it's heading down the road to serfdom and it's only by pushing back against government expanding the scope of the market that people will have I both freedom and and economic prosperity because of course they blamed all of the economic problems that began to materialize in the late 60s and early 70s they blame those all on too much government I also blame them on the what they might call the audacity of paternalism I know Robert Nelson wrote a book called economics as religion where he characterized Knights view of phal ability homo stuff Karl Popper like perspective with Paul Samuelson who was portrayed or caricature you might say as a control engineer from the top-down turning the dials and macroeconomic stabilizing things for the people the OPEC price shocks and the stress on profitability and so forth at the end of the 60s and into the early mid 70s created things like inflation rising when unemployment was rising so the superficial T the Phillips curve is obliterated in this fueled the Friedman and eventually Robert Lucas and others in taking apart that paternalistic view right and so part of that is the decline from Keynes's vision in the in the 30s and 40s to the kind of technocratic Keynesianism of the Council of Economic Advisers under Kennedy who said we could fine tune the economy and economics as a highly developed science and we have all of the these levers and we can fly the economy like a seven seven seven that all of those that technocratic emptying out of the content of Keynesianism made it brittle made it very easy for the right to attack it won those kind of nighty and grounds I mean that basically nobody likes technocratic arguments there they're unpopular because they essentially leave the public out of the process and so that was part of what made it possible for these free market ideas to return so in that sense in the book we contrast Palani with with canes I mean that won some points they they clearly converged but Cannes Cannes at the end of the day was an elitist and he wanted economic policy in the hands of experts and Palani was more deeply a Democrat his vision had been shaped by the experience of Vienna in the interwar years that in in the in the 20s and and the beginning of the 30s Vienna was the kind of crowning achievement of the of the European working class if they had essentially a system of municipal socialism in which they the Socialists had power within the city they created a very strong education system they built housing they raised the living conditions of the Viennese working class and this worked economically because essentially this this better off working class had higher levels of skill they were more productive workers and so Vienna as a city flourished in this in this period so Palani took from this experience the understanding that um one could protect people from the market one could develop social welfare institutions and have a well-functioning economy and all of this could work if the people really had a voice and government if they were able to be politically empowered so his his belief in the potential of democracy to create a well-functioning me was rooted in that historical experience and that we know from the experience of European social democracy particularly in those three decades right after World War two that that worked in that Sweden and the other Scandinavian countries achieve some of the highest standards of living with very dynamic economies and a high level of political participation so the the belief that democracy is the foundation for an effective state managing a market economy protecting people from the logic of the market there is historical experience to to support that but I want to say there's some historical experiences supported and there are some reason to be very skeptical I mean I can see people watching this video might be saying Keynes was the latest we talked about the Samuelson model of control engineering like you're flying an airplane a lot of people will say but that's not how policy gets done Robert Collins book the business response to Keynes about how the business community mobilized and pushed leadership into choosing to cut taxes on business repeatedly ratcheting them down in the name of Keynesian stabilization or the idea that how would I say democracy is going to produce a healthy and what you might call vital and intelligent system is undermine a little bit by Mansur Olson's logic of collective action where concentrated interests have the power relative to diffuse interests however intelligent are we are we over valuing the quality of mind and understanding relative to which my call might makes right and in which case both poliana and Keynes are a bit on the defensive and what we see now is what you might call rather ugly by-product where people don't trust at this juncture government to regulate finance well I mean I think that the way that I see the problem is that we have I'm now 30 40 years of this constant claim that the way in which a market economy a capitalist economy whatever we want to call it works best is with the limited amount of governmental activity and that that the needs of the economy Trump the the logic of democracy so if the people vote themselves higher pensions and more generous Social Security they need to be overruled because those things are inconsistent with a market economy and I think too many people have even people have progressive inclination have internalized that critique they've come to believe that that the oligarchs are right and that ultimately the only way in which capitalism can work is if all power goes to the college level of that is the pension crisis that we have the idea that somebody's worked 45 years under a contract where they took lower wages and bigger benefits but now we can't afford it so we're entitled to default on them because the oligarchs are leads as you call it saying we can't pay right and of course all the derivative contracts that those cities have entered into our sacred and they cannot be touched but so um so I think that um then I want to emphasize a kind of distinction that I don't think is sufficiently made in our kind of political economic analysis which is that there are two ideal type ways of making profit and the first is through predation I mean that you make money by taking it away from somebody or by imposing terrible costs on somebody you know working them so hard they lose their health some called finance the repackaging industry right or right through high-frequency trading you make your money by getting in three seconds before other people and as Michael Lewis has told us the second ideal type of how to make profit is by delivering more efficiency without externalities without imposing costs so the engineers who've kept making the chips the computer chips smaller and smaller and doubling their capacity every year and a half or two years have made possible the production of this whole series of products where the costs go down and the capacity Rises that's the paradigm of producing more efficiently and so I want to argue that we've got predation over here and we've got greater efficiency over here that the more democratic apology and I'm not just talking about having periodic elections like Putin does but of having really meaningful institutions of democratic politics of free and open debate high levels of participation competitive parties of free speed of Free Press the whole ball of wax that the more effective democracy you have the more it tilts the economy away from predation and towards finding more efficient ways to produce things and so we're now in a vicious downward cycle where we're getting ever less democracy and ever more predation and then the Predators the oligarchs use their great wealth to further influence the political process through campaign funding and ads and and so forth to essentially clear the way for even more predation but that the basic reality is that no no country ever got richer by predation it's as zero-sum activity it takes wealth from some people and transfers it to others it's only the efficiency route that makes people better off or going to war with somebody else so then and so why is democracy so important to tilting the balance away from predation towards efficiency well first of all when people have a voice they're able to say no you know this activity that you're doing this high frequency trading this isn't creating any value this is just taking money away from us you know meaning that when we trade through our mutual funds or our pension funds we're giving you a few dollars on every transaction that doesn't make make any sense so democratic politics gives you the regulatory or can give you an obviously it requires contestation and it doesn't happen automatically but it creates the potential for the regulation that can bring the predation under control so it's kind of we saw this in Russia kind of right after the the fall of communism the the people who believed in a quick transitions came in and said we're going to bring in the market overnight we're going to privatize everything shock treat their opee and what happened the predation took off I mean that because the fastest way to make money every time is stealing it from other people so kidnapping became a big business in in in Russia or the privatizations of public resources right that that the host more power could become right I'll see you to windfall right and then lots of the Russian capacity industrial capacity was simply smuggled across the border and sold and in other countries so that that that's the point that it's always easier to make money through predation the efficiency route getting those more circuits on a chip that's hard it takes a lot of work it takes a lot of capital it takes a lot of skill in pushing the technological envelope and so it's only in those societies where the predation route is effectively closed down that you get businesspeople to focus on making money through greater efficiency I argued this I grew up in Detroit I argued that we harmed in the long run the American auto companies by allowing government intervention to be a substitute for R&D that by relaxing fuel standards and other things and knowing they could manipulate Washington they weakened themselves in the long run relative to competitors like Toyota no absolutely and your previous book I know that we've talked about on camera together the state of innovation talks about the role of the state in a constructive supporter of the process of that healthy innovation the problem I have now or that I think we all have now is the state of trust after the mail outs and bonuses of tarp which unmasked a tremendous amount of failing in the democratic process albeit the officials probably had to stop us from going over the waterfall but there were no penalties attached to the polluters how do we get back to that state of trust how do we get back to that place where people trust the government to be play a role in innovation like Mariana Matsumoto and others are writing about how do we get to the place where those democratic things that pull on the thought were the essential ingredients to a constructive society are back in place what what's the trick tree that you envisioned well that's the $64,000 question and I didn't go on that show but I'm sad I mean I I think that did one of the one of the ways that I think it will happen is is from the bottom up and so we are seeing experiments going on at municipal levels at the city level you know in some states I mean they're carrying out health care reform in in different ways so I mean I think that that I think that progressives in the in the US I have been to single-mindedly focused on on Washington and that and the federal government it's lost those battles I think well or I mean right and or we've learned though we should have learned the lesson from the Obama administration that that having the White House is in isn't sufficient you know as we've seen in the health care that battles being fought out on the at the state-by-state level and our capacity at the many of those in many of those states is is too too weak so I think that the reinvigorating democracy is something that has to begin happening at the at the local level at the state level I've written recently about a kind of vision for democratizing finance because I I believe very strongly that that we're never going to be able to get the regulatory regime right for Bank of America and Citibank I mean that they remain too big to veil too big to jail and so that what what we need is to rebuild a financial them from the bottom up and sew that up I mean the interesting thing is that we actually have a quite elaborate network of credit unions across the country I think they have something like 10 to 12 percent of the of the bank deposits that I think a very systematic effort to essentially revitalize rebuild and expand those credit unions would be a way to essentially begin a process by which communities begin to put financial control back in their own hands that they use their own savings to invest in things in in their communities and their initiatives at this point for public pensions public pension control and management where the pay-to-play schemes governors and knispel officials and pension fiduciaries are all getting PACs together super PACs campaign contributions from the people who want to manage the money and will earn fees right and they send that money off to Wall Street and it gets lots of lots of it gets skimmed off by that by the fine-structure right which comes back in the form of campaign contributions right but then the alternative to that would be for at least some portion of that pension fund money going back into those communities that I see things on both sides of this coin I think you're right that the bottom-up locality where things are close to the ground make sense and you do see some positive signs of more democratization on the other hand in Michigan where I come from I've been listening and watching Grace Lee Boggs and Xie Hollow and the Michigan citizen and others writing about this democratization and then the governor imposes an emergency manager Kevyn Orr and he's restructuring the pension funds and not touching the tax code how I say there's some top-down authoritarian responses at the same time as the Democratic responses to this widespread dysfunction right no and I mean I think one of the most powerful things in Fulani is that he suggests very strongly that this contestation and this this effort to bring the economy under Democratic control has to proceed at all three levels at the at the local level at the national level and at the global level I mean that you can only get so far at the local level and then you start running into national level or state level obstacles well you also run into the notion that whether your locality a state or a nation Capitol has wings absolute technological knowledge has wings so there's a arbitrage absolutely the lowest common denominator which is why I reform in the global level I'm moving back to the the ideas of Bretton Woods or even to the vision of an international clearing Union that came in in the 40s all of those in other words that did even those countries at this point that have quite progressive leaders are constrained by this international capital mobility and the irrationality of the of the international monetary rules that were living under so so it's a process of contestation where that has to begin initially by the building up of capacity at the local level that quickly has to divert some of its energies to fighting for reforms at the national or in the European case at the supranational level and simultaneously there needs to be this greater contestation at the global level of putting on the agenda the kind of of structural reforms that are needed so nobody said it was going to be easy in this route but I will say when you write a book like this which would you might call elevates pollyana knees critique and vision casted in relation to market fundamentalism it does make it easier for all of us and in that respect I thank you for how I say fomenting the critical discourse and and bringing Polly Ani back into focus for the challenges that we face now thank you thanks for being with us

Channel: New Economic Thinking

Views: 41,845

Keywords: inet, Institute For New Economic Thinking (Nonprofit Organization), rob johnson, Fred Block

Id: Qw4M8t1cuJo

Length: 39min 3sec (2343 seconds)

Published: Wed Sep 24 2014